Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Richard B. Handler - Executive Chairman, Chief Executive Officer, President, Member of Risk Management Committee and Director of Jefferies

Peregrine C. de M. Broadbent - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Member of Risk Management Committee

Brian Paul Friedman - Director, Chairman of Executive Committee, Member of Risk Management Committee and President of Jefferies Capital Partners

Analysts

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

M. Patrick Davitt - BofA Merrill Lynch, Research Division

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

David M. Trone - JMP Securities LLC, Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Jeffrey Harte - Sandler O'Neill + Partners, L.P., Research Division

Vera Allain

Meredith Ann Whitney - Meredith Whitney Advisory Group LLC

Unknown Analyst

Jefferies Group (JEF) Q1 2012 Earnings Call March 20, 2012 9:00 AM ET

Operator

Welcome to the Jefferies 2012 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. A press release containing Jefferies' 2012 fiscal first quarter financial results was distributed via Business Wire earlier this morning and can be accessed at jefferies.com.

Some of the comments made in this conference call may include forward-looking statements. These forward-looking statements may contain statements about management's current assumptions, expectations, strategic objectives, growth opportunities, business and prospects. These forward-looking statements are not statements of historical fact and represent only Jefferies' belief as to future performance. They usually include the words continue, will, believe, should, estimate or other similar expressions. Actual results could differ materially from those projected in these forward-looking statements. Please refer to Jefferies' Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 27, 2012, and Jefferies' Form 8-Ks for discussions of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.

I would now like to introduce your host for today's conference, Mr. Richard Handler, Chairman and CEO of Jefferies. Mr. Handler, you may begin your conference.

Richard B. Handler

Good morning, and thank you for joining our discussion of Jefferies first quarter results. I am Rich Handler, CEO of Jefferies, and with me on the call today are Brian Friedman, Chairman of our Executive Committee; and Peg Broadbent, our Chief Financial Officer.

For the first quarter ended February 29, 2012, we posted net revenues of $780 million, net income to common shareholders of $77 million and earnings per share of $0.33. Our solid results reflect our continued growth in investment banking and strong results in fixed income. At quarter end, our assets were about $34.6 billion or about 9.5x shareholders' equity, slightly below our 9.9x leverage at the end of November.

During the quarter, we acquired the U.K. corporate broker, Hoare Govett, from RBS. This was another unique opportunity to advance our business with modest operating cost and no real use of capital in a period of challenge and industry consolidation. With a history of serving clients for over 100 years, Hoare Govett is one of the U.K.'s most prominent corporate brokers and is ranked #4 in terms of FTSE clients. This combination affirms our commitment to our U.K. and European investment banking and trading clients. The entire senior Hoare Govett corporate broking team, along with the relevant equity research, sales and capital market professionals who have joined Jefferies, totals 51 employee partners. With these additions, our headcount at March 1 was 3,875, down 23 people from year end.

For the time being, recent backstops of liquidity by the ECB into the European banking system and the Greek debt restructuring appear to have reduced the extreme anxiety surrounding the European sovereign debt and bank risks and consequently appear to have stabilized global credit markets. This more optimistic sentiment translated into increasingly higher fixed income and investment banking activity levels as our first quarter progressed. Equity volumes remained muted for much of the quarter, although we did note a pickup in equity activity toward the end of February. The same broad market trends have continued through the initial few weeks of our second quarter.

Now I'll turn it over to Peg to discuss our results and financial condition in more detail.

Peregrine C. de M. Broadbent

Thank you, Rich. As Rich said, our net revenues for our first fiscal quarter were $780 million. Our net income to common shareholders were $77 million and earnings per share of $0.33 versus $0.42 for the first quarter last year. The difference in EPS for the 2 quarters is largely attributable to an approximately 10% increase in our average shares outstanding due to our $500 million common equity raise in April 2011 and stronger results in Jefferies high-yield trading that shifted income to noncontrolling interests as we will explain below.

