Fitch Affirms Leucadia's 'BBB' Ratings Following Strategic Announcements; Outlook Stable.
Leucadia's wholly-owned subsidiary, Jefferies Group LLC (Jefferies Group, Long-Term IDR 'BBB'; Outlook Stable) is unaffected by this rating action.
The affirmation follows various strategic transactions announced by Leucadia, including the sale of 48% of National Beef Packing Company, LLC (National Beef) to Marfrig Global Foods for approximately $900 million in cash, and the sale of all of its equity interests in Garcadia to Leucadia's current partners, the Garff family, for a net $375 million in cash and $50 million in redeemable preferred equity.
Concurrently, Leucadia announced that its Board of Directors approved a share repurchase program of up to 25 million shares and it is proposing to change its name to Jefferies Financial Group Inc., in recognition of its shift into a diversified financial services holding company.
KEY RATING DRIVERS - IDR, SENIOR DEBT AND HYBRID SECURITIES
The rating affirmations reflect Fitch's view that the collective announcements are ratings neutral. While the sales transactions will generate incremental cash for the firm, Fitch's expectation is that excess liquidity will be redeployed into opportunistic investments and share repurchase activity over time. The reduced exposure to National Beef is viewed favorably from a portfolio concentration and liquidity perspective but was largely anticipated by Fitch. Exposure to Jefferies Group, which represented 55.8% of Leucadia's shareholders' equity as of Dec. 31, 2017, is expected to decline to 50.8% on a pro forma basis due to the increase in shareholders' equity as a result of the transactions, but remain meaningful and ultimately increase from the pro forma level as a portion of excess cash is used for share repurchase activity.
The ratings continue to be supported by Leucadia's strong investment track record, experienced management team, low balance sheet leverage, and long-dated debt maturity profile.
The ratings are constrained by the limited liquidity of the majority of Leucadia's investments (excluding temporarily elevated cash levels) and the potential for variable operating performance as measured by upstream dividend coverage of holding company interest expenses.
Leverage is expected to remain low, with parent company debt and convertible preferred stock to tangible equity of just below 0.15x on a pro forma basis, though this should increase modestly over time as a result of the authorized share repurchases. Still, Leucadia is expected to adhere to the operating parameters it established following the merger with Jefferies Group in 2013, which included maintaining a debt to stressed equity ratio of less than 0.50x and limiting its two largest investments as a percentage of book value at the time of the original investment, to 20% and 10%, respectively, excluding Jefferies Group. Debt to stressed equity is expected to be 0.21x on a pro forma basis. Excluding Jefferies Group, the two largest investments are HRG Group, Inc. and Vitesse Energy, LLC, which are expected to be 9.9% and 7.8% of book value, respectively, on a pro forma basis.
Key man risk continues to be a rating consideration for both Leucadia and Jefferies Group. The CEO of Leucadia also serves as Chairman of the Board and CEO of Jefferies Group, and the President of Leucadia is also the Chairman of the Executive Committee of Jefferies Group. These individuals continue to influence Leucadia's strategic direction and, in some cases, source investment opportunities. Jefferies Group has broadened and deepened its bench over the past several years, which Fitch views favorably. Other than Jefferies Group, the Leucadia portfolio companies are led by separate management teams.
Fitch believes that the credit profiles and rating sensitivities of Leucadia and Jefferies Group will become more aligned upon the completion of the sales transactions and the name change. Thereafter, Fitch is likely to apply a common rating approach between Leucadia and Jefferies Group, as outlined in the institutional support section of Fitch's Non-Bank Financial Institutions Rating Criteria. This would reflect the growing strategic alignment between Leucadia and Jefferies Group.
The 'BB+' rating on Leucadia's $125 million, 3.25% cumulative convertible preferred stock is notched down twice from the company's IDR. The two-notch differential reflects the subordination of the preferred stock to all senior debt and the fact that it may be converted into common shares. Nevertheless, the preferred stock is not afforded equity credit by Fitch given that it has a fixed conversion rate and lacks a mandatory conversion feature.
RATING SENSITIVITIES - IDR, SENIOR DEBT AND HYBRID SECURITIES
Fitch views rating upside for Leucadia as limited given its increased alignment with Jefferies Group, whose ratings are constrained by its business model and funding profile. That said, Leucadia's ratings could potentially be upgraded if the firm reduces its investment concentration in Jefferies Group and further broadens its investments, while also maintaining a conservative liquidity and leverage profile. Leucadia's ratings could also benefit from an improvement in Jefferies Group's ratings.
Leucadia's ratings could be negatively affected by a fundamental shift in financial policy related to parent company liquidity to parent company debt, a change in the company's strategy, a less conservative leverage profile or a downgrade of Jefferies Group's ratings.
A key man event with respect to the CEO and/or President of Leucadia would not necessarily result in an immediate downgrade but would be evaluated in the context of the potential impact on Leucadia's strategic direction. The fact that key man risk resides with two individuals, rather than just one, is viewed as a moderate mitigant.
The rating assigned to the preferred stock is primarily sensitive to changes in Leucadia's IDR and would be expected to move in tandem.
Fitch has affirmed the following ratings:
Leucadia National Corporation
--Long-Term IDR at 'BBB';
--Senior unsecured debt at 'BBB';
--Preferred stock at 'BB+'.
The Rating Outlook is Stable.
|Printer friendly Cite/link Email Feedback|
|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jun 28, 2018|
|Previous Article:||Fitch Affirms Metalsa's Ratings at 'BBB-'; Outlook Stable.|
|Next Article:||Fitch Affirms Swiss Car ABS 2016-1 and 2016-2; Outlook Stable.|