Notes to Consolidated Financial Statements
Note 1. Nature of Operations
Leucadia National Corporation (“Leucadia” or the “Company”) is a diversified holding company focused on long-term value creation to maximize shareholder value. We continuously review acquisitions of businesses, securities and assets that have the potential for significant long-term value creation, invest in a broad array of businesses, and evaluate the retention and disposition of our existing operations and holdings. Changes in the mix of our businesses and investments should be expected.
Our financial services businesses and investments include Jefferies (investment banking and capital markets), Leucadia Asset Management (asset management), Berkadia (commercial mortgage banking, investment sales and servicing), FXCM (provider of online foreign exchange trading services), HomeFed (publicly traded real estate company) and Foursight Capital (vehicle finance). We also own and have investments in a diverse array of other businesses, including National Beef (beef processing), HRG Group (insurance and consumer products), Vitesse Energy and JETX Energy (oil and gas exploration and development), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy), Idaho Timber (manufacturing company), and Golden Queen (gold and silver mining project). The structure of each of our investments was tailored to the unique opportunity each transaction presented. Our investments may be reflected in our consolidated results as consolidated subsidiaries, equity investments, securities, or in other ways, depending on the structure of our specific holdings.
Jefferies is a global full-service, integrated securities and investment banking firm. In March 2013, Jefferies became an indirect wholly-owned subsidiary of Leucadia, yet retains a separate credit rating and continues to be a separate SEC reporting company. Through Jefferies, we own
50%
of Jefferies Finance LLC ("Jefferies Finance"), our joint venture with Babson Capital Management LLC (now Barings, LLC) and Massachusetts Mutual Life Insurance Company. Jefferies Finance is a commercial finance company whose primary focus is the origination and syndication of senior secured debt of middle market and growth companies in the form of term and revolving loans. Through Jefferies, we also own a
48.5%
voting interest in Jefferies LoanCore, LLC ("Jefferies LoanCore"), a joint venture with the Government of Singapore Investment Corporation, the Canadian Pension Plan Investment Board and LoanCore, LLC. Jefferies LoanCore originates, purchases and securitizes commercial real estate loans throughout the U.S.
Jefferies has a November 30 year-end, which it retains for standalone reporting purposes. We reflect Jefferies in our consolidated financial statements utilizing a one month lag. We have reviewed Jefferies business and internal operating results for the month of March 2017 for the purpose of evaluating whether financial statement disclosure or adjustments are required in this Quarterly Report on Form 10-Q, and we have concluded that no additional disclosures or adjustments are warranted.
Leucadia Asset Management ("LAM") supports and develops focused alternative asset management businesses led by distinct management teams. These primarily include Folger Hill Asset Management LLC ("Folger Hill"), a multi-manager discretionary long/short equity hedge fund platform; Topwater Capital, a first-loss product; 54 Madison Capital, LLC ("54 Madison"), which invests in real estate projects; CoreCommodity Management LLC, an asset manager that focuses on commodities strategies; Tenacis Capital, a systematic macro investment platform; Lake Hill, an electronic trader in listed options and futures across asset classes; as well as several other smaller businesses. In addition, several investment management businesses, including Jefferies Strategic Investments Division, operate under Jefferies and are included under our marketing of the LAM platform.
Our investment in FXCM Group, LLC ("FXCM") and associated companies consists of a senior secured term loan due January 2018 (
$123.0 million
outstanding at
March 31, 2017
), a
49.9%
common membership interest in FXCM and up to
65%
of all distributions. FXCM's
six
-member board is comprised of
three
directors appointed by Leucadia and
three
directors appointed by Global Brokerage Holdings, LLC ("Global Brokerage Holdings" and formerly FXCM Holdings, LLC). See Notes 3 and 9 to our consolidated financial statements for additional information.
Berkadia Commercial Mortgage LLC ("Berkadia"), our 50-50 equity method joint venture with Berkshire Hathaway Inc., is a U.S. commercial real estate company providing capital solutions, investment sales advisory and mortgage servicing for multifamily and commercial properties.
We own an approximate
70%
equity method interest in HomeFed, which owns and develops residential and mixed use real estate properties. HomeFed is a public company traded on the NASD OTC Bulletin Board.
We own
100%
of Foursight Capital, an auto loan originator and servicer, and
85%
of Chrome Capital, which owns and manages a portfolio of leases on used Harley-Davidson motorcycles and is in the process of winding down.
We own approximately
23%
of HRG Group, Inc. ("HRG"), a publicly traded company (NYSE: HRG), and we reflect this investment at fair value based on quoted market prices. HRG primarily owns approximately
58%
of Spectrum Brands, a publicly traded (NYSE: SPB) global consumer products company; an approximately
80%
ownership stake in Fidelity & Guaranty Life ("FGL"), a publicly traded (NYSE: FGL) life insurance and annuity products company; and Front Street, a long-term reinsurance company. On November 8, 2015, FGL and Anbang Insurance Group Co., Ltd. ("Anbang") entered into a definitive merger agreement pursuant to which Anbang would have acquired FGL for
$26.80
per share in cash. On April 17, 2017, FGL terminated the merger agreement with Anbang and announced that it is continuing to evaluate strategic alternatives to maximize shareholder value and has received interest from a number of parties.
We own
78.9%
of National Beef Packing Company. National Beef processes and markets fresh and chilled boxed beef, ground beef, beef by-products, consumer-ready beef and pork, and wet blue leather for domestic and international markets. National Beef operates
two
beef processing facilities,
three
consumer-ready facilities and a wet blue tanning facility, all located in the U.S. National Beef operates one of the largest wet blue tanning facilities in the world that sells processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries. National Beef owns Kansas City Steak Company, LLC, which sells portioned beef and other products directly to customers through the internet, direct mail and direct response television. National Beef also owns a refrigerated and livestock transportation and logistics company that provides transportation services for National Beef and third parties.
Vitesse Energy, LLC ("Vitesse") is our
96%
owned consolidated subsidiary that acquires and develops non-operated working and royalty oil and gas interests in the Bakken Shale oil field in North Dakota and Montana as well as the Denver-Julesburg Basin in Wyoming.
JETX Energy, LLC ("JETX"), formerly Juneau Energy, LLC, is our
98%
owned consolidated subsidiary that engages in the exploration, development and production of oil and gas from onshore, unconventional resource areas. JETX currently has non-operated working interests and acreage in the Texas Gulf Coast regions.
Garcadia is an equity method joint venture that owns and operates
28
automobile dealerships in California, Texas, Iowa and Michigan. We own approximately
75%
of Garcadia.
We own approximately
42%
of the common shares of Linkem, as well as convertible preferred shares which, if converted, would increase our ownership to approximately
53%
of Linkem's common equity at
March 31, 2017
. Linkem provides residential broadband services using LTE technologies deployed over the 3.5 GHz spectrum band. Linkem operates in Italy, which has few cable television systems and poor broadband alternatives. Linkem is accounted for under the equity method.
Conwed Plastics ("Conwed") was our consolidated subsidiary that manufactured and marketed lightweight plastic netting used for building and construction, erosion and sediment control, packaging, agricultural purposes, carpet padding, filtration, consumer products and other purposes. In January 2017, we sold
100%
of Conwed to Schweitzer-Mauduit International, Inc., (NYSE: SWM) for
$295 million
in cash plus potential earn-out payments over
five
years of up to
$40 million
in cash to the extent the results of Conwed’s subsidiary, Filtrexx International, exceed certain performance thresholds. We recognized a
$179.9 million
pre-tax gain on the sale of Conwed in Other revenues in the three months ended March 31, 2017.
Idaho Timber is our consolidated subsidiary engaged in the manufacture and distribution of various wood products, including the following principal activities: remanufacturing dimension lumber; remanufacturing, bundling and bar coding of home center boards for large retailers; and production of pine dimension lumber and 5/4” radius-edge pine decking.
Golden Queen Mining Company, LLC ("Golden Queen") owns the Soledad Mountain project, an open pit, heap leach gold and silver mining project in Kern County, California, which commenced gold and silver production in March 2016. We and the Clay family have formed and made contributions to a limited liability company, controlled by us, through which we invested in Golden Queen for the development and operation of the project. Our effective ownership of Golden Queen is approximately
35%
and is accounted for under the equity method.
Note 2. Basis of Presentation and Significant Accounting Policies
Our unaudited interim consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes which are normally included in our Annual Report on Form 10-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations.
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, we evaluate all of these estimates and assumptions. The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, asset impairment, the ability to realize deferred tax assets, the recognition and measurement of uncertain tax positions and contingencies. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.
Fair Value Hierarchy
In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:
|
|
|
Level 1:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
|
|
Level 2:
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments fair values for which have been derived using model inputs that are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
|
Level 3:
|
Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
Financial instruments are valued at quoted market prices, if available. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, the financial instrument is valued at the point within the bid-ask range that meets our best estimate of fair value. We use prices and inputs that are current at the measurement date. For financial instruments that do not have readily determinable fair values using quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments.
The valuation of financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuation models may be made when, in management’s judgment, features of the financial instrument such as its complexity, the market in which the financial instrument is traded and risk uncertainties about market conditions require that an adjustment be made to the value derived from the models. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument and market conditions. As the observability of prices and inputs may change for a financial instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy levels. Transfers among the levels are recognized at the beginning of each period. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Valuation Process for Financial Instruments
The Jefferies Independent Price Verification ("IPV") Group, which is part of the Jefferies finance department, in partnership with Jefferies Risk Management, is responsible for establishing Jefferies valuation policies and procedures. The IPV Group and Risk Management, which are independent of business functions, play an important role and serve as a control function in determining that Jefferies financial instruments are appropriately reflected at fair value. This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. The IPV Group reports to the Jefferies Global Controller and is subject to the oversight of the IPV Committee, which includes senior members of Jefferies finance department and other personnel. Jefferies independent price verification policies and procedures are reviewed, at a minimum, annually and changes to the policies require the approval of the IPV Committee.
Price Testing Process
. Jefferies business units are responsible for determining the fair value of Jefferies financial instruments using approved valuation models and methodologies. In order to ensure that the business unit valuations represent a fair value exit price, the IPV Group tests and validates the fair value of the financial instruments inventory. In the testing process, the IPV Group obtains prices and valuation inputs from sources independent of Jefferies, consistently adheres to established procedures set forth in the valuation policies for sourcing prices and valuation inputs and utilizing valuation methodologies. Sources used to validate fair value prices and inputs include, but are not limited to, exchange data, recently executed transactions, pricing data obtained from third party vendors, pricing and valuation services, broker quotes and observed comparable transactions.
To the extent discrepancies between the business unit valuations and the pricing or valuations resulting from the price testing process are identified, such discrepancies are investigated by the IPV Group and fair values are adjusted, as appropriate. The IPV Group maintains documentation of its testing, results, rationale and recommendations and prepares a monthly summary of its valuation results. This process also forms the basis for the classification of fair values within the fair value hierarchy (i.e., Level 1, Level 2 or Level 3). The IPV Group utilizes the additional expertise of Risk Management personnel in valuing more complex financial instruments and financial instruments with less or limited pricing observability. The results of the valuation testing are reported to the IPV Committee on a monthly basis, which discusses the results and determines the financial instrument fair values in the consolidated financial statements. This process specifically assists management in asserting as to the fair presentation of our financial condition and results of operations as included within our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. At each quarter end, the overall valuation results, as determined by the IPV Committee, are presented to the Jefferies Audit Committee.