Investment banking revenues were $286 million, an increase of 20% over the first quarter of 2011 and 9% over the fourth quarter of 2011. Of the $286 million, capital markets revenues were $136 million and M&A and advisory revenues were $150 million. Fixed income revenues of $339 million were up 141% from last quarter's total of $141 million and 7% above last year's strong first quarter. Equities net revenues for our first quarter were $136 million, lower than the $177 million reported in the comparable quarter last year, but 10% stronger than last year's $124 million. Asset management revenues for the quarter were $6 million, a decrease from the $7 million reported from -- for the fourth quarter last year and the $24 million reported for the year-ago quarter, which included an exceptionally high performance fee accrual.

As per our revenues by source statement on Page 4 of our press release, the other revenue line was $13 million for the quarter and included the impact of 2 separate accounting items. First, we recognized a $3 million bargain purchase accounting gain related to the acquisition of Hoare Govett. This is similar to what happened last year with our Jefferies Bache acquisition. Second, we recorded a $10 million debt extinguishment gain in connection with our market -- making a market in our own bonds during December 2011. Significant price volatility and volumes of market-making activities in our own debt gave rise to this gain whereby, in effect, purchases are treated as extinguishments and sales as reissuances.

The $13 million overall net positive impact on earnings of this quarter's accounting gains was partially offset by the impact of our amortizing Bache acquisition items and the additional interest expense arising from debt extinguishment accounting. The resulting impact on net income was approximately $4 million or $0.01 per share. The net future impact of additional amortization due to both acquisition items and the debt extinguishment gains of the last 9 months will be about negative $0.02 per quarter for each of the remaining 3 quarters of this year, about negative $0.01 per quarter during 2013 and less than negative $0.01 per quarter thereafter until the end of 2018, all based on current shares outstanding.

The combination of our minority interest lines was $41.4 million this quarter versus $31.1 million for the first quarter of 2011, an increase of $10.3 million. Virtually all of the minority interests are with respect to our Jefferies high-yield trading joint venture, and therefore, the increase of $10.3 million was almost entirely driven by the strong performance of Jefferies high-yield trading during the first quarter of 2012. With this higher proportion of our operating results attributable to Jefferies high-yield trading, this incremental $10.3 million allocated to noncontrolling interests translated to a $0.04 reduction in EPS this quarter.

Non-compensation expenses were $163 million, seasonally lower than last year's fourth quarter of $178 million, but also reflecting lower brokerage and clearing costs, driven by lower equity trading volumes. Last year's first quarter non-compensation expenses of $136 million were prior to our Bache acquisition.

Our compensation expense ratio for the first quarter was 57.2% of net revenues. Due to our revenue mix this quarter, including significant net revenues in Jefferies high-yield trading, our comp ratio is lower than the adjusted rate of 59.4% recorded for fiscal 2011, which is calculated after adjusting net revenues for the 2011 accounting gains.

During the quarter, we repurchased 3.2 million shares at an average price of $15.17 per share. There are still about 14.4 million shares authorized for future repurchases. Book value per share was $15.97 at quarter end based on 206 million shares outstanding. Our adjusted book value per common share was $15.21 based on 228 million shares outstanding, including restricted stock units.

As Rich mentioned, we estimate total assets at February 29 were about 36 -- $34.6 billion or about 9.5x our estimated shareholders' equity. This was slightly down from our significantly reduced year-end balance sheet of $34.9 billion. We estimate that our average balance sheet during the most recent quarter end was about 22% higher than the quarter-end amount.

We estimate our total quarter-end Level 3 inventory, after accounting for noneconomic interests, was approximately $435 million. The vast majority of our inventory continues to be highly liquid, with 97% of our inventory continuing to be classified as either Level 1 or Level 2. We estimate that our quarter-end liquidity buffer was about $3.6 billion. Of the $3.6 billion, we estimate $2.6 billion was cash and about $1 billion was unencumbered liquid collateral. We estimate our average VaR for the quarter was approximately $9.9 million compared to last quarter's $9.4 million and the $10.6 million reported in the first quarter of 2011.

Our tax rate for the quarter was 35% versus 37.4% in the first quarter of 2011 and versus the adjusted full year tax rate of 36.2% for fiscal 2011 after adjusting profit before taxes for last year's accounting gains.

