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Sunday, 17 December 2017

Jefferies sets sights on major buyouts role

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Investment bank Jefferies is on the move in the lucrative buyout financing space, aggressively trying to carve away market share from its larger and richer rivals.

After a 2016 revamp of its leveraged finance business - accompanied by a round of layoffs - the bank believes the pieces are now in place to challenge for a leading spot in LBO banking.

The privately held firm’s principals rarely speak to the media, but they told IFR that Jefferies wants to establish itself as a go-to lender for private-equity sponsors.

“We are cracking the code,” said Jim Walsh, global head of leveraged finance at Jefferies. “Our industry coverage is growing and we are starting to see a real pick-up in activity.”

According to Thomson Reuters data, Jefferies brought to market nearly the same volume of junk bonds in the first three months of the year that it did in all of 2016.

That has lifted its market share in the US high-yield space to 4% in the first quarter - up from 2.5% in the same period last year and 1.6% over all of last year.

Meanwhile its piece of the leveraged loan market has grown to 2.2% so far this year from 1.5% in full-year 2016 - and market participants are noticing.

“Time will tell,” said one leveraged finance lawyer. “But I think it is clear that they are putting their chips on the table to go big-league.”

 

ENERGY DRAIN

Not so long ago the picture was far less rosy for Jefferies, a shop whose fixed-income business has most of its eggs in the junk bond, leveraged loan and distressed debt baskets.

Energy accounts for around 15% of the US junk bond market, and when oil prices tanked in late 2015 triggering a broader market sell-off, the firm was hit especially hard.

Jefferies posted a loss in the quarter ended in February 2016, as revenues from equities and fixed income trading slumped. It also ended up hung on some of the leveraged financings it had underwritten months earlier.

Longtime CEO Richard Handler said at the time he was “humbled” by the poor performance, and an overhaul of its leveraged finance business saw many top bankers leave.

The firm combined its junk-rated bond and loan origination team at Jefferies Finance - its joint venture with MassMutual - with its own leveraged finance group.

That led to a number of redundancies and the departure of, among others, the global head of leveraged finance Kevin Lockhart and global head of sponsors Adam Sokoloff.

Many believed the upheavals put Jefferies at a crossroads, forced to choose between stepping back into a smaller role or doubling down on its commitment to leveraged finance.

It chose the latter - and the turnaround has started to pay off.

In March Jefferies reported pre-tax profit of US$124m for its first quarter, compared to a US$250m Q1 loss in the previous year. Net revenue soared to US$796m over the same period from US$299m a year ago.

Oppenheimer analyst Chris Kotowski said the results were “nicely ahead of expectations,” as strength in M&A and fixed income more than offset weakness in equities.

“The depth and breadth of our relationship with private equity sponsors has increased exponentially in the last two years,” Jefferies’ global head of sponsors Jeff Greenip told IFR.

Jefferies executives say new hires from larger competitors such as Barclays, Credit Suisse and Deutsche Bank will help unlock new opportunities.

The firm hired two energy-focused leveraged finance bankers from Barclays and attempted to snare as many as eight from Credit Suisse, including veteran Jonathan Moneypenny.

Though Moneypenny and four others stayed at the Swiss lender, the bid was seen as another sign that the bank is intent on becoming a top-tier player in leveraged finance.

Last year the firm also hired five technology investment bankers from Credit Suisse and six metals and mining bankers from Deutsche Bank.

“There seems to be a concerted push to upgrade their team,” said one lawyer who has worked with Jefferies.

As the head of capital markets at a large private equity firm told IFR: “What they are trying to change is the market’s perception.”

 

FIRM ADVANTAGE

By being an investment firm rather than a bank holding company, Jefferies is not subject to US regulations introduced after the financial crisis to curb leveraged lending - a key advantage versus some of its rivals.

Many of the LBO financings it has led recently are leveraged well above the six times that typically attracts scrutiny from regulators, such as Blackstone’s purchase of music rights organization Sesac and Advent International’s takeover of CCC Information Services.

Critics charge that Jefferies is gaining market share by taking on deals that regulated banks cannot.

But it has also won roles alongside regulated players on other deals in recent months, including debt backing TPG’s acquisition of Mediware and Carlyle’s takeover of Novolex.

And Jefferies contends that only 10% of leveraged loan financings with more than six times leverage are led solely by non-banks such as itself - and that the big regulated players still take the lion’s share.

While some argue that the current regulatory framework may have helped Jefferies get a seat at the table with sponsors, broadening the scope of its business makes sense at a time of regulatory uncertainty under the new Trump administration.

“It’s a brilliant strategy,” a second lawyer said.

“They have built a brand in LBOs, and what they can do is to solidify their position and maintain market share if and when that (regulatory) arbitrage goes away.”

And while its roughly US$40bn balance sheet pales in comparison to the US$2trn plus in assets of juggernauts such as Bank of America Merrill Lynch and JP Morgan, the firm is picking its spots carefully.

“We don’t look at size of a transaction being the biggest barometer of us participating in any one underwrite,” said Walsh.

“Our real focus is getting a satisfactory risk/return based on the capital we are putting to work. Typically to get that return we need to be in a leadership position or a top three bank.”

 

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