Judgment exercised in determining Level 3 fair value measurements is supplemented by daily analysis of profit and loss performed by the Product Control functions. Gains and losses, which result from changes in fair value, are evaluated and corroborated daily based on an understanding of each trading desk's overall risk positions and developments in a particular market on the given day. Valuation techniques generally rely on recent transactions of suitably comparable financial instruments and use the observable inputs from those comparable transactions as a validation basis for Level 3 inputs. Level 3 fair value measurements are further validated through subsequent sales testing and market comparable sales, if such information is available. Level 3 fair value measurements require documentation of the valuation rationale applied, which is reviewed for consistency in application from period to period.
Third Party Pricing Information
. Pricing information obtained from external data providers (including independent pricing services and brokers) may incorporate a range of market quotes from dealers, recent market transactions and benchmarking model derived prices to quoted market prices and trade data for comparable securities. External pricing data is subject to evaluation for reasonableness by the IPV Group using a variety of means including comparisons of prices to those of similar product types, quality and maturities, consideration of the narrowness or wideness of the range of prices obtained, knowledge of recent market transactions and an assessment of the similarity in prices to comparable dealer offerings in a recent time period. Jefferies processes challenge the appropriateness of pricing information obtained from external data providers (including independent pricing services and brokers) to validate the data for consistency with the definition of a fair value exit price. Jefferies process includes understanding and evaluating the external data providers’ valuation methodologies. For corporate, U.S. government and agency, and municipal debt securities, and loans, to the extent independent pricing services or broker quotes are utilized in Jefferies valuation process, the vendor service providers are collecting and aggregating observable market information as to recent trade activity and active bid-ask submissions. The composite pricing information received from the independent pricing service is thus not based on unobservable inputs or proprietary models. For mortgage- and other asset-backed securities, collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs"), the independent pricing services use a matrix evaluation approach incorporating both observable yield curves and market yields on comparable securities as well as implied inputs from observed trades for comparable securities in order to determine prepayment speeds, cumulative default rates and loss severity. Further, Jefferies considers pricing data from multiple service providers as available as well as compares pricing data to prices observed for recent transactions, if any, in order to corroborate valuation inputs.
Model Review Process
. If a pricing model is used to determine fair value, the pricing model is reviewed for theoretical soundness and appropriateness by Risk Management, independent from the trading desks, and then approved by Risk Management to be used in the valuation process. Review and approval of a model for use may include benchmarking the model against relevant third party valuations, testing sample trades in the model, backtesting the results of the model against actual trades and stress-testing the sensitivity of the pricing model using varying inputs and assumptions. In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model. Models are independently reviewed and validated by Risk Management annually or more frequently if market conditions or use of the valuation model changes.
Hedge Accounting
Jefferies applies hedge accounting using interest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate senior long-term debt. Jefferies interest rate swaps are included within Trading assets - Derivatives and Trading liabilities - Derivatives in the Consolidated Statements of Financial Condition. Jefferies uses regression analysis to perform ongoing prospective and retrospective assessments of the effectiveness of these hedging relationships. A hedging relationship is deemed effective if the change in fair value of the interest rate swap and the change in the fair value of the long-term debt due to changes in the benchmark interest rate offset within a range of
80%
to
125%
. The impact of valuation adjustments related to Jefferies own credit spreads and counterparty credit spreads are included in the assessment of effectiveness. For qualifying fair value hedges of benchmark interest rates, the change in the fair value of the derivative and the change in fair value of the long-term debt provide offset of one another, and together with any resulting ineffectiveness, are recorded in Interest expense. See Note 4 for further information.
Receivables
At
March 31, 2017
and
December 31, 2016
, Receivables include receivables from brokers, dealers and clearing organizations of
$2,868.2 million
and
$2,062.9 million
, respectively, and receivables from customers of securities operations of
$1,181.9 million
and
$843.1 million
, respectively.
Payables, expense accruals and other liabilities
At
March 31, 2017
and
December 31, 2016
, Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of
$2,967.6 million
and
$3,290.4 million
, respectively, and payables to customers of securities operations of
$2,412.1 million
and
$2,297.3 million
, respectively.
Accounting Developments - Accounting Standards to be Adopted in Future Periods
Revenue Recognition.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The core principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance is effective for interim and annual periods beginning after December 15, 2017. We intend to adopt the new guidance with a cumulative-effect adjustment to opening retained earnings and our evaluation of the impact this new guidance will have on our consolidated financial statements is ongoing.
Financial Instruments.
In January 2016, the FASB issued new guidance that affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact of the new guidance related to equity investments and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. Early adoption was permitted for the accounting guidance on financial liabilities under the fair value option and we adopted this guidance in the first quarter of 2016. The adoption of the guidance on financial liabilities under the fair value option did not have a significant impact on our consolidated financial statements.
Leases.
In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for leases. The FASB requires the recognition of lease assets and lease liabilities on the statement of financial condition. The guidance is effective for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
Financial Instruments - Credit Losses.
In June 2016, the FASB issued new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective for annual and interim periods beginning after December 15, 2019. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
Cash Flow Classifications.
In August 2016, the FASB issued new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
Goodwill.
In January 2017, the FASB issued new guidance for simplifying goodwill impairment testing. The guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
Retirement Benefits.
In March 2017, the FASB issued new guidance for improving the presentation of net periodic pension costs in the statement of operations. The update also allows the service cost to be eligible for capitalization, when applicable. The guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Accounting Developments - Adopted Accounting Standards
Share-Based Payments to Employees.
In January 2017, we adopted the FASB's new guidance that simplifies and improves accounting for share-based payments. The amendments include the recognition of all excess tax benefits and tax deficiencies as income tax expense or benefit in the statement of operations and changes to the timing of recognition of excess tax benefits, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The adoption of this guidance did not have a significant impact on our consolidated financial statements. We elected to account for forfeitures as they occur, which results in dividends and dividend equivalents originally charged against retained earnings for forfeited shares to be reclassified to compensation cost in the period in which the forfeiture occurs.
Note 3. Fair Value Disclosures
The following is a summary of our financial instruments, trading liabilities and long-term debt that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value ("NAV") (within trading assets) of
$24.2 million
and
$24.3 million
, respectively, by level within the fair value hierarchy at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Level 1 (1)
|
|
Level 2 (1)
|
|
Level 3
|
|
Counterparty
and
Cash
Collateral
Netting (2)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Trading assets, at fair value:
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
2,620,350
|
|
|
$
|
86,959
|
|
|
$
|
20,580
|
|
|
$
|
—
|
|
|
$
|
2,727,889
|
|
Corporate debt securities
|
—
|
|
|
2,422,480
|
|
|
33,467
|
|
|
—
|
|
|
2,455,947
|
|
CDOs and CLOs
|
—
|
|
|
39,899
|
|
|
45,354
|
|
|
—
|
|
|
85,253
|
|
U.S. government and federal agency securities
|
1,124,343
|
|
|
28,702
|
|
|
—
|
|
|
—
|
|
|
1,153,045
|
|
Municipal securities
|
—
|
|
|
714,104
|
|
|
26,554
|
|
|
—
|
|
|
740,658
|
|
Sovereign obligations
|
1,506,428
|
|
|
1,312,799
|
|
|
—
|
|
|
—
|
|
|
2,819,227
|
|
Residential mortgage-backed securities
|
—
|
|
|
1,400,215
|
|
|
39,259
|
|
|
—
|
|
|
1,439,474
|
|
Commercial mortgage-backed securities
|
—
|
|
|
565,494
|
|
|
20,653
|
|
|
—
|
|
|
586,147
|
|
Other asset-backed securities
|
—
|
|
|
113,881
|
|
|
37,702
|
|
|
—
|
|
|
151,583
|
|
Loans and other receivables
|
—
|
|
|
1,729,227
|
|
|
53,172
|
|
|
—
|
|
|
1,782,399
|
|
Derivatives
|
5,045
|
|
|
3,016,829
|
|
|
4,905
|
|
|
(2,826,763
|
)
|
|
200,016
|
|
Investments at fair value
|
—
|
|
|
—
|
|
|
307,830
|
|
|
—
|
|
|
307,830
|
|
FXCM term loan
|
—
|
|
|
—
|
|
|
132,800
|
|
|
—
|
|
|
132,800
|
|
Total trading assets, excluding investments at fair value based on NAV
|
$
|
5,256,166
|
|
|
$
|
11,430,589
|
|
|
$
|
722,276
|
|
|
$
|
(2,826,763
|
)
|
|
$
|
14,582,268
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
95,545
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95,545
|
|
Corporate debt securities
|
—
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
179
|
|
U.S. government securities
|
293,142
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
293,142
|
|
Residential mortgage-backed securities
|
—
|
|
|
34,828
|
|
|
—
|
|
|
—
|
|
|
34,828
|
|
Commercial mortgage-backed securities
|
—
|
|
|
10,446
|
|
|
—
|
|
|
—
|
|
|
10,446
|
|
Other asset-backed securities
|
—
|
|
|
28,363
|
|
|
—
|
|
|
—
|
|
|
28,363
|
|
Total available for sale securities
|
$
|
388,687
|
|
|
$
|
73,816
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
462,503
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
1,468,429
|
|
|
$
|
32,576
|
|
|
$
|
324
|
|
|
$
|
—
|
|
|
$
|
1,501,329
|
|
Corporate debt securities
|
—
|
|
|
1,544,945
|
|
|
523
|
|
|
—
|
|
|
1,545,468
|
|
U.S. government and federal agency securities
|
841,725
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
841,725
|
|
Sovereign obligations
|
1,500,854
|
|
|
1,485,616
|
|
|
—
|
|
|
—
|
|
|
2,986,470
|
|
Loans
|
—
|
|
|
1,491,488
|
|
|
1,036
|
|
|
—
|
|
|
1,492,524
|
|
Derivatives
|
7,710
|
|
|
3,171,881
|
|
|
11,318
|
|
|
(2,794,432
|
)
|
|
396,477
|
|
Total trading liabilities
|
$
|
3,818,718
|
|
|
$
|
7,726,506
|
|
|
$
|
13,201
|
|
|
$
|
(2,794,432
|
)
|
|
$
|
8,763,993
|
|
Other secured financings
|
$
|
—
|
|
|
$
|
34,100
|
|
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
34,187
|
|
Long-term debt - structured notes
|
$
|
—
|
|
|
$
|
310,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
310,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1 (1)
|
|
Level 2 (1)
|
|
Level 3
|
|
Counterparty
and
Cash
Collateral
Netting (2)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Trading assets, at fair value:
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
2,522,977
|
|
|
$
|
92,839
|
|
|
$
|
21,739
|
|
|
$
|
—
|
|
|
$
|
2,637,555
|
|
Corporate debt securities
|
—
|
|
|
2,675,020
|
|
|
25,005
|
|
|
—
|
|
|
2,700,025
|
|
CDOs and CLOs
|
—
|
|
|
54,306
|
|
|
54,354
|
|
|
—
|
|
|
108,660
|
|
U.S. government and federal agency securities
|
2,389,397
|
|
|
56,726
|
|
|
—
|
|
|
—
|
|
|
2,446,123
|
|
Municipal securities
|
—
|
|
|
708,469
|
|
|
27,257
|
|
|
—
|
|
|
735,726
|
|
Sovereign obligations
|
1,432,556
|
|
|
990,492
|
|
|
—
|
|
|
—
|
|
|
2,423,048
|
|
Residential mortgage-backed securities
|
—
|
|
|
960,494
|
|
|
38,772
|
|
|
—
|
