Jefferies Group announced financial results for its fiscal third quarter 2015. Total sales and trading net revenues were $185 million.
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Richard B. Handler, chairman and chief executive officer, and Brian P. Friedman, chairman of the executive committee, commented: “Despite solid results in Investment Banking and Equities, our overall results are disappointing. Our Net Revenues for the quarter were $583 million and our Net Earnings were $47 million, excluding Bache.
"After a solid second quarter, the third quarter’s sales and trading environment was initially slow due to concerns about a possible Greek exit from the Euro, and then became more volatile and challenging in the second half of the quarter as news of China's economic growth deceleration led to a further deterioration of trading volumes and continuing declines in global asset prices.
"A substantial increase in volatility affected almost every asset class globally. This significantly impacted, among other areas, the distressed side of the credit market, most notably in the energy sector.â€
“Fixed Income net revenues were negative $14 million for the quarter, reflecting the slow environment and the volatility that resulted in mark-to-market write-downs in our inventory.
"Trading results of our high yield distressed sales and trading business for the quarter particularly impacted our results negatively. As is the nature of the distressed market making business, Jefferies assumes positions in sectors where the firm's clients and the market are most active, with mark to market gains and losses recognized on a daily basis.
"During the last nine months, losses totaling $90 million were recorded across more than 25 distressed energy positions. For the nine month period we recognized negative revenues in respect of the ten largest individual loss-making positions of about $4 million to $19 million each, or an average of about $8 million.
"These markdowns, combined with lower activity levels and more modest inventory write downs in several other areas of our global fixed income business, accounted for much of the balance of negative pressure on our fixed income results.
"As one of the leading investment banking platforms serving the energy sector, with meaningful recent involvement in restructurings and financings, we continue to be committed to our energy clients.â€
“We believe most of the issues we faced this past quarter in Fixed Income were due to distinct factors that began about a year ago and the largest portion of which relates to the turmoil in the oil and gas industry.
"For the first nine months of 2015, we have provided liquidity and traded approximately $5 billion in distressed energy securities for our clients.
"Our exposures in our distressed energy trading business decreased approximately 50% during the quarter and are currently down to $70 million in total net market value.
"We believe that, with our exposures in distressed securities reduced to current levels, there should be no similar impact on our future results.â€
“While adversely affected by the sell-off in the global markets during August, our core Equities business performed reasonably. Equities Net Revenues for the period were $203 million. Jefferies Investment Banking Net Revenues were a very solid $390 million, including our best quarter ever in Equity Capital markets.
"For the nine months ended August 31, 2015, our fee based investment represented 54% of net revenues, a similar proportion to the comparable period a year ago. Our investment banking backlog remains robust and diverse in terms of products, sectors and regions.
"Our level 3 assets remain below 3% of our inventory, and all of our balance sheet and liquidity metrics are in line with every one of our historical ranges. We reduced our KCG position during the quarter by tendering 6.5 million shares at $14 per share, realizing $91 million in cash.â€
"We have substantially completed the unwind of Bache within our expectations of timing, cost and write-offs. We have transferred virtually all client accounts to Societe Generale and other service providers.
"No meaningful risk pertaining to this business remained on our books at the end of the third quarter. To put into perspective how the impact Bache has had on our recent results, in 2014 our firmwide net income of $158 million included a net loss of $100 million with respect to Bache.
"Similarly, for the 2015 full fiscal year, we expect Jefferies will incur the same net loss in respect of Bache as we did in 2014, or about $100 million, including all material final-wind down costs.
"For the first nine months of 2015, our results include a net loss of $77 million with respect to Bache. These overall results included a write-off of goodwill of $52 million in 2014 and non-cash write-offs of $24 million in 2015 on a pre-tax basis. We are pleased finally to be able to move on.†■