Jefferies Group announced financial results for its fiscal first quarter 2016. Total sales and trading net revenues were $59 million.
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Investment banking net revenues were $231. Net loss was $167 million (tax rate 33.3%).
This is primarily attributable to an approximately $90 million after-tax difference in results this year related to two listed equity block positions, including KCG, and our share of the results of our Jefferies Finance joint venture, as compared to our results from the same items for last year's fiscal first quarter
Rich Handler, chairman and chief executive officer, and Brian Friedman, chairman of the executive committee, commented: "Our core equity business performed reasonably well during the quarter, despite the challenging environment.
"Although our Equities revenues declined to $2 million for the quarter from $203 million for the first quarter of 2015, this was primarily attributable to a $145 million difference in net revenues related to two listed equity block positions, including KCG, and our share of the results of our Jefferies Finance joint venture.
"The two equity block positions generated pre-tax, mark to market losses during the quarter that totaled $82 million, $67 million of which is unrealized, including KCG, which was written down by $37 million.
"This compares to the combined net revenues of the same positions of positive $30 million during the first quarter of 2015, a year-on-year decline of $112 million.
"In the first ten trading days of March, the same two positions have increased in value by $18 million, 22% of the first quarter's markdowns. Inception to date net revenues in respect of KCG is $259 million and a loss of $10 million for the other block position. That position was reduced in size by 38% during the first quarter.
Our share of the results generated by our 50% corporate lending joint venture with Mass Mutual, Jefferies Finance, which is recorded in our Equity net revenues line, was a loss of $22 million for the first quarter of 2016, compared to positive net earnings of $11 million for the first quarter of 2015, a year-on-year decline of $33 million.
"Leverage lending activity and related liquidity was very muted during the quarter, and two loans Jefferies Finance closed during the quarter and held for sale as of the end of the quarter were marked down by a total of $38 million. That is reflected in our share of Jefferies Finance's results.
"The two loans held for sale in Jefferies Finance as of the end of February 2016 were marked at prices believed to be required to clear their sale, with the potential for gains should markets improve prior to sell-down.
"Jefferies Finance's equity is $949 million. Jefferies Finance is highly liquid and positioned well to serve our clients in this important business as the market recovers. We recently strengthened our Leveraged Finance origination team and expect to grow further our presence in this segment.
"Fixed Income net revenues for the first quarter were $57 million, an improvement over the $9 million recorded for last year’s fourth quarter, despite markdowns in less liquid positions. We expect continued improvement in our fixed income results in coming quarters.
"Investment banking net revenues for the first quarter were $231 million, compared to $272 million for the first quarter of 2015, a decline of $41 million.
"This is substantially a result of Equity Capital Markets net revenues for the first quarter being $44 million versus $79 million for the comparable quarter in 2015, a reduction of $35 million.
"As equity prices fell during the quarter, a significant portion of equity capital markets activity was postponed to future periods. Our second quarter backlog is solid.
"Consistent with our strategy, our balance sheet, liquidity and key risk metrics ended the quarter at even more conservative levels than after we took aggressive actions in fourth quarter 2015.
"Our balance sheet at February 29, 2016 was $35.2 billion, down $3.4 billion from 2015 year-end and $8.6 billion from the year ago period. We estimate period-end tangible leverage to be 9.8 times. We continue to have ample excess liquidity.
"At the end of the first quarter our liquidity buffer was about $4.3 billion and represented 12.9% of gross tangible assets. We repaid our $350 million March debt maturity today from cash on hand and have retired a net $784 million of debt in the last six months.
"Our Level 3 assets decreased 10% to $489 million, from the year end level of $542 million and represents 3.6% of inventory. Average VaR for the quarter of $8.4 million was lower by 13%, compared to $9.7 million for the fourth quarter." ■