|
|
999,266
|
|
Commercial mortgage-backed securities
|
—
|
|
|
296,405
|
|
|
20,580
|
|
|
—
|
|
|
316,985
|
|
Other asset-backed securities
|
—
|
|
|
63,587
|
|
|
40,911
|
|
|
—
|
|
|
104,498
|
|
Loans and other receivables
|
—
|
|
|
1,557,233
|
|
|
81,872
|
|
|
—
|
|
|
1,639,105
|
|
Derivatives
|
3,825
|
|
|
4,616,822
|
|
|
6,429
|
|
|
(4,255,998
|
)
|
|
371,078
|
|
Investments at fair value
|
—
|
|
|
—
|
|
|
314,359
|
|
|
—
|
|
|
314,359
|
|
FXCM term loan
|
—
|
|
|
—
|
|
|
164,500
|
|
|
—
|
|
|
164,500
|
|
Total trading assets, excluding investments at fair value based on NAV
|
$
|
6,348,755
|
|
|
$
|
12,072,393
|
|
|
$
|
795,778
|
|
|
$
|
(4,255,998
|
)
|
|
$
|
14,960,928
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
79,425
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
79,425
|
|
Corporate debt securities
|
—
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
179
|
|
U.S. government securities
|
174,933
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
174,933
|
|
Residential mortgage-backed securities
|
—
|
|
|
19,133
|
|
|
—
|
|
|
—
|
|
|
19,133
|
|
Commercial mortgage-backed securities
|
—
|
|
|
8,337
|
|
|
—
|
|
|
—
|
|
|
8,337
|
|
Other asset-backed securities
|
—
|
|
|
19,042
|
|
|
—
|
|
|
—
|
|
|
19,042
|
|
Total available for sale securities
|
$
|
254,358
|
|
|
$
|
46,691
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
301,049
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
1,593,548
|
|
|
$
|
16,806
|
|
|
$
|
313
|
|
|
$
|
—
|
|
|
$
|
1,610,667
|
|
Corporate debt securities
|
—
|
|
|
1,718,424
|
|
|
523
|
|
|
—
|
|
|
1,718,947
|
|
U.S. government and federal agency securities
|
976,497
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
976,497
|
|
Sovereign obligations
|
1,375,590
|
|
|
1,253,754
|
|
|
—
|
|
|
—
|
|
|
2,629,344
|
|
Loans
|
—
|
|
|
801,977
|
|
|
378
|
|
|
—
|
|
|
802,355
|
|
Derivatives
|
2,566
|
|
|
4,867,586
|
|
|
9,870
|
|
|
(4,229,213
|
)
|
|
650,809
|
|
Total trading liabilities
|
$
|
3,948,201
|
|
|
$
|
8,658,547
|
|
|
$
|
11,084
|
|
|
$
|
(4,229,213
|
)
|
|
$
|
8,388,619
|
|
Other secured financings
|
$
|
—
|
|
|
$
|
41,350
|
|
|
$
|
418
|
|
|
$
|
—
|
|
|
$
|
41,768
|
|
Long-term debt - structured notes
|
$
|
—
|
|
|
$
|
248,856
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248,856
|
|
|
|
(1)
|
There were no material transfers between Level 1 and Level 2 during the
three months ended March 31, 2017
and during the year ended
December 31, 2016
.
|
|
|
(2)
|
Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.
|
The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:
Corporate Equity Securities
Exchange Traded Equity Securities:
Exchange traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy.
|
|
•
|
Non-exchange Traded Equity Securities
: Non-exchange traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization ("EBITDA"), price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by Jefferies. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).
|
|
|
•
|
Equity Warrants:
Non-exchange traded equity warrants are measured primarily using pricing data from external pricing services, prices observed for recently executed market transactions and broker quotations and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.
|
Corporate Debt Securities
|
|
•
|
Corporate Bonds:
Corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed for recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and are a limited portion of our corporate bonds.
|
|
|
•
|
High Yield Corporate and Convertible Bonds:
A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed for recently executed market transactions of comparable size. Where pricing data is less observable, valuations are categorized within Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.
|
CDOs and CLOs
CDOs and CLOs are measured based on prices observed for recently executed market transactions of the same or similar security or based on valuations received from third party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs. Valuation that is based on recently executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and comparability criteria including but not limited to collateral type, tranche type, rating, origination year, prepayment rates, default rates, and loss severity.
U.S. Government and Federal Agency Securities
|
|
•
|
U.S. Treasury Securities:
U.S. Treasury securities are measured based on quoted market prices and categorized within Level 1 of the fair value hierarchy.
|
|
|
•
|
U.S. Agency Issued Debt Securities:
Callable and non-callable U.S. agency issued debt securities are measured primarily based on quoted market prices obtained from external pricing services and are generally categorized within Level 1 or Level 2 of the fair value hierarchy.
|
Municipal Securities
Municipal securities are measured based on quoted prices obtained from external pricing services and are generally categorized within Level 2 of the fair value hierarchy.
Sovereign Obligations
Foreign sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size. To the extent external price quotations are not available or recent transactions have not been observed, valuation techniques incorporating interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value of sovereign bonds or obligations. Foreign sovereign government obligations are classified in Level 1, Level 2 or Level 3 of the fair value hierarchy, primarily based on the country of issuance.
Residential Mortgage-Backed Securities
|
|
•
|
Agency Residential Mortgage-Backed Securities:
Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations and interest-only and principal-only securities and are generally measured using market price quotations from external pricing services and categorized within Level 2 of the fair value hierarchy.
|
|
|
•
|
Agency Residential Interest-Only and Inverse Interest-Only Securities ("Agency Inverse IOs"):
The fair value of Agency Inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to the underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer, and weighted average loan age. Agency Inverse IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate.
|
|
|
•
|
Non-Agency Residential Mortgage-Backed Securities:
Fair values are determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields.
|
Commercial Mortgage-Backed Securities
|
|
•
|
Agency Commercial Mortgage-Backed Securities:
Government National Mortgage Association (“GNMA”) project loans are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation for various factors, including prepayment speeds, default rates, and cash flow structures as well as the likelihood of pricing levels in the current market environment. Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) mortgage-backed securities are generally measured by using prices observed for recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.
|
|
|
•
|
Non-Agency Commercial Mortgage-Backed Securities:
Non-agency commercial mortgage-backed securities are measured using pricing data obtained from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.
|
Other Asset-Backed Securities
Other asset-backed securities include, but are not limited to, securities backed by auto loans, credit card receivables, student loans and other consumer loans and are categorized within Level 2 and Level 3 of the fair value hierarchy. Valuations are primarily determined using pricing data obtained from external pricing services and broker quotes and prices observed for recently executed market transactions.
Loans and Other Receivables
|
|
•
|
Corporate Loans:
Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.
|
|
|
•
|
Participation Certificates in Agency Residential Loans:
Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing.
|
|
|
•
|
Project Loans and Participation Certificates in GNMA Project and Construction Loans:
Valuations of participation certificates in GNMA project and construction loans are based on inputs corroborated from and benchmarked to observed prices of recent securitizations of assets with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans incorporating an evaluation for various factors, including prepayment speeds, default rates, and cash flow structures as well as the likelihood of pricing levels in the current market environment. The measurements are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.
|
|
|
•
|
Consumer Loans and Funding Facilities:
Consumer and small business whole loans and related funding facilities are valued based on observed market transactions incorporating additional valuation inputs including, but not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and loan age. These assets are categorized within Level 2 or Level 3 of the fair value hierarchy.
|
|
|
•
|
Escrow and Trade Claim Receivables:
Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level 2 of the fair value hierarchy where fair value is based on recent trade activity in the same security.
|
Derivatives
|
|
•
|
Listed Derivative Contracts:
Listed derivative contracts that are actively traded are measured based on quoted exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy. Listed derivatives for which there is limited trading activity are measured based on incorporating the closing auction price of the underlying equity security, use similar valuation approaches as those applied to over-the-counter derivative contracts and are categorized within Level 2 of the fair value hierarchy.
|
|
|
•
|
OTC Derivative Contracts:
Over-the-counter ("OTC") derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models. Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.
|
OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using various valuation models, such as the Black-Scholes, with key inputs impacting the valuation including the underlying security, foreign exchange spot rate or commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which incorporate observable inputs related to commodity spot prices and forward curves. Credit default swaps include both index and single-name credit default swaps. External prices are available as inputs in measuring index credit default swaps and single-name credit default swaps. For commodity and equity total return swaps, market prices are observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from external pricing services.
|
|
•
|
National Beef Derivatives:
National Beef uses futures contracts in order to reduce its exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. The futures contracts and their related firm purchase commitments are accounted for at fair value, which are classified as Level 1 or Level 2 within the fair value hierarchy. Certain firm commitments for live cattle purchases and all firm commitments for sales are treated as normal purchases and sales and
|
therefore not marked to market. Fair values classified as Level 1 are calculated based on the quoted market prices of identical assets or liabilities compared to National Beef's cost of those same assets or liabilities. Fair values classified as Level 2 are calculated based on the difference between the contracted price for live cattle and the relevant quoted market price for live cattle futures.
|
|
•
|
Oil Futures Derivatives:
Vitesse uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Vitesse accounts for the derivative instruments at fair value, which are classified as Level 2 within the fair value hierarchy. Fair values classified as Level 2 are determined under the income valuation technique using an option-pricing model that is based on directly or indirectly observable inputs.
|
Investments at Fair Value
Investments at fair value included in Trading assets on the Consolidated Statements of Financial Condition include direct equity investments in private companies, which are measured at fair value using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analysis and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 2 or Level 3 of the fair value hierarchy. Additionally, investments at fair value include investments in insurance contracts relating to Jefferies defined benefit plan in Germany. Fair value for the insurance contracts are determined using a third party and is categorized within Level 3 of the fair value hierarchy.
Investment in FXCM
FXCM is an online provider of foreign exchange trading services. In January 2015, we entered into a credit agreement with FXCM, and provided FXCM a
$300 million
senior secured term loan due January 2017, with rights to a variable proportion of certain future distributions in connection with an FXCM sale of assets or certain other events, and to require a sale of FXCM beginning in January 2018. The loan had an initial interest rate of
10%
per annum, increasing by
1.5%
per annum each quarter, not to exceed
20.5%
per annum. Through the first quarter of 2017 interest accrued at
20.5%
per annum. During the
three months ended March 31, 2017
, we received
$42.7 million
of principal, interest and fees from FXCM and
$123.0 million
remained outstanding under the term loan as of
March 31, 2017
.
