Manhattan’s Jefferies office building.
Jefferies Financial Group Inc. took action to allay investors’ mounting concerns about the consequences of its client First Brands’ bankruptcy by claiming that any damage to its finances could be easily “absorbed” and would not affect its operations.
Since investors were seeking some explanation on the situation, it appeared to be effective—at least for the time being. Monday afternoon trading saw a 4.9% increase in the stock (JEF). A 10-session losing streak, the longest since a 13-day run that concluded on May 18, 2012, would finish with a closing in positive territory.
Over the course of the losing run, Jefferies’ shares sank 23.7%, the SPDR S&P Bank ETF KBE fell 6.4%, and the S&P 500 index SPX fell 1.4%.
Through its Bonita Point Capital asset-management division, Jefferies provided First Brands with funding for its receivables, and its Apex Credit Partners division managed leveraged loans and collateralized loan commitments pertaining to the company.
With over $10 billion in debt, First Brands declared Chapter 11 bankruptcy on September 29. That information was the catalyst for Jefferies’ stock to go on a losing run.
The real effect of the bankruptcy on Jefferies seems to be more about what investors didn’t know than what they did know, according to Gil Mermelstein, CEO of consultancy firm West Monroe, who spoke to MarketWatch. Brian Friedman, the CEO of Jefferies, clarified matters in a letter he sent to investors over the weekend.
“The market is punishing Jefferies not for the magnitude of the impact to their financials, which appears manageable, but rather a general nervousness as to the lack in of transparency into private-credit portfolios, a rapidly growing space,” said Mermelstein.
But he said that First Brands does not provide any “systemic risk” to him.
“I see the large private credit players deploying capital responsibility,” added Mermelstein.
Bank analyst Christopher McGratty told MarketWatch that he anticipates analyst inquiries about credit strength to be a recurring theme during the third-quarter earnings season, which begins on Tuesday with updates from Goldman Sachs Group Inc. (GS), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Wells Fargo & Co. (WFC). According to him, bankruptcies involving private credit seem to be peculiar right now.
In the letter to shareholders, Jefferies Chief Executive Rich Handler stated that the bank’s investments in First Brands could result in losses of up to $45 million over time, but that neither the bank’s financial stability nor its commercial momentum was in danger.
According to Handler, Jefferies had $11.5 billion in cash as of August 31 along with $10.5 billion in total equity and $8.5 billion in tangible equity.
“We believe there has been an impact on our equity market value and credit perception that is meaningfully overdone, and we expect this to correct soon as the facts and range of outcomes are better understood,” Handler stated.
“Decisions and actions” by the company, including “possible fraudulent or otherwise improper activity that is under investigation,” are to blame for the current predicament First Brands finds itself in, according to Handler. “Those actions and decisions drove First Brands … to need bankruptcy protection.”
He said that Jefferies did not receive any concealed fees for the financing that was done through a side letter between Jefferies and First Brands.
Mermelstein of West Monroe stated that although market and economic cycles “always” lead to failures, the industry is not presently dealing with any significant issues.
Patrick James was replaced as First Brands’ interim CEO on Monday by Charles Moore, a restructuring specialist from Alvarez & Marsal.