On March 1, we had a total of 3,875 employees, a net decrease of 23 from the 3,898 at the end of the last fiscal year. The change in headcount includes the impact of the modest reduction in staffing in our Equities business and associated support headcount reduction, which were partially offset by the addition of the 51 Hoare Govett employee partners in London and 33 additional employee partners in our Jefferies Bache business in furtherance of our growth plan.

Brian will now address in more detail our investment banking results.

Brian Paul Friedman

Thanks, Peg. As Peg indicated, investment banking revenues were a very solid $286 million for the first quarter, an increase of 20% from the $239 million generated during the comparable period last year. Our M&A and advisory revenues were $150 million in the first quarter, up 19% from the first quarter of 2011. Notable deals included our acting as sole advisor to Samson Investment Company in its $7.2 billion sale to a private equity group led by KKR and our role as sole advisor to XLHealth in its sale to UnitedHealth Group. We also sole advised Thomas -- Thoma Bravo on its $1.3 billion acquisition of Blue Coat Systems, and were sole lead arranger on the $525 million credit facility used to finance this acquisition. We also jointly advised Lionsgate on its $634 million acquisition of Summit Entertainment and acted as joint advisor to Brigham Exploration on its $4.6 billion sale to Statoil.

Capital markets revenues were $136 million for the quarter, up 20% from the first quarter of 2011, with debt capital markets generating $90 million and equity capital markets, $46 million. During the quarter, we completed 122 capital markets transactions, and our backlog for both debt and equity capital markets as well as M&A and advisory remains robust.

Notable capital markets deals during the quarter included our advising and financing A.M. Castle & Co. through a group of transactions related to the its acquisition of Tube Supply, including our acting as sole M&A advisor as well as sole book runner of A.M. Castle's $225 million acquisition bridge facility, $225 million senior notes offering, $100 million asset-based revolving credit facility and $58 million convertible notes offering.

We also acted as joint book runner on the $402 million common stock offering of Clearwire Corporation, the $257 million common stock offering of ARIAD Pharmaceuticals, the $273 million common stock offering of Westport Innovations, the $200 million IPO of U.S. Silica and the $187 million IPO of Roundies. Finally, we acted as sole manager on $700 million of add-on senior notes for Icon Enterprises and sole manager of a $423 million Ginnie Mae commercial mortgage securitization.

Now Rich will comment on our trading results before we take questions.

Richard B. Handler

Thanks, Brian. Our fixed income revenues were $339 million for the quarter, up 7% as compared to $318 million a year ago and up nearly 2.5x the $141 million reported for the fourth quarter of 2011. The significant improvement in our fixed income results was led by our credit businesses including leveraged credit, mortgages, municipals and international U.S. corporate bond sales and trading, which enjoyed a ramp-up in results throughout the quarter.

Our Rates business has also performing well during the period. Lower industry-wide futures activity levels meant that our Bache futures business performed below expectations during the quarter, although we foresee some pickup in this activity and growth through a rebound in activity and our addition of talented sales and trading professionals.

Our equity revenues were $136 million for the quarter, up from the $124 million reported for the fourth quarter, but down from the $177 million for the first quarter of 2011. Our equity results were impacted by low industry-wide volumes that picked up toward the end of the quarter.

We believe Jefferies is unique today in our intense focus on offering an integrated global capital markets platform to our clients and entrepreneurial culture to our employee partners. Our first quarter results show some of our potential, and we continue to believe in our future growth opportunities.

We are now available for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Patrick O'Shaughnessy with Raymond James.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

So my first question, if I could dig into your fixed income trading a little bit more. The great results that you guys saw this quarter, can you maybe provide a little bit more detail on how much of those good results were driven by just increased client trading activity and how much mark-to-market gains you might have seen this quarter just based off of the pricing trends that we saw in fixed income?

Richard B. Handler

Clearly, market prices have improved throughout fixed income for the quarter. But given the fact that A, our balance sheet was slightly -- was reduced, so we didn't come into the quarter with a very large balance sheet, I'd say the large percentage of the gains were due to healthy customer flows and reasonable bid-ask spreads.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

Okay, good. That is very useful. Second question I have is so you guys underwrote a loan to, I believe it's Harbinger Capital, not too long ago, $190 million loan. To what extent have you guys been able to syndicate that and what do you view your risk for that particular loan?