Through September 1, 2016, the total amount of our investment in FXCM was reported within Trading assets, at fair value in our Consolidated Statements of Financial Condition, and unrealized and realized changes in value, including the component related to interest income on the loan, were included within Principal transactions in the Consolidated Statements of Operations. We recorded in Principal transactions an aggregate
$10.9 million
during the
three months ended March 31, 2017
from our term loan and losses of
$(53.2) million
during the
three months ended March 31, 2016
from our term loan and related rights.
On September 1, 2016 we, Global Brokerage Inc. ("Global Brokerage" and formerly FXCM Inc.) and Global Brokerage Holdings entered into an agreement that amended the terms of our loan and associated rights. Among other changes, the amendments extended the maturity of the term loan by
one
year to January 2018 to allow FXCM more time to optimize remaining asset sales; gave Leucadia a
49.9%
common membership interest in FXCM, and up to
65%
of all distributions; created a
six
-member board for FXCM, comprised of
three
directors appointed by Leucadia and
three
directors appointed by Global Brokerage Holdings; put in place a long-term incentive program for FXCM's senior management; and gave Global Brokerage Holdings the same right Leucadia has to require a sale of FXCM beginning in January 2018. Distributions to Leucadia under the amended agreements are now:
100%
until amounts due under the loan are repaid;
45%
of the next
$350 million
; then
79.2%
of the next
$500 million
; and
51.6%
of all amounts thereafter.
During February 2017, Global Brokerage Holdings and FXCM's U.S. subsidiary, Forex Capital Markets LLC ("FXCM U.S.") settled complaints filed by the National Futures Association ("NFA") and the Commodity Futures Trading Commission ("CFTC") against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. The NFA settlement has
no
monetary fine and the CFTC settlement has a
$7 million
fine. As part of the settlements, FXCM U.S. withdrew from business and agreed to sell FXCM U.S.'s customer accounts to Gain Capital Holdings, Inc. FXCM U.S. generated approximately
20%
of FXCM's revenue, but was not profitable. FXCM also announced the implementation of a restructuring plan that includes the termination of approximately
150
employees, which represents approximately
18%
of its global workforce. The proceeds from the sale of the U.S. accounts, net of closure and severance costs, as well as regulatory capital released after a sale, has been used to pay down the Leucadia term loan. As part of the settlement, Leucadia, Global Brokerage Holdings and FXCM have amended the management and incentive compensation agreements, giving any
three
directors of the FXCM board the right to terminate management and any unvested incentive compensation at any time.
On February 21, 2017, Drew Niv resigned as the Chief Executive Officer of FXCM, although he remains in an advisory position. Brendan Callan became the interim Chief Executive Officer of FXCM and Jimmy Hallac (a Managing Director at Leucadia) became Chairman of the Board of FXCM.
In addition, on February 21, 2017, Mr. Niv resigned from his positions as Chief Executive Officer and Chairman of the Board of Global Brokerage, but remains as acting Chief Executive Officer of Global Brokerage until his successor is identified.
We do not hold any interest in Global Brokerage, the publicly traded company and issuer of senior convertible notes. Global Brokerage holds an economic interest of
74.5%
in Global Brokerage Holdings, which in turn holds
50.1%
of FXCM. As more fully described above, we own the remaining
49.9%
of FXCM, and our senior secured term loan is also with FXCM, which is a holding company for all of FXCM's affiliated operating subsidiaries. Net profits and proceeds generated by these subsidiaries, and from the sales of these subsidiaries, flow first to FXCM, where they are applied to the outstanding balance of our term loan and then, in accordance with the agreement described above, to us and Global Brokerage Holdings. A portion of the profits and proceeds that flow to Global Brokerage Holdings then flow to Global Brokerage, in accordance with its economic interest.
Through the amendments on September 1, 2016, our derivative rights were exchanged for a
49.9%
common membership interest in FXCM and up to
65%
of all distributions. We gained the ability to significantly influence FXCM through our common membership interest and our seats on the board of directors. As a result, we classify our equity investment in FXCM in our
March 31, 2017
Consolidated Statement of Financial Condition as Loans to and investments in associated companies. We account for our equity interest on a one month lag. As the amendments only extended the maturity of the term loan, we continue to use the fair value option and classify our term loan within Trading assets, at fair value.
FXCM is considered a variable interest entity ("VIE") and our term loan and equity ownership are variable interests. We have determined that we are not the primary beneficiary of FXCM because we do not have the power to direct the activities that most significantly impact FXCM's performance. Therefore, we do not consolidate FXCM and we account for our equity interest as an investment in an associated company.
Our maximum exposure to loss as a result of our involvement with FXCM is limited to the carrying value of the term loan (
$132.8 million
) and the investment in associated company (
$186.7 million
), which totaled
$319.5 million
at
March 31, 2017
.
We engaged an independent valuation firm to assist management in estimating the fair value of our loan to FXCM. Our estimate of fair value was determined using valuation models with inputs including management’s assumptions concerning the amount and timing of expected cash flows; the loan’s implied credit rating and effective yield. Because of these inputs and the degree of judgment involved, we have categorized our term loan in Level 3.
As described further in Note 9, we engaged an independent valuation firm to assist management in estimating the fair value of our equity investment in FXCM. Our estimate of fair value was based on a discounted cash flow and comparable public company analysis and is categorized within Level 3 of the fair value hierarchy. The discounted cash flow valuation model used inputs including management's projections of future FXCM cash flows and a discount rate of approximately
15%
. The comparable public company model used market data for comparable companies including a price to EBITDA multiple of
5.4
and a price to revenue multiple of
1.5
.
Investments at Fair Value Based on NAV and Investments in Managed Funds
Investments at fair value based on NAV and Investments in managed funds include investments in hedge funds, fund of funds, private equity funds and other funds, which are measured at the NAV of the funds, provided by the fund managers and are excluded from the fair value hierarchy.
The following tables present information about our investments in entities that have the characteristics of an investment company (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value (1)
|
|
Unfunded
Commitments
|
|
Redemption
Frequency
(if currently eligible)
|
March 31, 2017
|
|
|
|
|
|
Equity Long/Short Hedge Funds (2)
|
$
|
362,870
|
|
|
$
|
—
|
|
|
(2)
|
Fixed Income and High Yield Hedge Funds (3)
|
761
|
|
|
—
|
|
|
—
|
Fund of Funds (4)
|
169
|
|
|
—
|
|
|
—
|
Equity Funds (5)
|
40,688
|
|
|
20,040
|
|
|
—
|
Multi-asset Funds (6)
|
118,211
|
|
|
—
|
|
|
—
|
Total
|
$
|
522,699
|
|
|
$
|
20,040
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Equity Long/Short Hedge Funds (2)
|
$
|
363,256
|
|
|
$
|
—
|
|
|
(2)
|
Fixed Income and High Yield Hedge Funds (3)
|
772
|
|
|
—
|
|
|
—
|
Fund of Funds (4)
|
230
|
|
|
—
|
|
|
—
|
Equity Funds (5)
|
42,179
|
|
|
20,295
|
|
|
—
|
Multi-asset Funds (6)
|
133,190
|
|
|
—
|
|
|
—
|
Total
|
$
|
539,627
|
|
|
$
|
20,295
|
|
|
|
|
|
(1)
|
Where fair value is calculated based on NAV, fair value has been derived from each of the funds' capital statements.
|
|
|
(2)
|
This category includes investments in hedge funds that invest, long and short, in primarily equity securities in domestic and international markets in both the public and private sectors. At
March 31, 2017
and
December 31, 2016
, the majority of these investments are redeemable with
10
business days prior written notice.
|
|
|
(3)
|
This category includes investments in funds that invest in loans secured by a first trust deed on property, domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt, and private equity investments. There are no redemption provisions.
|
|
|
(4)
|
This category includes investments in fund of funds that invest in various private equity funds. The investments in this category are managed by us and have no redemption provisions. These investments are gradually being liquidated or we have requested redemption, however, we are unable to estimate when these funds will be received.
|
|
|
(5)
|
At
March 31, 2017
and
December 31, 2016
, the investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries. These investments cannot be redeemed; instead distributions are received through the liquidation of the underlying assets of the funds, which are expected to liquidate in
one
to
six
years.
|
|
|
(6)
|
This category includes investments in hedge funds that invest, long and short, primarily in multi-asset securities in domestic and international markets in both the public and private sectors. At
March 31, 2017
and
December 31, 2016
, investments representing approximately
13%
and
12%
, respectively, of the fair value of investments in this category are redeemable with
30
to
90
days prior written notice.
|
Other Secured Financings
Other secured financings that are accounted for at fair value include notes issued by consolidated VIEs, which are classified as Level 2 or Level 3 within the fair value hierarchy. Fair value is based on recent transaction prices for similar assets.
Long-term Debt - Structured Notes
Long-term debt includes variable rate and fixed to floating rate structured notes that contain various interest rate payment terms and are generally measured using valuation models for the derivative and debt portions of the notes. These models incorporate market price quotations from external pricing sources referencing the appropriate interest rate curves and are generally categorized within Level 2 of the fair value hierarchy. The impact of Jefferies credit spreads is also included based on observed secondary bond market spreads and asset-swap spreads.
