4:09 p.m. | Updated
Trading in the Jefferies Group was temporarily halted on Thursday morning after its stock briefly plunged on sovereign debt fears.
Shares of Jefferies dropped about 20 percent, to $9.79, prompting the exchange to halt trading. After trading resumed, the stock recovered to close at $12.01, down 2.1 percent for the day.
The sharp initial drop came after the Egan-Jones Ratings Company cut its rating on Jefferies.
Egan-Jones flagged a handful of issues that investors should be concerned about, including the company’s leverage ratio and its exposure to European sovereign debt, which it estimated at $2.7 billion.
Since the bankruptcy of MF Global on Monday, Jefferies has been fighting heightened fears about its exposure to debt problems on the Continent. On Tuesday, Jefferies said it had “no meaningful exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece and Spain.” It said it took positions in the debt of these countries from time to time but that those positions tended to “short-term in nature.”
Reacting to the volatility in its stock price on Thursday, Jefferies issued a statement clarifying its position, saying it had “no meaningful net exposure to European sovereign debt.”
“Recent reports and calculations appear to have been focusing only on long inventory of $2.684 billion but not taking into account the fact that there were offsetting short positions in such sovereign debt of $2.545 billion as well as offsetting positions in futures instruments,” the firm said.
Jefferies added later that it “has no credit-default swaps hedging its sovereign debt positions, which as previously indicated are short-term trading positions that turn over approximately three to four times per week. ”
In an interview on Thursday, Sean Egan, the rating firm’s president, said his firm’s main concern “is the significant change in the operating environment for midsize broker dealers, post-Lehman and MF Global.”
Jefferies’s leverage ratio, or the amount of borrowed money used against its capital, is roughly 13 to 1, in line with bigger firms like Goldman Sachs and Morgan Stanley. Mr. Egan said that it would be “foolish” to put Jefferies in the league of those banks and that the firm should be operating with a lower leverage ratio.
But Mr. Egan said his main concern is the changed environment Jefferies is operating in. “No company is an island,” he said. “The operating environment for broker dealers has changed and the old ways of doing business won’t do.”
Leucadia National, a public investment vehicle that owns nearly 30 percent of Jefferies, has been caught in the downdraft. Leucadia stock fell more than 7 percent in morning trading on Thursday, but later recovered most their losses.
Eric Owles contributed reporting.
Article source: http://feeds.nytimes.com/click.phdo?i=028e669c76b57a37dba05da972d0f6f1
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