Richard B. Handler

That transaction was fully syndicated.

Operator

Your next question comes from Patrick Davitt with Bank of America Merrill Lynch.

M. Patrick Davitt - BofA Merrill Lynch, Research Division

I guess at the time of the acquisition of Bache, you had talked about how there was a lot of opportunity to risk that up a bit more, put leverage on it. It wasn't really managed appropriately for a business like that when it was a part of Prudential. Could you update us on that process? Is it largely done or are you still in the process of doing that? To what -- and when do you expect it to become a fully contributing ROE contributor?

Brian Paul Friedman

Yes, I'm not sure we ever would have said anything about financial leverage. There's no question that, in our view, there's a fair amount of operating leverage and the operating leverage is the fact that we acquired a strong infrastructure and broad-based capability in futures commodities and ForEx, we'll be doing some strengthening of the infrastructure. But we saw then and we see even more clearly now that there's a lot of opportunity to add particularly salespeople as well as some trading capability and grow that platform. As Peg indicated earlier, I think the number was 34 people that we added in the first quarter. We're continuing to add to that platform in the second quarter. So you're going to see the headcount rise a bit predominantly in the front office side, in the production end. And I would say the process of developing that platform is going to be throughout this year and even beyond this year, so you're going to see us adding to it. It should start to contribute more over the next couple of quarters.

M. Patrick Davitt - BofA Merrill Lynch, Research Division

Okay, great. And on the regulatory front, there's still a number of legislators talking about, particularly players in commodities and derivatives trading, being subject to some of the provisions in Dodd-Frank regardless of bank holding company status. Do you all have any view on that or more color than what we've read in the press?

Brian Paul Friedman

I'm not sure we have any more color. I would probably separate that there's been lots of suggestions made for activities relating to futures and commodities coming out of the MF experience. We'll see what that entails, but we've always been in full compliance and we'll continue to be. I don't know that we've seen anything new on the Dodd-Frank. We're waiting to see the rule-making and the rest. But on balance, we think that, that should have more opportunity than issue for us.

Operator

Your next question comes from the line of Joel Jeffrey with KBW.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Rich, I think in the past, you've talked about your leverage ratio and your belief that in the times that we're in, that investors wouldn't give you guys credit for generating additional earnings through higher leverage ratios. Given that the market's seeming to be improving, do you think the sentiment has changed and would that impact the way you guys think about your leverage ratio?

Richard B. Handler

I think we're always going to be mindful of our leverage ratio. I think that's served us well over the past 20-plus years. I still think the environment, while it was a healthy period, it wasn't that unhealthy -- it was not long ago that it was unhealthy, so we're very mindful of the macro environment. That being said, I think this is a period where with a reduced balance sheet, you're still able to generate very reasonable returns, especially if we get continued operating leverage from our bank. So I don't think we need to expand our leverage ratios to deliver good results. I think we'll take the environment as we see it each day.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then staying with the, sort of with the FICC numbers, how much of the FICC revenue was generated from any kind of European sovereign trading? And can you give us any update on your gross or net exposures?

Brian Paul Friedman

Well, we will publish our exposures, but you're not going to see anything substantially different from what you saw at the end of the fiscal year. Our performance in international rates for this quarter versus the year-ago quarter was a little better, but not material to the overall revenue levels. Our first quarter this year in fixed income was fairly comparable in the spread of revenue across all of our different trading desks, domestic and international, as it was last year. Obviously, some small differences, but not big differences.

Operator

Your next question comes from the line of David Trone with JMP Securities.

David M. Trone - JMP Securities LLC, Research Division

On the non-comp side, you guys came in pretty lean and I think even below guidance. So is there anything unusual in there, particularly 4 was pretty low. Any thoughts on how we should think about non-comp going forward?