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the
three months ended March 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Balance, December 31, 2016
|
|
Total gains (losses)
(realized and unrealized) (1)
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
Issuances
|
|
Net transfers
into (out of)
Level 3
|
|
Balance at March 31, 2017
|
|
Changes in
unrealized gains (losses) relating to instruments still held at
March 31, 2017 (1)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
21,739
|
|
|
$
|
532
|
|
|
$
|
847
|
|
|
$
|
(145
|
)
|
|
$
|
(186
|
)
|
|
$
|
—
|
|
|
$
|
(2,207
|
)
|
|
$
|
20,580
|
|
|
$
|
362
|
|
Corporate debt securities
|
25,005
|
|
|
(1,793
|
)
|
|
3,002
|
|
|
(3,157
|
)
|
|
(1,207
|
)
|
|
—
|
|
|
11,617
|
|
|
33,467
|
|
|
(1,662
|
)
|
CDOs and CLOs
|
54,354
|
|
|
(7,594
|
)
|
|
8,663
|
|
|
(22,633
|
)
|
|
(45
|
)
|
|
—
|
|
|
12,609
|
|
|
45,354
|
|
|
(8,525
|
)
|
Municipal securities
|
27,257
|
|
|
(636
|
)
|
|
—
|
|
|
(67
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,554
|
|
|
(641
|
)
|
Residential mortgage-backed securities
|
38,772
|
|
|
(253
|
)
|
|
263
|
|
|
(12,411
|
)
|
|
(210
|
)
|
|
—
|
|
|
13,098
|
|
|
39,259
|
|
|
(440
|
)
|
Commercial mortgage-backed securities
|
20,580
|
|
|
(1,420
|
)
|
|
—
|
|
|
(412
|
)
|
|
—
|
|
|
—
|
|
|
1,905
|
|
|
20,653
|
|
|
(1,421
|
)
|
Other asset-backed securities
|
40,911
|
|
|
(1,788
|
)
|
|
3,553
|
|
|
(299
|
)
|
|
(3,335
|
)
|
|
—
|
|
|
(1,340
|
)
|
|
37,702
|
|
|
(1,717
|
)
|
Loans and other receivables
|
81,872
|
|
|
4,950
|
|
|
9,489
|
|
|
(9,778
|
)
|
|
(7,764
|
)
|
|
—
|
|
|
(25,597
|
)
|
|
53,172
|
|
|
836
|
|
Investments at fair value
|
314,359
|
|
|
3,856
|
|
|
—
|
|
|
(10,119
|
)
|
|
(266
|
)
|
|
—
|
|
|
—
|
|
|
307,830
|
|
|
5,879
|
|
FXCM term loan
|
164,500
|
|
|
10,878
|
|
|
—
|
|
|
—
|
|
|
(42,578
|
)
|
|
—
|
|
|
—
|
|
|
132,800
|
|
|
3,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
313
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
324
|
|
|
$
|
(11
|
)
|
Corporate debt securities
|
523
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
523
|
|
|
—
|
|
Net derivatives (2)
|
3,441
|
|
|
(4,384
|
)
|
|
—
|
|
|
—
|
|
|
3,373
|
|
|
186
|
|
|
3,797
|
|
|
6,413
|
|
|
1,347
|
|
Loans
|
378
|
|
|
189
|
|
|
(323
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
792
|
|
|
1,036
|
|
|
(189
|
)
|
Other secured financings
|
418
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(323
|
)
|
|
87
|
|
|
11
|
|
|
|
(1)
|
Realized and unrealized gains (losses) are reported in Principal transactions in the Consolidated Statements of Operations.
|
|
|
(2)
|
Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.
|
Analysis of Level 3 Assets and Liabilities for the
three months ended March 31, 2017
During the
three months ended March 31, 2017
, transfers of assets of
$49.9 million
from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
|
|
•
|
CDOs and CLOs of
$18.1 million
and residential mortgage-backed securities of
$13.7 million
, due to a lack of observable market transactions;
|
|
|
•
|
Corporate debt securities of
$11.6 million
due to a lack of observable market transactions.
|
During the
three months ended March 31, 2017
, transfers of assets of
$39.8 million
from Level 3 to Level 2 are primarily attributed to:
|
|
•
|
Loans and other receivables of
$28.2 million
due to greater pricing transparency supporting classification into Level 2.
|
Net gains on Level 3 assets were
$6.7 million
and net gains on Level 3 liabilities were
$4.2 million
for the
three months ended March 31, 2017
. Net gains on Level 3 assets were primarily due to increased valuations of our FXCM term loan and increased valuations of certain investments at fair value and loans and other receivables, partially offset by decreased valuations of CDOs and CLOs, corporate debt securities, other asset-backed securities and commercial mortgage-backed securities. Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives.
The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the
three months ended March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Balance, December 31, 2015
|
|
Total gains (losses)
(realized and unrealized) (1)
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
Issuances
|
|
Net transfers
into (out of)
Level 3
|
|
Balance, March 31, 2016
|
|
Changes in
unrealized gains (losses) relating to instruments still held at
March 31, 2016 (1)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
40,906
|
|
|
$
|
3,071
|
|
|
$
|
2,087
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(15,524
|
)
|
|
$
|
30,540
|
|
|
$
|
3,560
|
|
Corporate debt securities
|
25,876
|
|
|
(2,602
|
)
|
|
15,337
|
|
|
(15,129
|
)
|
|
(111
|
)
|
|
—
|
|
|
2,263
|
|
|
25,634
|
|
|
(2,540
|
)
|
CDOs and CLOs
|
85,092
|
|
|
(16,573
|
)
|
|
1,021
|
|
|
(20,178
|
)
|
|
(463
|
)
|
|
—
|
|
|
18,449
|
|
|
67,348
|
|
|
(17,003
|
)
|
Sovereign obligations
|
120
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
119
|
|
|
(1
|
)
|
Residential mortgage-backed securities
|
70,263
|
|
|
(4,548
|
)
|
|
62,844
|
|
|
(64,926
|
)
|
|
(114
|
)
|
|
—
|
|
|
4,500
|
|
|
68,019
|
|
|
(3,358
|
)
|
Commercial mortgage-backed securities
|
14,326
|
|
|
(971
|
)
|
|
2,962
|
|
|
—
|
|
|
(878
|
)
|
|
—
|
|
|
6,555
|
|
|
21,994
|
|
|
(1,387
|
)
|
Other asset-backed securities
|
42,925
|
|
|
1,662
|
|
|
15,425
|
|
|
(2,100
|
)
|
|
(1
|
)
|
|
—
|
|
|
(24,787
|
)
|
|
33,124
|
|
|
1,679
|
|
Loans and other receivables
|
189,289
|
|
|
(5,772
|
)
|
|
181,264
|
|
|
(114,667
|
)
|
|
(95,354
|
)
|
|
—
|
|
|
682
|
|
|
155,442
|
|
|
(9,113
|
)
|
Investments at fair value
|
199,794
|
|
|
48,618
|
|
|
1,187
|
|
|
—
|
|
|
(273
|
)
|
|
—
|
|
|
26,063
|
|
|
275,389
|
|
|
48,618
|
|
Investment in FXCM
|
625,689
|
|
|
(53,203
|
)
|
|
—
|
|
|
—
|
|
|
(7,686
|
)
|
|
—
|
|
|
—
|
|
|
564,800
|
|
|
(53,203
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
—
|
|
Net derivatives (2)
|
(242
|
)
|
|
10,304
|
|
|
—
|
|
|
—
|
|
|
2,558
|
|
|
554
|
|
|
(1,417
|
)
|
|
11,757
|
|
|
(8,135
|
)
|
Loans
|
10,469
|
|
|
(345
|
)
|
|
(2,240
|
)
|
|
1,033
|
|
|
(1,077
|
)
|
|
—
|
|
|
(96
|
)
|
|
7,744
|
|
|
345
|
|
Other secured financings
|
544
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
538
|
|
|
—
|
|
|
|
(1)
|
Realized and unrealized gains (losses) are reported in Principal transactions in the Consolidated Statements of Operations.
|
|
|
(2)
|
Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.
|
Analysis of Level 3 Assets and Liabilities for the
three months ended March 31, 2016
During the
three months ended March 31, 2016
, transfers of assets of
$119.0 million
from Level 2 to Level 3 of the fair value hierarchy are primarily attributed to:
|
|
•
|
CDOs and CLOs of
$39.5 million
and non-agency residential mortgage-backed securities of
$20.4 million
, for which no recent trade activity was observed for purposes of determining observable inputs;
|
|
|
•
|
Investments at fair value of
$26.1 million
due to lack of observable market transactions.
|
During the
three months ended March 31, 2016
, transfers of assets of
$100.8 million
from Level 3 to Level 2 are primarily attributed to:
|
|
•
|
Other asset-backed securities of
$28.8 million
and non-agency residential mortgage-backed securities of
$15.9 million
, for which market trades were observed in the period for either identical or similar securities;
|
|
|
•
|
CDOs and CLOs of
$21.0 million
due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;
|
|
|
•
|
Corporate equity securities of
$19.2 million
due to an increase in observable market transactions.
|
Net losses on Level 3 assets were
$30.3 million
and net losses on Level 3 liabilities were
$10.0 million
for the
three months ended March 31, 2016
. Net losses on Level 3 assets were primarily due to decreased valuations of our investment in FXCM and decreased valuations of CDOs and CLOs, loans and other receivables, residential mortgage-backed securities and corporate debt securities, partially offset by an increase in valuations of investments at fair value, corporate equity securities and other asset-backed securities. Net losses on Level 3 liabilities were primarily due to increased valuations of certain derivative instruments.
Quantitative Information about Significant Unobservable Inputs used in Level 3 Fair Value Measurements
The tables below present information on the valuation techniques, significant unobservable inputs and their ranges for our financial assets and liabilities, subject to threshold levels related to the market value of the positions held, measured at fair value on a recurring basis with a significant Level 3 balance. The range of unobservable inputs could differ significantly across different firms given the range of products across different firms in the financial services sector. The inputs are not representative of the inputs that could have been used in the valuation of any one financial instrument (i.e., the input used for valuing one financial instrument within a particular class of financial instruments may not be appropriate for valuing other financial instruments within that given class). Additionally, the ranges of inputs presented below should not be construed to represent uncertainty regarding the fair values of our financial instruments; rather the range of inputs is reflective of the differences in the underlying characteristics of the financial instruments in each category.
