OREANDA-NEWS. Jefferies Group LLC (Jefferies) today reported fiscal fourth quarter 2015 (4Q15) results that reflected a continued challenging environment for sales and trading, dragged lower by the firm's strategic decision to de-risk its fixed income business in response to a perceived reduction in the available market opportunity.

The latest results have no immediate rating impact on Jefferies' 'BBB-/F3' ratings or Stable Outlook, given the company's relatively conservative leverage and liquidity profiles, which further improved in 4Q15, and relative stability in Jefferies' investment banking and equity sales and trading businesses. Nevertheless, uncertainty remains around the trajectory of profitability going forward, and the extent to which capital will be redeployed.

Jefferies actions to reduce risk during the quarter were a manifestation of the firm's October announced strategic refocus of the fixed income business, following a 12-month period of volatility driven by interest rate uncertainty and stress in the energy sector, among other challenges. In 4Q15, Jefferies reduced its balance sheet to $38.5 billion, an absolute reduction of $4.2 billion versus the prior quarter, which included a $2.3 billion reduction in long securities inventory. In connection with this decline in risk, Jefferies net exposure in distressed energy trading was reduced to $37 million from $70 million in 3Q15.

The liquidation of positions during 4Q15 had a negative impact on fixed income revenues and profitability given the challenging market backdrop against which Jefferies was selling, including lower liquidity in certain market sectors. In Fitch's opinion, the fact that Jefferies had publicly articulated an intention to de-risk the business in the near term may have also contributed to the negative impact.

Quarterly net revenues of $513.1 million were down 11.4% from 3Q15 and 2.2% from 4Q14. In the sales and trading businesses, equities revenues were weaker (down 39.1% sequentially and down 22.0% on a linked-quarter basis), and fixed income revenues, while improved from negative revenues in the prior quarter, were down 82.6% on a linked-quarter basis. Investment banking exhibited continued strength with net revenues of $372.9 million (up 18% on a linked-quarter basis) driven by a strong quarter from the advisory business. Performance in the asset management segment remains variable, but is a small contributor to overall performance.

Adjusted 4Q15 net income, excluding impacts from the Bache business, was $36.8 million, down 21.4% from $46.8 million in 3Q15. Jefferies reported that as of 4Q15, all Bache client accounts had been transferred to Societe Generale or other service providers and final costs related to the Bache exit for 2016 should be less than $5 million.

As a result of Jefferies' strategic risk reduction, firm-wide VaR for the quarter declined 40% to $9.7 million, compared to $13.8 million in 3Q15. Jefferies-calculated adjusted leverage, defined as assets excluding securities borrowed, reverse repurchase agreements, cash and goodwill, and intangibles divided by tangible equity, decreased to 8.8x as of Nov. 30, 2015, from 10.3x as of Aug. 31, 2015. Fitch views Jefferies' leverage and VaR levels as increasingly conservative, although it remains to be seen to what extent Jefferies will redeploy capital and risk capacity into other activities.

Jefferies-calculated liquidity, which includes cash, cash equivalents, high-quality government securities and reverse repurchase agreements collateralized by high-quality government securities, increased to 13.1% of total assets from 12.0% of total assets at 3Q15. The increase was driven by the sale of inventory positions, partially offset by a $500 million debt maturity repayment made during the quarter. The company indicated its intention to use cash on hand to repay $350 million of debt maturing in March 2016.

Jefferies, a Delaware-incorporated holding company, is a full-service investment banking and institutional securities firm primarily serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies LLC, holds the vast majority of the firm's consolidated assets and is regulated by the SEC. At Nov. 30, 2015, Jefferies had U.S. GAAP total assets of $38.5 billion and shareholders' equity of $5.5 billion (including non-controlling interests and $1.9 billion of goodwill and intangibles). Fitch considers Jefferies to be a core subsidiary of Leucadia National Corp. (Leucadia, 'BBB-', Outlook Stable) based on Jefferies' significance relative to Leucadia's equity and the role it is expected to continue playing in the combined company's future strategic direction.