Peregrine C. de M. Broadbent

No, as I indicated, David, in the prepared remarks, I mean, firstly, on a -- seasonally, it tends to be -- our first quarter, which includes December and the holiday period therein, tends to mean that our non-comps are sort of relatively light, everything else being equal during the course of the first quarter. Secondly, I also indicated that our brokerage and clearing numbers were down a little because equity volumes were somewhat muted during the quarter, particularly the first month or two. I'd say that our non-comps going forward will be somewhere around sort of low 170s, but we're going to pay a large amount of attention to controlling our costs in the up-and-coming months and throughout the course of this year. So to the extent we can keep those costs below the 170s, that would certainly be our aspiration at this point.

David M. Trone - JMP Securities LLC, Research Division

Well, I guess I'm not following exactly on an apples-to-apples basis because your equities were, correct me if I'm wrong, versus fourth quarter were up 10%?

Peregrine C. de M. Broadbent

Our equity revenues were comparable to the fourth quarter, I believe. And our brokerage and clearing costs compared to the fourth quarter were down a little, so there's always a little bit of noise in terms of mark-to-market and some other activities that can give rise to changes in equity revenues quarter-over-quarter. They're very comparable. The equity revenues were comparable. I'm just saying that the brokerage and clearing costs during the course of the first quarter were down a little bit compared to the fourth quarter of last year, not the first quarter of last year, the fourth quarter of last year just because the equity volumes were down a little.

David M. Trone - JMP Securities LLC, Research Division

Yes, okay. I guess we're -- I understand what you're saying. I'm just looking at the 136.2 versus...

Peregrine C. de M. Broadbent

The 136.2 for the first quarter of last year, as I've said in my prepared remarks, does not include Bache activity. So you were really comparing apples to oranges when you compare the first quarter of this year in the 160s compared to the first quarter of last year. The gap between the 2 is driven by the advent of the acquisition of Bache, which took place in -- during the course of the third quarter. We closed on that acquisition during the course of third quarter of last year. So that's the difference between the first quarter of 2011 and the first quarter of 2012 from a non-comp perspective.

David M. Trone - JMP Securities LLC, Research Division

Yes, I guess I'm looking at fourth quarter 136 versus 124, right, which is about a 10% difference and then floor goes from 30 -- goes to 28 from 34. I guess that -- I understand it's not going to be a perfect correlation. I guess that was just a pretty big variable.

Brian Paul Friedman

Yes, there's a lot of items in that. And if you look at the pure cash equities Q4 going to Q1, it's a little -- those numbers are closer in line than the total numbers, which show you and then we have a little bit of cost savings on the clearing numbers.

David M. Trone - JMP Securities LLC, Research Division

Yes, yes. Okay, okay. I didn't mean to beat a dead horse on that. But in terms of looking bigger picture philosophically, you've got HG, you've got Bache and kind of where do you go from here? Are you still going to continue the pace of expansion both organically and through deals? I know you don't have a crystal ball and don't know what's out there, but can you give us a sense for how aggressive you'll be on the expansion front?

Richard B. Handler

Look, I think what you're going to see from us is the same thing you've seen historically. We're going to play aggressive offense and aggressive defense, and we're going to make sure that we can really participate in the space that we're in. The company today is in a very unique spot. We've got a platform that's got the products, the services. It's global. It's independent. It's entrepreneurial. And the competitive landscape has never been better for us. So we plan on being aggressive as we build our company. At the same time, we're going to be very mindful of the macro environment and make sure that we are protecting our platform at all costs. And a way to say it is it's offense, but it's guarded offense.

David M. Trone - JMP Securities LLC, Research Division

Yes. Any specific thoughts on Asia, maybe getting bigger there?

Richard B. Handler

We've been expanding in investment banking. I mean, Brian, you want to comment on it?

Brian Paul Friedman

Yes, I'd say we feel we have the equity footprint we need for this year, and we've been adding on the investment banking side. We expect to see some of the results come through as this year progresses.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer & Co.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

I wonder if you can just give us a little bit more color on the interplay between the size of the balance sheet and the revenue opportunity. And I guess even though all the periods aren't comparable, in the fourth quarter, Goldman and Morgan Stanley's balance sheet was down 4% or 5%, something like that, and yours was down 22%. And you kept it flat here. And I'm curious kind of does that translate into a loss of share? And if your balance sheet had been 10% or 20% larger, is there any way to think about how much revenue you left on the table?

