Jefferies Group Inc. (JEF:US) had its credit rating cut to one level above junk by Moody’s Investors Service, which cited concern that the New York-based investment bank may struggle to manage risk after its expansion.
Jefferies was reduced to Baa3, the lowest investment grade, from Baa2, the ratings firm said today in a statement.
“Since the onset of the financial crisis in 2007, Jefferies has grown significantly and opportunistically,” Moody’s said. “This growth also introduces risks as the firm integrates the people and operations that it has acquired, and establishes long-term discipline around risk-taking.”
The firm, run by Chief Executive Officer Richard Handler, 51, for more than a decade, has boosted headcount by 68 percent since 2008 to more than 3,800 as bigger rivals contracted in the wake of the financial crisis. Handler has said the firm is focusing on transparency and managing risk after the collapse of MF Global Holdings Ltd. last year fueled investor concern that Jefferies might be hurt by Europe’s market turmoil.
“Being a mid-sized firm has enabled Jefferies’s most senior management to remain highly engaged” in risk management, Moody’s said. “As the firm continues on its growth path, the ability of its senior leaders to remain as highly involved will diminish.”
Moody’s has downgraded more than a dozen of the world’s biggest banks, including Credit Suisse Group AG (CSGN), Morgan Stanley (MS:US) and Citigroup Inc. (C:US), this year amid an industrywide review of firms with significant capital-markets operations. Risks of outsized losses are “inherent” in that business, Moody’s said in June.
Richard Khaleel, a spokesman for Jefferies, declined to comment.
The ratings company said Jefferies avoided key risk- management missteps during its expansion. “The firm has kept leverage down, avoided costly acquisitions and has generally shied away from illiquid, concentrated positions,” helping it maintain a less complex balance sheet than larger competitors, Moody’s said.
Jefferies, which is about 1/28th the size of Goldman Sachs Group Inc. (GS:US), more effectively avoided trading losses this year than larger Wall Street rivals. The company said it had trading losses on three days for the first nine months of its fiscal year, according to company filings. That compares with 29 days at New York-based JPMorgan Chase & Co. (JPM:US) and 19 days at Morgan Stanley in the first six months of 2012.
Jefferies’s net exposure to sovereign issuers, corporations, financial institutions and structured products in Greece, Ireland, Italy, Portugal and Spain was negative $20.4 million at the end of August, the firm said in a filing last week. That figure decreased from a net short of $125.4 million on May 31.
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