For certain categories, we have provided a weighted average of the inputs allocated based on the fair values of the financial instruments comprising the category. We do not believe that the range or weighted average of the inputs is indicative of the reasonableness of uncertainty of our Level 3 fair values. The range and weighted average are driven by the individual financial instruments within each category and their relative distribution in the population. The disclosed inputs when compared with the inputs as disclosed in other periods should not be expected to necessarily be indicative of changes in our estimates of unobservable inputs for a particular financial instrument as the population of financial instruments comprising the category will vary from period to period based on purchases and sales of financial instruments during the period as well as transfers into and out of Level 3 each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
Financial Instruments Owned
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
Corporate equity securities
|
|
$
|
18,834
|
|
|
|
|
|
|
|
|
|
Non-exchange traded securities
|
|
|
|
|
Market approach
|
|
Price
|
|
$3 to $75
|
|
$44.0
|
|
|
|
|
|
|
Underlying stock price
|
|
$6
|
|
—
|
|
|
|
|
|
Comparable pricing
|
|
Comparable asset price
|
|
$9
|
|
—
|
|
|
|
|
|
Option model
|
|
Volatility
|
|
40%
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
33,467
|
|
|
Convertible bond model
|
|
Discount rate/yield
|
|
8%
|
|
—
|
|
|
|
|
|
|
|
Volatility
|
|
40%
|
|
—
|
|
|
|
|
|
Market approach
|
|
Price
|
|
$18 to $98
|
|
$53.0
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
1% to 3%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
CDOs and CLOs
|
|
$
|
45,354
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
20%
|
|
—
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
2% to 8%
|
|
3
|
%
|
|
|
|
|
|
|
|
Loss severity
|
|
25% to 70%
|
|
29
|
%
|
|
|
|
|
|
|
|
Discount rate/yield
|
|
9% to 18%
|
|
13
|
%
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
4% to 45%
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
39,259
|
|
|
Discounted cash flows
|
|
Cumulative loss rate
|
|
0% to 22%
|
|
7
|
%
|
|
|
|
|
|
|
|
Duration (years)
|
|
4 to 18
|
|
10
|
|
|
|
|
|
|
|
|
Discount rate/yield
|
|
5% to 11%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
$
|
20,653
|
|
|
Discounted cash flows
|
|
Cumulative loss rate
|
|
15% to 68%
|
|
30
|
%
|
|
|
|
|
|
|
|
Duration (years)
|
|
1 to 5
|
|
3
|
|
|
|
|
|
|
|
Discount rate/yield
|
|
7% to 19%
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities
|
|
$
|
37,702
|
|
|
Discounted cash flows
|
|
Cumulative loss rate
|
|
0% to 30%
|
|
18
|
%
|
|
|
|
|
|
|
|
Duration (years)
|
|
1 to 11
|
|
2
|
|
|
|
|
|
|
|
|
Discount rate/yield
|
|
4% to 15%
|
|
14
|
%
|
|
|
|
|
Market approach
|
|
Price
|
|
$100
|
|
—
|
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
51%
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and other receivables
|
|
$
|
51,929
|
|
|
Discounted cash flows
|
|
Discount rate/yield
|
|
32%
|
|
—
|
|
|
|
|
|
|
|
Cumulative loss rate
|
|
0%
|
|
—
|
|
|
|
|
|
|
|
Duration (years)
|
|
0.1
|
|
—
|
|
|
|
|
|
|
Market approach
|
|
EBITDA (a) multiple
|
|
3.3
|
|
—
|
|
|
|
|
|
|
|
Transaction level
|
|
$1 to $42
|
|
$32.0
|
|
|
|
|
|
|
Price
|
|
$98 to $100
|
|
$99.0
|
|
|
|
|
|
|
Estimated recovery percentage
|
|
103%
|
|
—
|
|
|
|
|
|
Present value
|
|
Average silver production (tons per day)
|
|
642
|
|
—
|
|
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
3% to 45%
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
4,905
|
|
|
|
|
|
|
|
|
|
|
Unfunded commitments
|
|
|
|
Market approach
|
|
Price
|
|
$82 to $97
|
|
$94.0
|
Credit default swaps
|
|
|
|
|
Market approach
|
|
Credit spread
|
|
265 bps
|
|
—
|
|
Interest rate swaps
|
|
|
|
Market approach
|
|
Credit spread
|
|
800 bps
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity securities
|
|
$
|
93,198
|
|
|
Market approach
|
|
Transaction level
|
|
$3 to $250
|
|
$116.0
|
|
|
|
|
|
|
Discount rate
|
|
15% to 30%
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Investment in FXCM
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
132,800
|
|
|
Discounted cash flows
|
|
Term based on the pay off
|
|
0 months to .75 years
|
|
0.5 years
|
|
|
|
|
|
|
|
|
|
|
|
Trading Liabilities
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
Derivatives
|
|
$
|
11,318
|
|
|
|
|
|
|
|
|
|
|
Equity options
|
|
|
|
Option model/default rate
|
|
Default probability
|
|
0%
|
|
—
|
|
Unfunded commitments
|
|
|
|
Market approach
|
|
Price
|
|
$82 to $98
|
|
$87.0
|
Variable funding note swaps
|
|
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
20%
|
|
—
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
2%
|
|
—
|
|
|
|
|
|
|
|
|
Loss severity
|
|
25%
|
|
—
|
|
|
|
|
|
|
|
|
Discount rate/yield
|
|
18%
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Financial Instruments Owned
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
Corporate equity securities
|
|
$
|
19,799
|
|
|
|
|
|
|
|
|
|
Non-exchange traded securities
|
|
|
|
Market approach
|
|
Underlying stock price
|
|
$3 to $75
|
|
$15.0
|
|
|
|
|
Comparable pricing
|
|
Underlying stock price
|
|
$218
|
|
—
|
|
|
|
|
|
|
|
Comparable asset price
|
|
$11
|
|
—
|
|
|
|
|
|
Present value
|
|
Average silver production (tons per day)
|
|
666
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
25,005
|
|
|
Convertible bond model
|
|
Discount rate/yield
|
|
9%
|
|
—
|
|
|
|
|
|
|
|
Volatility
|
|
40%
|
|
—
|
|
|
|
|
|
Market approach
|
|
Transaction level
|
|
$30
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs and CLOs
|
|
$
|
33,016
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
10% to 20%
|
|
19
|
%
|
|
|
|
|
|
|
|
Constant default rate
|
|
2% to 4%
|
|
2
|
%
|
|
|
|
|
|
|
|
Loss severity
|
|
25% to 70%
|
|
40
|
%
|
|
|
|
|
|
|
|
Yield
|
|
7% to 17%
|
|
12
|
%
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
28% to 38%
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
38,772
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
0% to 11%
|
|
5
|
%
|
|
|
|
|
|
|
|
Constant default rate
|
|
1% to 7%
|
|
3
|
%
|
|
|
|
|
|
|
|
Loss severity
|
|
35% to 100%
|
|
62
|
%
|
|
|
|
|
|
|
|
Yield
|
|
2% to 10%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
$
|
20,580
|
|
|
Discounted cash flows
|
|
Yield
|
|
6% to 11%
|
|
8
|
%
|
|
|
|
|
|
|
|
Cumulative loss rate
|
|
5% to 95%
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities
|
|
$
|
40,911
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
4% to 20%
|
|
14
|
%
|
|
|
|
|
|
|
|
Constant default rate
|
|
0% to 31%
|
|
13
|
%
|
|
|
|
|
|
|
|
Loss severity
|
|
0% to 100%
|
|
90
|
%
|
|
|
|
|
|
|
|
Yield
|
|
4% to 17%
|
|
15
|
%
|
|
|
|
|
Market approach
|
|
Price
|
|
$72
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and other receivables
|
|
$
|
54,347
|
|
|
Market approach
|
|
Discount rate/yield
|
|
2% to 4%
|
|
3
|
%
|
|
|
|
|
|
|
|
EBITDA (a) multiple
|
|
3.3
|
|
—
|
|
|
|
|
|
|
|
Transaction level
|
|
$0.42
|
|
—
|
|
|
|
|
|
Present value
|
|
Average silver production (tons per day)
|
|
666
|
|
—
|
|
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
6% to 50%
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
6,429
|
|
|
|
|
|
|
|
|
|
|
Equity swaps
|
|
|
|
|
Comparable pricing
|
|
Comparable asset price
|
|
$102
|
|
—
|
|
Credit default swaps
|
|
|
|
Market approach
|
|
Credit spread
|
|
265 bps
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity securities
|
|
$
|
67,383
|
|
|
Market approach
|
|
Transaction level
|
|
$250
|
|
—
|
|
|
|
|
|
|
|
Price
|
|
$25,815,720
|
|
—
|
|
|
|
|
|
|
|
Discount rate
|
|
15% to 30%
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Investment in FXCM
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
164,500
|
|
|
Discounted cash flows
|
|
Term based on the pay off
|
|
0 months to .5 years
|
|
0.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Liabilities
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
Derivatives
|
|
$
|
9,870
|
|
|
|
|
|
|
|
|
|
|
Equity options
|
|
|
|
|
Option model
|
|
Volatility
|
|
45%
|
|
—
|
|
|
|
|
|
Default rate
|
|
Default probability
|
|
0%
|
|
—
|
|
Equity swaps
|
|
|
|
Comparable pricing
|
|
Comparable asset price
|
|
$102
|
|
—
|
|
Unfunded commitments
|
|
|
|
Market approach
|
|
Discount rate/yield
|
|
4%
|
|
—
|
|
Variable funding note swaps
|
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
20%
|
|
—
|
|
|
|
|
|
|
|
Constant default rate
|
|
2%
|
|
—
|
|
|
|
|
|
|
|
Loss severity
|
|
25%
|
|
—
|
|
|
|
|
|
|
|
Yield
|
|
16%
|
|
—
|
|
|
|
(a)
|
Earnings before interest, taxes, depreciation and amortization (“EBITDA”).
|
The fair values of certain Level 3 assets and liabilities that were determined based on third-party pricing information, unadjusted past transaction prices, reported net asset value or a percentage of the reported enterprise fair value are excluded from the above table. At
March 31, 2017
and
December 31, 2016
, asset exclusions consisted of
$244.2 million
and
$325.0 million
, respectively, primarily comprised of investments at fair value, private equity securities, CDOs and CLOs, municipal securities, non-exchange traded securities and loans and other receivables. At
March 31, 2017
and
December 31, 2016
, liability exclusions consisted of
$2.0 million
and
$1.6 million
, respectively, of other secured financings, loans and corporate debt and equity securities.
Sensitivity of Fair Values to Changes in Significant Unobservable Inputs
For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs (if any) are described below:
|
|
•
|
Non-exchange traded securities and equity swaps using comparable pricing valuation techniques. A significant increase (decrease) in the comparable asset and underlying stock price in isolation would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
Corporate debt securities using a convertible bond model. A significant increase (decrease) in the bond discount rate/yield would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in volatility would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
Non-exchange traded securities, corporate debt securities, loans and other receivables, unfunded commitments, credit default swaps, interest rate swaps, other asset-backed securities and private equity securities using a market approach valuation technique. A significant increase (decrease) in the EBITDA or other multiples in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount rate/yield of a loan and other receivable, private equity securities or certain derivatives would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the transaction level of a private equity security, corporate debt security, loan and other receivable would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the underlying stock price of the non-exchange traded securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the credit spread of certain derivatives would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the price of the private equity securities, non-exchange traded securities, corporate debt securities, other asset-backed securities, loans and other receivables or certain derivatives would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the estimated recovery rates of the cash flow outcomes underlying the loans and other receivables would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
Corporate debt securities, loans and other receivables, CDOs and CLOs and other asset-backed securities using scenario analysis. A significant increase (decrease) in the possible recovery rates of the cash flow outcomes underlying the investment would result in a significantly higher (lower) fair value measurement for the financial instrument.
|
|
|
•
|
Loans and other receivables, CDOs and CLOs, residential and commercial mortgage-backed securities, other asset-backed securities and variable funding notes using a discounted cash flow valuation technique. A significant increase (decrease) in isolation in the constant default rate, loss severity or cumulative loss rate would result in a significantly lower (higher) fair value measurement. The impact of changes in the constant prepayment rate and duration would have differing impacts depending on the capital structure and type of security. A significant increase (decrease) in the discount rate/security yield would result in a significantly lower (higher) fair value measurement.
|
|
|
•
|
Non-exchange traded securities and derivative equity options using an option model. A significant increase (decrease) in volatility would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
Derivative equity options using a default rate model. A significant increase (decrease) in default probability would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
Non-exchange traded securities and loans and other receivables using a present value model. A significant increase (decrease) in average silver production would result in a significantly higher (lower) fair value measurement.
|
|
|
•
|
FXCM term loan using a discounted cash flow valuation technique. A significant increase (decrease) in term based on the time to pay off the loan would result in a higher (lower) fair value measurement.
|
Fair Value Option Election
We have elected the fair value option for all loans and loan commitments made by Jefferies capital markets businesses. These loans and loan commitments include loans entered into by Jefferies Investment Banking division in connection with client bridge financing and loan syndications, loans purchased by Jefferies leveraged credit trading desk as part of its bank loan trading activities and mortgage and consumer loan commitments, purchases and fundings in connection with mortgage- and other asset-backed securitization activities. Loans and loan commitments originated or purchased by Jefferies leveraged credit and mortgage-backed businesses are managed on a fair value basis. Loans are included in Trading assets and loan commitments are included in Trading liabilities. The fair value option election is not applied to loans made to affiliate entities as such loans are entered into as part of ongoing, strategic business ventures. Loans to affiliate entities are included within Loans to and investments in associated companies on the Consolidated Statements of Financial Condition and are accounted for on an amortized cost basis. Jefferies has also elected the fair value option for certain of its structured notes which are managed by Jefferies capital markets business and are included in Long-term debt on the Consolidated Statements of Financial Condition. Jefferies has elected the fair value option for certain financial instruments held by its subsidiaries as the investments are risk managed on a fair value basis. The fair value option has also been elected for certain secured financings that arise in connection with Jefferies securitization activities and other structured financings. Other secured financings, receivables from brokers, dealers and clearing organizations, receivables from customers of securities operations, payables to brokers, dealers and clearing organizations and payables to customers of securities operations, are accounted for at cost plus accrued interest rather than at fair value; however, the recorded amounts approximate fair value due to their liquid or short-term nature.