Richard B. Handler

Okay. First off, I think in fixed income, it's a general statement, but I believe that we have pretty much gained share in our various businesses in fixed income. And the balance sheet can be a little bit misleading. In times of very frothy periods, you almost need more -- and frothy means lots of participants, very tight bid-ask spreads, new entrants into the marketplace, large amounts of capital will not be in use to be used to keep market share. And your returns aren't necessarily robust based upon that capital base. I think the time period we've had right now is you're seeing a number of larger foreign players who had ambitions of being global are choosing to go back to their respective countries to basically satisfy their regulators and the rating agencies and it creates an opportunity for a firm like ourselves to use our balance sheet, but not leading with our balance sheet, and gain market share. So I think it's more complicated than saying the larger the balance sheet, the more the returns. It's really the opportunity and we see right now a very reasonable opportunity to use our balance sheet, keep it at a decent size. It's still a big balance sheet. It's not like we're exiting the business. It's basically a meaningful amount of capital, and we're getting market share.

Brian Paul Friedman

If you look at last year's balance sheets by quarter, you'll see that our balance sheets peaked in the third quarter into the fourth quarter, and those were our 2 weakest quarters in fixed income. So if you go back to first quarter last year, that was solid just like this quarter. That balance sheet wasn't nearly as big as the balance sheet was in the third quarter or the fourth quarter, so what Rich is saying about the correlation is not that close.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Okay. And I guess just, I'd also love some perspective on the high-yield market. It seems like the -- just in a low-rate environment, the flavor of the day is anything that will generate some yield, and high yield's been the most active area of underwriting. And wonder if you have a perspective on whether this is still just getting going given the low rates and the chase for yield all around, or are we getting into the more frothy, dangerous part of the -- of that cycle?

Richard B. Handler

My personal opinion is it's a very attractive place to be, given low rates and given the fact that people really haven't embraced the equity markets yet and the rest of the fixed income market is pretty tightly bid, and default rate is still relatively low and expect it to be relatively low for the foreseeable future. Obviously, it's economy-dependent and absolute interest-rate dependent. But the flow has been very healthy. The new issue market has been healthy. Supply has been soft up and I think it's a pretty healthy functioning marketplace right now, and we're happy to be participating in a significant way.

Operator

Your next question comes from the line of Jeff Harte with Sandler O'Neill + Partners.

Jeffrey Harte - Sandler O'Neill + Partners, L.P., Research Division

Can you talk a little bit about how you're thinking about the share count or maybe how we should? I mean it's -- the shares issued were -- spiked quite a bit this quarter and the buyback stayed similar to where it had been. How should we be thinking about that going forward?

Richard B. Handler

Well, I think the shares issued was relatively higher because our stock price was relatively low at year end. That being said, we did buy 3.5 million shares back in. And I think the thought process is to try to keep our share count consistent as we have historically. Peg, you want to add?

Peregrine C. de M. Broadbent

Yes, the stock compensation that we granted in the fourth quarter impacted our equity account in the fourth quarter. However, the shares outstanding weren't impacted until the first. It's just a quirk of how the legal stroke accounting activities work. So we issued 6 million to 7 million -- granted 6 million to 7 million shares of stock compensation last year and it didn't impact the share count until this first quarter. Additionally, in terms of EPS, some diluted share count, last quarter, we took out the impact or the potential impact of our convertible converting because it had an anti-dilutive effect. That came back in this quarter. And that was about a 4 million increase and then the offset to that was a 3 million reduction as a result of repurchases, as Rich indicated.

Jeffrey Harte - Sandler O'Neill + Partners, L.P., Research Division

Okay. And the -- I don't think I heard you mention this, but the investment income losses in the quarter, with the way risk assets really rallied, it seemed across-the-board in the quarter, what drove the loss there?

Peregrine C. de M. Broadbent

There were some modest gains of -- in our convertible fund asset appreciation there that was offset by some losses in one of our new equity-based asset management businesses.

