Ratings agency Standard & Poor’s just placed three brokerage houses, including Jefferies Group and Cantor Fitzgerald, on negative outlook.
S&P said it took the action as investment banking and institutional sales and trading operations continue to face a soft market environment.
However, the company maintained its BBB ratings on the two houses.
GFI Group, another brokerage firm, was placed on CreditWatch negative, which generally precedes a downgrade. If the company is hit with a ratings action, it would see its debt cut to junk rating.
“We believe brokers with institutional sales and trading and investment banking businesses will be challenged by ongoing weakness in the financial markets — largely because of concerns about Europe’s financial crisis and the impact that it is having on the European banking systems and economies,” Primary Credit Analyst Robert Hoban said.
S&P noted that Jefferies was only modestly exposed to Europe, but that the risk of contagion could lower underwriting volumes for all three firms.
Shares in Jefferies are now off some 2.4%, after trading higher earlier in the day.
Negative Rating Actions Taken On Three U.S. Brokers Based On Expectation Of Continued Weak Industry Conditions
- We believe that brokers with institutional sales and trading and investment banking businesses are likely to face a prolonged period of low profitability and possibly other financial pressures because of ongoing weakness in the financial markets.
- In our view, the confidence sensitivity of firms such as Jefferies Group and Cantor Fitzgerald is elevated under these conditions.
- As a result, we are revising our outlooks on Jefferies Group and Cantor Fitzgerald to negative from stable, and we’re placing our ‘BBB-‘ ratings on GFI Group on CreditWatch negative.
- The negative outlooks and CreditWatch negative reflect our view that these firms’ operating performance will remain under pressure as a result of broader issues affecting the securities markets.
NEW YORK (Standard & Poor’s) Jan. 27, 2012–Standard & Poor’s Ratings Services today said it revised its outlooks on Jefferies Group Inc. and Cantor Fitzgerald L.P. to negative from stable and placed its ‘BBB-‘ ratings on GFI Group Inc. on CreditWatch with negative implications. We also affirmed our ‘BBB’ counterparty credit ratings on Jefferies and Cantor Fitzgerald.
The rating actions reflect our view that these companies, and some other institutional brokers, will likely face continued pressures and lower profitability as a result of broader issues affecting the securities markets. We also believe that these conditions could further increase the already high confidence sensitivity of leveraged wholesale funded institutions like Jefferies and Cantor.
We believe brokers with institutional sales and trading and investment banking businesses will be challenged by ongoing weakness in the financial markets–largely because of concerns about Europe’s financial crisis and the impact that it is having on the European banking systems and economies. Although Jefferies’ direct exposure to Europe is modest, in our view, and Cantor’s even more so, the risk of contagion from the region’s debt crisis could lead to a prolonged period of reduced trading and underwriting activities, heightened risk of a recession in the U.S., less favourable funding conditions, and possibly some mark-to-market losses. Based on this view, we already have negative outlooks on Goldman Sachs Group (A-/Negative/A-2) and Morgan Stanley (A-/Negative/A-2), among others.
We continue to believe that Jefferies’, Cantor’s, and GFI’s more agency-focused business models and comparatively limited principal market and credit risk exposures bolster their financial profiles and should reduce the risk of material losses from eroding asset valuations. In addition, we recognise measures these firms have taken, including reducing leverage and making efforts to reduce risk. That said, we consider their exposure to prolonged weakness in the financial markets and heightened stress in the financial system material given the firms’ business and financial profiles. For further company-specific information, see the individual research updates, listed below.