The following is a summary of Jefferies gains (losses) due to changes in instrument specific credit risk on loans, other receivables and debt instruments and gains (losses) due to other changes in fair value on long-term debt measured at fair value under the fair value option for the
three months ended March 31, 2017 and 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
2017
|
|
2016
|
Financial Instruments Owned:
|
|
|
|
|
Loans and other receivables
|
|
$
|
(5,127
|
)
|
|
$
|
(15,462
|
)
|
|
|
|
|
|
Financial Instruments Sold:
|
|
|
|
|
|
|
Loans
|
|
$
|
(27
|
)
|
|
$
|
48
|
|
Loan commitments
|
|
$
|
871
|
|
|
$
|
(3,746
|
)
|
|
|
|
|
|
Long-term Debt:
|
|
|
|
|
|
|
Changes in instrument specific credit risk (1)
|
|
$
|
(16,040
|
)
|
|
$
|
(302
|
)
|
Other changes in fair value (2)
|
|
$
|
3,417
|
|
|
$
|
6,858
|
|
(1) Changes in instrument specific credit risk related to structured notes are included in the Consolidated Statements of Comprehensive Income (Loss), net of tax.
(2) Other changes in fair value are included within Principal transactions revenues in the Consolidated Statements of Operations.
The following is a summary of the amount by which contractual principal exceeds fair value for loans and other receivables and long-term debt measured at fair value under the fair value option (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Financial Instruments Owned:
|
|
|
|
Loans and other receivables (1)
|
$
|
1,078,397
|
|
|
$
|
1,325,938
|
|
Loans and other receivables on nonaccrual status and/or greater than 90 days past due (1) (2)
|
$
|
242,022
|
|
|
$
|
205,746
|
|
Long-term Debt
|
$
|
7,582
|
|
|
$
|
20,202
|
|
|
|
(1)
|
Interest income is recognized separately from other changes in fair value and is included within Interest income in the Consolidated Statements of Operations.
|
|
|
(2)
|
Amounts include all loans and other receivables greater than 90 days past due of
$68.5 million
and
$64.6 million
at
March 31, 2017
and
December 31, 2016
, respectively.
|
The aggregate fair value of Jefferies loans and other receivables on nonaccrual status and/or greater than
90
days or more past due was
$253.8 million
and
$29.8 million
at
March 31, 2017
and
December 31, 2016
, respectively, which includes loans and other receivables greater than 90 days past due of
$25.8 million
and
$18.9 million
at
March 31, 2017
and
December 31, 2016
, respectively.
Jefferies has elected the fair value option for its investment in KCG Holdings, Inc. ("KCG"). The change in the fair value of this investment were losses of
$(4.6) million
and
$(37.3) million
for the
first
quarter of
2017
and
2016
, respectively. Jefferies has also separately entered into securities lending transactions with KCG in the normal course of its capital markets activities. The balances of Securities borrowed and Securities loaned were
$2.1 million
and
$2.2 million
, respectively, at
March 31, 2017
, and
$9.2 million
and
$9.2 million
, respectively, at
December 31, 2016
. In April 2017, Virtu Financial agreed to acquire KCG at a price of
$20.00
per share, which is a premium of
$98 million
on the carrying value of Jefferies
24%
interest in KCG at the end of the first quarter of 2017. The transaction is expected to close during the third quarter of 2017.
As of
March 31, 2017
and
December 31, 2016
, we owned approximately
46.6 million
common shares of HRG, representing approximately
23%
of HRG’s outstanding common shares, which are accounted for under the fair value option. The shares are included in our Consolidated Statements of Financial Condition at fair value of
$900.3 million
and
$725.1 million
at
March 31, 2017
and
December 31, 2016
, respectively. The shares were acquired at an aggregate cost of
$475.6 million
. The change in the fair value of our investment in HRG aggregated
$175.2 million
and
$17.2 million
for the
three months ended March 31, 2017 and 2016
, respectively. As reported in its Form 10-Q, for the three months ended December 31, 2016 and 2015, HRG's revenues were
$1,189.6 million
and
$1,209.4 million
, respectively; net income from continuing operations was
$2.0 million
and
$9.5 million
, respectively; net income was
$260.8 million
and
$7.0 million
, respectively; and net income (loss) attributable to HRG was
$212.2 million
and
$(33.9) million
, respectively. We currently have
two
directors on HRG’s board, including our Chairman who serves as HRG's Chairman and CEO.
We believe accounting for these investments at fair value better reflects the economics of these investments, and quoted market prices for these investments provides an objectively determined fair value at each balance sheet date. Our investment in HomeFed is the only other investment accounted for under the equity method of accounting that is also a publicly traded company for which we did not elect the fair value option. HomeFed’s common stock is not listed on any stock exchange, and price information for the common stock is not regularly quoted on any automated quotation system. It is traded in the over-the-counter market with high and low bid prices published by the NASD OTC Bulletin Board Service; however, trading volume is minimal. For these reasons we did not elect the fair value option for HomeFed.
Financial Instruments Not Measured at Fair Value
Certain of our financial instruments are not carried at fair value but are recorded at amounts that approximate fair value due to their liquid or short-term nature and generally negligible credit risk. These financial assets include Cash and cash equivalents and Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations and would generally be presented in Level 1 of the fair value hierarchy. Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations includes U.S. treasury securities with a fair value of
$99.9 million
and
$99.9 million
at
March 31, 2017
and
December 31, 2016
, respectively. See Note 22 for additional information related to financial instruments not measured at fair value.
Note 4. Derivative Financial Instruments
Off-Balance Sheet Risk
Jefferies has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the fair values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon our consolidated financial statements.
Derivative Financial Instruments
Derivative activities are recorded at fair value in the Consolidated Statements of Financial Condition in Trading assets and Trading liabilities, net of cash paid or received under credit support agreements and on a net counterparty basis when a legally enforceable right to offset exists under a master netting agreement. Predominantly, Jefferies and our Leucadia Asset Management businesses enter into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit risks resulting from its trading activities. In addition, Jefferies applies hedge accounting to an interest rate swap that has been designated as a fair value hedge of the changes in fair value due to the benchmark interest rate for certain fixed rate senior long-term debt. See Notes 3 and 20 for additional disclosures about derivative financial instruments.
Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities. Jefferies manages the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading as part of its firm wide risk management policies.
In connection with Jefferies derivative activities, Jefferies may enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements or similar agreements with counterparties. These agreements provide Jefferies with the ability to offset a counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default. See Note 10 for additional information with respect to financial statement offsetting.
The following tables present the fair value and related number of derivative contracts categorized by type of derivative contract as reflected in the Consolidated Statements of Financial Condition at
March 31, 2017
and
December 31, 2016
. The fair value of assets/liabilities related to derivative contracts represents our receivable/payable for derivative financial instruments, gross of counterparty netting and cash collateral received and pledged (in thousands, except contract amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
Fair Value
|
|
Number of
Contracts
|
|
Fair Value
|
|
Number of
Contracts
|
March 31, 2017
|
|
|
|
|
|
|
|
Derivatives designated as accounting hedges - interest rate contracts
|
$
|
—
|
|
|
—
|
|
|
$
|
3,456
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedges:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
2,078,505
|
|
|
28,081
|
|
|
$
|
1,971,452
|
|
|
45,250
|
|
Foreign exchange contracts
|
308,706
|
|
|
6,639
|
|
|
300,834
|
|
|
6,556
|
|
Equity contracts
|
605,893
|
|
|
1,856,995
|
|
|
882,188
|
|
|
1,617,398
|
|
Commodity contracts
|
4,329
|
|
|
8,815
|
|
|
5,167
|
|
|
8,778
|
|
Credit contracts: centrally cleared swaps
|
9,520
|
|
|
25
|
|
|
12,555
|
|
|
34
|
|
Credit contracts: other credit derivatives
|
19,826
|
|
|
191
|
|
|
15,257
|
|
|
122
|
|
Total
|
3,026,779
|
|
|
|
|
|
3,187,453
|
|
|
|
|
Counterparty/cash-collateral netting (1)
|
(2,826,763
|
)
|
|
|
|
|
(2,794,432
|
)
|
|
|
|
Total derivatives not designated as accounting hedges
|
$
|
200,016
|
|
|
|
|
|
$
|
393,021
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per Consolidated Statement of Financial Condition (2)
|
$
|
200,016
|
|
|
|
|
$
|
396,477
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedges:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
3,282,245
|
|
|
29,032
|
|
|
$
|
3,159,457
|
|
|
34,845
|
|
Foreign exchange contracts
|
529,669
|
|
|
7,826
|
|
|
516,869
|
|
|
8,319
|
|
Equity contracts
|
786,987
|
|
|
2,843,329
|
|
|
1,169,201
|
|
|
2,414,715
|
|
Commodity contracts
|
1,906
|
|
|
2,766
|
|
|
6,430
|
|
|
7,289
|
|
Credit contracts: centrally cleared swaps
|
7,044
|
|
|
98
|
|
|
2,562
|
|
|
19,900
|
|
Credit contracts: other credit derivatives
|
19,225
|
|
|
213
|
|
|
25,503
|
|
|
184
|
|
Total
|
4,627,076
|
|
|
|
|
|
4,880,022
|
|
|
|
|
Counterparty/cash-collateral netting (1)
|
(4,255,998
|
)
|
|
|
|
|
(4,229,213
|
)
|
|
|
|
Total per Consolidated Statement of Financial Condition (2)
|
$
|
371,078
|
|
|
|
|
|
$
|
650,809
|
|
|
|
|
(1) Amounts netted include both netting by counterparty and for cash collateral paid or received.
(2) We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of Financial Condition.
