The Associated Press November 4, 2011, 4:11PM ET

Jefferies discloses specifics on European holdings

The Jefferies Group Inc. on Friday released detailed information about its European debt holdings in a bid to calm investors rattled by the investment bank's exposure to the continent's ongoing financial turmoil. The information appeared to quell some fears, sparking an immediate rebound in the firm's stock.

In late trading, Jefferies shares gained 6 cents to $12.07. The stock was earlier down more than 7 percent, and has been volatile all week following the collapse of MF Global Holdings Ltd.

MF Global ran low on cash and sought bankruptcy protection Monday after a $6 billion bet on European government bonds spooked investors.

New York-based Jefferies also holds debt issued by the most troubled European countries: Italy, Spain, Ireland, Portugal and Greece. But the firm has spent the week maintaining that it is handling its situation differently than MF Global.

On Friday, Jefferies published a list of the amount of debt it holds from each country, and the positions it has taken to counterbalance those holdings. The firm showed that it maintains a net $9 million short position -- a bet on a decline in price -- on $2.41 billion in bonds from the five countries.

"As is clear from this information, Jefferies has no meaningful credit risk in respect of the sovereign debt of these nations, and an insignificant risk related to interest rate movements," Jefferies Chairman and CEO Richard Handler said.

He said his firm decided to disclose the normally closely held information in order to "conclusively dispel rumors, misinformation and misplaced concerns."

Yet it may not be enough.

One concern that was not addressed was the identity of the counterparties on Jefferies' short positions, said Sean Egan, managing director of Egan-Jones Ratings Co., which on Thursday cut its ratings on Jefferies debt in a move that helped fuel an early selloff of the stock. "If it's a third-tier bank, then you have to question whether or not the bank will be able to fulfill its obligations in the event the peripheral countries in the EU continue to slide."

"They may prefer not to disclose that, and so be it, but that's a comfort that investors need to properly view an entity like the Jefferies Group," Egan said in an interview.

There's also the larger question of how much debt Jefferies is carrying. Egan said the main reason for the downgrade was his firm's view that Jefferies is over-leveraged. While acknowledging the debt is not has high as MF Global's, or the levels that failed competitors Bear Stearns and Lehman Brothers carried before they collapsed in 2008, he said it is still a concern.

Egan-Jones is so far alone among ratings companies on this issue. Larger agencies have not issued opinions in recent days on Jefferies' debt.

And some analysts are questioning whether Jefferies is taking an undeserved beating.

"Despite heightened concerns about viability of the independent investment banking model since the MF Global bankruptcy, we continue to believe that Jefferies represents a high-quality franchise and it has been unjustifiably punished in recent days," wrote Keefe, Bruyette & Woods analyst Lauren Smith in a note to clients on Friday. Smith said the firm is "well positioned to grow and gain market share" as the markets improve.

Jefferies is not a too-big-to-fail bank, which means it isn't likely to be required to beef up capital reserves like Goldman Sachs Group Inc. and Morgan Stanley. And while acknowledging that higher debt levels do tend to increase risk for a company, Smith said the current amount does not appear to represent an "outsized risk."

Nevertheless, Smith did cut the price target on Jefferies' stock to $17 from $22 because of the continued speculation and concerns over increased regulation.


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