Jeffrey Harte - Sandler O'Neill + Partners, L.P., Research Division

Okay. And on fixed income a little bit, I mean high-yield apparently had a good quarter. Can you give us any insight as to how quickly some of the inventory turns over within the high-yield business? I mean how much of it is inventory held or you maybe not realizing gains versus actually realizing them?

Richard B. Handler

I mean it's a combination of everything. We have some strategic holds in the portfolio, but the large proportion of it is inventory that we use for market-making that turns over very quickly. That being said, we set the vehicle up to allow us to have particular positions that we can take principal risk in if we choose to.

Jeffrey Harte - Sandler O'Neill + Partners, L.P., Research Division

Okay. And you mentioned opportunities as European banks exit. I mean we hear talk about that quite a bit. Can you -- I mean are there specific markets or products where you're really seeing opportunities from European bank exits?

Richard B. Handler

Look, we're seeing opportunities in fixed income. We're seeing opportunities in equity and we're seeing opportunities in banking. I mean across the board, and you can just look at the headline and see a number of larger banks are choosing to do what they do best, basically lending in their respective countries. And that's what the regulators want and that's what the rating agencies want and that's what the management is deciding to do.

Brian Paul Friedman

And keep in mind that we have 2 levels in which we compete with them. One is the one you're focused on, which is clients and to the extent that there's less competition, there's more clarity as to what we can add. Equally, there's competition for talented individuals and with some of these banks pulling back, it's causing some very capable people to be available to us, and that's additive.

Jeffrey Harte - Sandler O'Neill + Partners, L.P., Research Division

Okay. I mean like looking at equity and banking, I guess maybe within fixed income, are there specific areas where -- I mean are there specific products -- that's a big group of products where you can be gaining shares, are there specific areas you're seeing it more in?

Richard B. Handler

I mean it's -- I don't want to name specific competitors, but there's opportunities in high yield, there's opportunities in mortgages, there's opportunities in high-grade bonds. I mean we believe we're gaining share in various aspects of our fixed income business.

Operator

Your next question comes from the line of Vera Allain with UBS.

Vera Allain

I just had a quick question on funding and liquidity. I wanted to find out what percentage of your repo book is currently on term? And what is the weighted average maturity of the term book?

Peregrine C. de M. Broadbent

Well, the first thing to say about our repo activity is that about 90% of our repo activity is with respect to sort of a clearing corporation-eligible securities, i.e, most of the repo activity or the vast majority of it is cleared through an exchange in some way, shape or form, either the London Clearing House or Government Clearing Corporation here in the United States. With respect to the remaining 10%, which is not clearing corporation-eligible, it's at around the 2-month market is the average term, a little less at this point in time then 2 months is the average term of the non-clearing corporation-eligible repo activity.

Vera Allain

And then what kind of collateral are foreseeing? Can you tell me what percentage is kind of less liquidity than agency or treasuries?

Peregrine C. de M. Broadbent

Yes, I'd say that's about 83%, 84% of our total inventory is what I'll call highly liquid and attracts repo haircuts of 10% or less. So the remaining is sort of a little less than highly liquid. If you take our mortgage book, we're still sort of 80% to 90% for mortgage inventory is some agency. So again, whether it's reflected in the Level 3 statistics or what I just quoted with respect to clearing corporation-eligible securities, the vast majority of our inventories remains highly liquid.

Operator

Your next question comes from the line of Meredith Whitney with Meredith Whitney Advisory Group.

Meredith Ann Whitney - Meredith Whitney Advisory Group LLC

I have one question for Peg and then one question for Brian and Rich, please. Peg, could you just simplify all the moving parts and tell us what the CI impact this quarter?

Peregrine C. de M. Broadbent

Sorry, I beg your pardon, Meredith, you're referring to...

Meredith Ann Whitney - Meredith Whitney Advisory Group LLC

Well, I'm trying to just simply get to the movement in tangible book and I'm assuming that's...

