Moody's to Review Jefferies' Ratings

Moody's Investors Service, the ratings arm of Moody's Corp. (MCO - Analyst Report), announced that it has placed Jefferies Group Inc.’s (JEF) credit ratings, including Long Term Issuer rating of ‘Baa2’, under review for a probable downgrade. The possibility of a downgrade comes on the back of industry-wide risks faced by capital market firms.

According to Moody’s, though Jefferies has maintained a conservative growth strategy while boosting its market share in spite of the financial crisis, the company faces risks almost similar to its peers. Nevertheless, the company has been able to maintain a stable and relatively less complicated balance sheet. Further, the company is expected to report upbeat financial results for the remainder of fiscal 2012.

However, despite having a stable balance sheet position, Jefferies is susceptible to the changes that take place in equity and debt markets. At present, overall global markets are expected to remain weak and there seems to be no end to the Euro-zone crisis. All these factors put together are bound to impact the company’s financials. Nonetheless, while placing the ratings under review, Moody’s stated that if it downgrades the ratings, more than a notch is less likely.

Moody’s further stated that the review would also take into consideration the risk management capabilities as Jefferies has been expanding rapidly (both organically as well as through acquisitions). In the last few years, the company has been undertaking various initiatives to diversify its revenue base and improve its market share. But while doing this, the company faces increased risks related to the establishment and maintenance of independent controls as capital market activities continue to expand.

Currently, Moody’s has a ‘Stable’ outlook on Jefferies, reflecting disciplined business approach and low risk appetite of the company. Similarly, Fitch Ratings has a ‘Stable’ outlook, while Standard and Poor’s has a ‘Negative’ outlook on the company.

In its latest quarterly filing, Jefferies stated that in case there is a downgrade by a notch of its long term credit ratings, the extra amount of collateral that would be called for will amount to $30.9 million. Further, the ratings downgrade is expected to increase the funding cost of the company.

Currently, Jefferies retains a Zacks #3 Rank, which translates into a short-term Hold rating.