Bloomberg News

Jefferies Note by Egan-Jones ‘Flat Out Wrong,’ Kotowski Says

November 24, 2011

(Updates share price in fifth paragraph.)

Nov. 23 (Bloomberg) -- Egan-Jones Ratings Co.’s analysis of Jefferies Group Inc., including estimates of tumbling revenue, was “flat out wrong by a country mile,” Chris Kotowski, an Oppenheimer & Co. analyst, said in a report entitled “Another Hack Attack.”

“Every analyst is entitled to his or her opinion, but one would think that one aspiring to become a significant rating agency would do a minimum of proof-reading and fact-checking before launching a highly controversial report,” Kotowski wrote in a note today.

Egan-Jones said yesterday that New York-based Jefferies should raise $1 billion in equity and reduce leverage as MF Global Holdings Ltd.’s bankruptcy increases scrutiny of the firm’s balance sheet. Without “major deleveraging,” Egan-Jones said it may cut Jefferies’s credit grade.

“We stand by our analysis,” Sean Egan, president and founding principal at Egan-Jones, said today in an e-mail. “Leverage remains too high for an investment-grade rating, particularly with the change in the operating environment post- MF Global.”

Jefferies, which has lost 61 percent this year in New York trading, gained 45 cents, or 4.5 percent, to $10.51 at 4:15 p.m.

Egan-Jones’s analysis yesterday included an estimate that revenue had declined 37.8 percent annually “over the last couple of years, which is disappointing.”

Revenue Puzzle

Kotowski said he was unable to determine where those figures came from. “Try as we might, we could not reverse engineer a 37.8 percent decline rate to figure out what the ‘couple of years’ time-frame was,” Kotowski wrote.

Egan-Jones released an updated report after Kotowski’s note showing an annual revenue increase for Jefferies of 13.5 percent during the past five years.

The rating company’s first report estimated that assets at Jefferies would jump to $102.2 billion by November 2012 from about $67 billion at the end of this fiscal year. Jefferies assets at the end of August were $45.1 billion.

Kotowski called those figures “so grotesquely wrong they should immediately jump off the page to anyone remotely familiar with the numbers.”

In its update today, Egan-Jones estimated Jefferies’s assets would fall to $36.2 billion by November 2012 from $36.3 billion at the end of this fiscal year.

August Statements

“What we were focused on in performing the analysis and assigning the ratings was the most recent financials issued by Jefferies, which happens to be the August 2011 statements and the most recent balance sheet,” Egan said in a phone interview.

Egan-Jones’s revised note reiterated its opinion that Jefferies needs to raise $1 billion in equity and reduce leverage.

Egan-Jones downgraded Jefferies to BBB- from BBB earlier this month, citing large “sovereign obligations” relative to equity and a “changed environment” following the collapse of MF Global. The ratings company also said earlier this month it would “prefer that Jefferies maintain a lower leverage” ratio than 12.9-to-1.

Jefferies has since responded with at least six statements about its risks linked to Europe’s most indebted nations. The company said it reduced holdings in Greece, Italy, Ireland, Portugal and Spain by about 75 percent as of Nov. 21.

Since MF Global’s Oct. 31 bankruptcy, Jefferies has been “barraged by a group of people maliciously spreading rumors, half-truths and outright lies,” Chief Executive Officer Richard Handler and Brian Friedman, chairman of Jefferies’s executive committee, said in a Nov. 21 letter to stakeholders that didn’t identify who he meant. The letter also detailed Jefferies’s financial health, including its liquidity and available funding.

“We think Mr. Kotowski is absolutely right,” Richard Khaleel a Jefferies spokesman, said today in an interview about the two analysts’ reports.

--Editors: Steve Dickson, David Scheer

To contact the reporter on this story: Laura Marcinek in New York at

To contact the editor responsible for this story: David Scheer at

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