Peregrine C. de M. Broadbent

Well, that's why I actually -- from a tangible book perspective, I do try to encourage people to look at the adjusted numbers. We had -- in terms of tangible book, we had increases in, obviously, our earnings contributed $77 million or so and we paid a dividend, so there's a small increase in tangible book. I encourage people actually to look in terms of book -- tangible book value per share, I actually encourage folks to look at the adjusted tangible book value per share number because as I indicated to Jeff, there's sort of large timing differences between our outstanding share counts as measured by GAAP. So from -- I tend to encourage people to look at the adjusted tangible book value per share number rather than the GAAP book value per share number, and you can see a modest increase in that, which is driven really by the increase -- by the earnings this quarter.

Meredith Ann Whitney - Meredith Whitney Advisory Group LLC

Okay. And then the second question is if you looked at business valuations, and this is business valuations from the asset disposition markets and not just individual securities but portfolios, businesses akin to some of the ones that you have acquired over the last couple of years. Would the pricing be different or is the pricing different post LTRO? Does it change the opportunities on the disposition front materially?

Brian Paul Friedman

If you look at the Bache acquisition or the Hoare Govett, I mean frankly, the Hoare Govett was 0. So to get it much more favorable than that is kind of tough. I mean you really should look at that as a mass hire coupled with business flow. So we were able to hire 50 people that were accustomed to working together, and more importantly or equally importantly, their customer relationships came with them intact with their former employer supporting the transition. So it doesn't get any better than that. We're pleased with that. If you go back to the Bache deal, we bought it at tangible book value and because of some odds and ends that came with it, we actually had a bargain purchase gain, meaning we got some modest edge versus book value. Again, once in a while in business, you're going to see things go for less than tangible book, but it's not very often. And it was a highly liquid book, so we felt that our downside was fairly limited. So I don't think pricing on those kind of assets can go much lower or are much lower today. I think what happens is people don't transact, they don't lightly exit businesses. If they take a haircut, it's relatively small, it doesn't matter.

Meredith Ann Whitney - Meredith Whitney Advisory Group LLC

Okay. So I just -- those clearly were excellent values. I'm just wondering if was LTRO a game changer in terms of sense of urgency or did values like that are clearly in the rearview mirror on a go-forward basis?

Brian Paul Friedman

For the last 3, 4 years, right, since '07, '08, you keep wanting to think that the past is in the past and then you still get little gifts that come from it. So we might have said 3 months ago that we didn't see anything in the offing and whatever, whatever. And yet we just finished the Hoare Govett thing. And the Hoare Govett really probably came about because of decisions being made by the principal shareholder of RBS. So I don't think we're done with the aftermath of '08 or 2011 in terms of some of the challenges faced by the larger financial institutions. Whether that creates more opportunity for us in acquisitions and absorptions, I don't know, but again, 4 months ago, I don't think we were thinking that Hoare Govett was going to land in our lap, and we're thrilled it did.

Operator

Your next question comes from the line of Mohad Baird [ph] with HSBC.

Unknown Analyst

I just wanted to know how the geographical breakdown of revenue is there for the first quarter since we have acquired Prudential Bache and also Hoare Govett from RBS this 2012?

Brian Paul Friedman

Not going to be able to give you a precise number, but if you go back to 2011, we were running almost 80% U.S., a little over 20% outside the U.S. This quarter, the performance in the U.S. was proportionally stronger than the performance in Europe and Asia. So it might skew a little bit more U.S. I think we believe we're going to be trending up over time, but this quarter wasn't that trend.

Unknown Analyst

One more thing, can you discuss something about the performance of Jefferies Bache in U.K. per se?

Brian Paul Friedman

I'm sorry, I missed the last few words, Jefferies Bache, please go ahead.

Unknown Analyst

Yes, Jefferies Bache performance during the first quarter of 2012?

Brian Paul Friedman

As I think Peg mentioned, it was a little bit below our expectations. I think that the principal reason for that is, I think, the aftermath of MF Global where industrials, as well as others, pulled back a little bit their level of activity as there was uncertainty in the market. We think that will be coming back over the next quarter or 2. At the same time, we've continued to strengthen the platform. That wasn't really felt in the first quarter, but we think that'll be felt in the second quarter and into the future.

Operator

That concludes our question-and-answer session for today. I hand the program back over to Mr. Handler for closing remarks.

Richard B. Handler

Thank you, everybody, for participating, and have a nice day.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Jefferies Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts