Jefferies (JEF) and sovereign debt exposure

Discussion in 'Stocks' started by m22au, Nov 3, 2011.

  1. m22au


    As it has been noted on Zero Hedge and elsewhere, one significant consequence of the MF Global missing customer funds drama has been the increase in risk associated with money held at non-TBTF brokers.

    So it's interesting to read this article from Zero Hedge:

    "Egan Jones Downgrades Jefferies On Concerns About Sovereign Exposure Amounting To 77% Of Equity"

    Jefferies Group Inc: EJR lowered BBB to BBB- (Neg.) (S&P: BBB)

    Synopsis: Changed environment - the problems of MF have increased scrutiny of other medium-sized broker/dealers. We are concerned about the values included the $2.7B of " sovereign obligations " per page 24 of the Aug. 2011 10-Q representing 77% of shareholders equity. Although not as highly leveraged as MF Global's 40:1, we would prefer that JEF maintain a lower leverage than its 12.9:1.
  2. m22au


    The 10-Q for the quarter ended 31 August 2011 can be found here:

    The balance sheet can be found on page 24 of the 10-Q.
    (Search term = 2,684,578).

    The 2,684,578 is made up of

    level 1: 1,994,296
    level 2: 690,154
    level 3: 128

    JEF defines the sovereign obligations as:

    G-7 Government and non-G-7 Government Bonds: G-7 government and non-G-7 government bonds are measured based on quoted market prices obtained from external pricing services. G-7 government bonds are categorized within Level 1 of the fair value hierarchy and non-G-7 government bonds are generally categorized within Level 2.

    Emerging Market Sovereign Debt Securities: Valuations are primarily based on market price quotations from external data providers, where available, or recently executed independent transactions of comparable size. To the extent market price quotations are not available or recent transactions have not been observed, valuation techniques incorporating foreign currency curves, interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value. Emerging market sovereign debt securities are generally classified within Level 2 of the fair value hierarchy.
  3. m22au


    According to Wikipedia the G-7 is comprised of:

    United States of America, Japan, United Kingdom, Canada,
    France, Germany, Italy.

    So investors would be very interested in finding out just exactly what the 1,994,296 of level 1 assets includes. If it is mainly US Treasuries, then the 1,994,296 figure would be considered very safe. If it is mainly Italian govt bonds (or even increasingly dubious French bonds), then things don't look as safe.
  4. m22au


    JEF press release on Tue 1 November at 9.16am:

    "Jefferies confirmed today, in response to questions from investors and analysts, that it currently has no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece, and Spain."

    Still, it would be interesting to know what their exposure to France is.
  5. Sh1t, I just wanted to start a beautiful cap intro relationship with them. Ay, ay, ay.
  6. m22au


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  9. m22au