The following table provides information related to gains (losses) recognized in Interest expense in the Consolidated Statements of Operations on a fair value hedge (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
2017
|
|
2016
|
Interest rate swaps
|
|
$
|
(4,609
|
)
|
|
$
|
—
|
|
Long-term debt
|
|
5,405
|
|
|
—
|
|
Total
|
|
$
|
796
|
|
|
$
|
—
|
|
The following table presents unrealized and realized gains (losses) on derivative contracts which are primarily recognized in Principal transactions revenues in the Consolidated Statements of Operations which are utilized in connection with our client activities and our economic risk management activities for the
three months ended March 31, 2017 and 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
2017
|
|
2016
|
Interest rate contracts
|
|
$
|
9,678
|
|
|
$
|
(68,513
|
)
|
Foreign exchange contracts
|
|
2,503
|
|
|
836
|
|
Equity contracts
|
|
(178,622
|
)
|
|
(224,282
|
)
|
Commodity contracts
|
|
7,248
|
|
|
729
|
|
Credit contracts
|
|
10,192
|
|
|
(10,975
|
)
|
Total
|
|
$
|
(149,001
|
)
|
|
$
|
(302,205
|
)
|
The net gains (losses) on derivative contracts in the table above are one of a number of activities comprising Jefferies business activities and are before consideration of economic hedging transactions, which generally offset the net gains (losses) included above. Jefferies substantially mitigates its exposure to market risk on its cash instruments through derivative contracts, which generally provide offsetting revenues, and Jefferies manages the risk associated with these contracts in the context of its overall risk management framework.
OTC Derivatives.
The following tables set forth by remaining contract maturity the fair value of OTC derivative assets and liabilities as reflected in the Consolidated Statement of Financial Condition at
March 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC Derivative Assets (1) (2) (3)
|
|
0-12 Months
|
|
1-5 Years
|
|
Greater Than
5 Years
|
|
Cross-
Maturity
Netting (4)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps, options and forwards
|
$
|
371
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
433
|
|
Equity swaps and options
|
19,143
|
|
|
3,271
|
|
|
—
|
|
|
—
|
|
|
22,414
|
|
Credit default swaps
|
—
|
|
|
14,487
|
|
|
6,449
|
|
|
—
|
|
|
20,936
|
|
Total return swaps
|
6,384
|
|
|
771
|
|
|
—
|
|
|
(38
|
)
|
|
7,117
|
|
Foreign currency forwards, swaps and options
|
37,502
|
|
|
37,500
|
|
|
—
|
|
|
(13,111
|
)
|
|
61,891
|
|
Interest rate swaps, options and forwards
|
32,212
|
|
|
153,246
|
|
|
124,873
|
|
|
(66,627
|
)
|
|
243,704
|
|
Total
|
$
|
95,612
|
|
|
$
|
209,337
|
|
|
$
|
131,322
|
|
|
$
|
(79,776
|
)
|
|
356,495
|
|
Cross product counterparty netting
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,512
|
)
|
Total OTC derivative assets included in Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
354,983
|
|
|
|
(1)
|
At
March 31, 2017
, we held exchange traded derivative assets and other credit agreements with a fair value of
$15.5 million
, which are not included in this table.
|
|
|
(2)
|
OTC derivative assets in the table above are gross of collateral received. OTC derivative assets are recorded net of collateral received in the Consolidated Statements of Financial Condition. At
March 31, 2017
, cash collateral received was
$176.5 million
.
|
|
|
(3)
|
Derivative fair values include counterparty netting within product category.
|
|
|
(4)
|
Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC Derivative Liabilities (1) (2) (3)
|
|
0-12 Months
|
|
1-5 Years
|
|
Greater Than
5 Years
|
|
Cross-Maturity
Netting (4)
|
|
Total
|
Commodity swaps, options and forwards
|
$
|
1,582
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,582
|
|
Equity swaps and options
|
13,148
|
|
|
17,187
|
|
|
1,994
|
|
|
—
|
|
|
32,329
|
|
Credit default swaps
|
178
|
|
|
13,155
|
|
|
—
|
|
|
—
|
|
|
13,333
|
|
Total return swaps
|
20,221
|
|
|
2,391
|
|
|
—
|
|
|
(38
|
)
|
|
22,574
|
|
Foreign currency forwards, swaps and options
|
39,898
|
|
|
27,382
|
|
|
—
|
|
|
(13,111
|
)
|
|
54,169
|
|
Fixed income forwards
|
275
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
275
|
|
Interest rate swaps, options and forwards
|
19,346
|
|
|
92,177
|
|
|
96,958
|
|
|
(66,627
|
)
|
|
141,854
|
|
Total
|
$
|
94,648
|
|
|
$
|
152,292
|
|
|
$
|
98,952
|
|
|
$
|
(79,776
|
)
|
|
266,116
|
|
Cross product counterparty netting
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,512
|
)
|
Total OTC derivative liabilities included in Trading liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
264,604
|
|
|
|
(1)
|
At
March 31, 2017
, we held exchange traded derivative liabilities and other credit agreements with a fair value of
$254.9 million
, which are not included in this table.
|
|
|
(2)
|
OTC derivative liabilities in the table above are gross of collateral pledged. OTC derivative liabilities are recorded net of collateral pledged in the Consolidated Statements of Financial Condition. At
March 31, 2017
, cash collateral pledged was
$144.2 million
.
|
|
|
(3)
|
Derivative fair values include counterparty netting within product category.
|
|
|
(4)
|
Amounts represent the netting of receivable balances with payable balances for the same counterparty within product category across maturity categories.
|
At
March 31, 2017
, the counterparty credit quality with respect to the fair value of our OTC derivative assets was as follows (in thousands):
|
|
|
|
|
Counterparty credit quality (1):
|
|
A- or higher
|
$
|
225,496
|
|
BBB- to BBB+
|
62,994
|
|
BB+ or lower
|
28,130
|
|
Unrated
|
38,363
|
|
Total
|
$
|
354,983
|
|
|
|
(1)
|
Jefferies utilizes internal credit ratings determined by the Jefferies Risk Management department. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies.
|
Contingent Features
Certain of Jefferies derivative instruments contain provisions that require their debt to maintain an investment grade credit rating from each of the major credit rating agencies. If Jefferies debt were to fall below investment grade, it would be in violation of these provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on Jefferies derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position at
March 31, 2017
and
December 31, 2016
is
$19.4 million
and
$70.6 million
, respectively, for which Jefferies has received collateral of
$3.7 million
and posted collateral of
$44.4 million
, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on
March 31, 2017
and
December 31, 2016
, Jefferies would have been required to post an additional
$23.1 million
and
$26.1 million
, respectively, of collateral to its counterparties.
Other Derivatives
National Beef uses futures contracts in order to reduce its exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. National Beef accounts for the futures contracts at fair value. Firm commitments for sales are treated as normal sales and therefore not marked to market. Certain firm commitments to purchase cattle, are marked to market when a price has been agreed upon, otherwise they are treated as normal purchases and, therefore, not marked to market. The gains
and losses associated with the change in fair value of the futures contracts and offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments are recorded to income and expense in the period of change.
Vitesse uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Vitesse accounts for the derivative instruments at fair value. The gains and losses associated with the change in fair value of the derivatives are recorded in income.
Note 5. Collateralized Transactions
Jefferies enters into secured borrowing and lending arrangements to obtain collateral necessary to effect settlement, finance inventory positions, meet customer needs or re-lend as part of dealer operations. Jefferies monitors the fair value of the securities loaned and borrowed on a daily basis as compared with the related payable or receivable, and requests additional collateral or returns excess collateral, as appropriate. Jefferies pledges financial instruments as collateral under repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. Jefferies agreements with counterparties generally contain contractual provisions allowing the counterparty the right to sell or repledge the collateral. Pledged securities owned that can be sold or repledged by the counterparty are included within Financial instruments owned and noted parenthetically as Securities pledged on our Consolidated Statements of Financial Condition.
The following tables set forth the carrying value of securities lending arrangements and repurchase agreements by class of collateral pledged and remaining contractual maturity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017
|
Collateral Pledged
|
|
Securities Lending Arrangements
|
|
Repurchase Agreements
|
|
Total
|
Corporate equity securities
|
|
$
|
1,839,036
|
|
|
$
|
167,950
|
|
|
$
|
2,006,986
|
|
Corporate debt securities
|
|
683,539
|
|
|
1,766,716
|
|
|
2,450,255
|
|
Mortgage- and asset-backed securities
|
|
—
|
|
|
2,836,035
|
|
|
2,836,035
|
|
U.S. government and federal agency securities
|
|
271
|
|
|
8,465,938
|
|
|
8,466,209
|
|
Municipal securities
|
|
—
|
|
|
511,340
|
|
|
511,340
|
|
Sovereign obligations
|
|
—
|
|
|
2,422,148
|
|
|
2,422,148
|
|
Loans and other receivables
|
|
—
|
|
|
230,762
|
|
|
230,762
|
|
Total
|
|
$
|
2,522,846
|
|
|
$
|
16,400,889
|
|
|
$
|
18,923,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
Collateral Pledged
|
|
Securities Lending Arrangements
|
|
Repurchase Agreements
|
|
Total
|
Corporate equity securities
|
|
$
|
2,046,243
|
|
|
$
|
66,291
|
|
|
$
|
2,112,534
|
|
Corporate debt securities
|
|
731,276
|
|
|
1,907,888
|
|
|
2,639,164
|
|
Mortgage- and asset-backed securities
|
|
—
|
|
|
2,171,480
|
|
|
2,171,480
|
|
U.S. government and federal agency securities
|
|
41,613
|
|
|
9,232,624
|
|
|
9,274,237
|
|
Municipal securities
|
|
—
|
|
|
553,010
|
|
|
553,010
|
|
Sovereign obligations
|
|
—
|
|
|
2,625,079
|
|
|
2,625,079
|
|
Loans and other receivables
|
|
—
|
|
|
455,960
|
|
|
455,960
|
|
Total
|
|
$
|
2,819,132
|
|
|
$
|
17,012,332
|
|
|
$
|
19,831,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity
|
|
|
At March 31, 2017
|
|
|
Overnight and Continuous
|
|
Up to 30 Days
|
|
30 to 90 Days
|
|
Greater than 90 Days
|
|
Total
|
Securities lending arrangements
|
|
$
|
1,250,755
|
|
|
$
|
—
|
|
|
$
|
712,777
|
|
|
$
|
559,314
|
|
|
$
|
2,522,846
|
|
Repurchase agreements
|
|
8,906,185
|
|
|
2,321,184
|
|
|
3,651,291
|
|
|
1,522,229
|
|
|
16,400,889
|
|
Total
|
|
$
|
10,156,940
|
|
|
$
|
2,321,184
|
|
|
$
|
4,364,068
|
|
|
$
|
2,081,543
|
|
|
$
|
18,923,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity
|
|
|
At December 31, 2016
|
|
|
Overnight and Continuous
|
|
Up to 30 Days
|
|
30 to 90 Days
|
|
Greater than 90 Days
|
|
Total
|
Securities lending arrangements
|
|
$
|
2,131,891
|
|
|
$
|
39,673
|
|
|
$
|
104,516
|
|
|
$
|
543,052
|
|
|
$
|
2,819,132
|
|
Repurchase agreements
|
|
9,147,176
|
|
|
2,008,119
|
|
|
3,809,533
|
|
|
2,047,504
|
|
|
17,012,332
|
|
Total
|
|
$
|
11,279,067
|
|
|
$
|
2,047,792
|
|
|
$
|
3,914,049
|
|
|
$
|
2,590,556
|
|
|
$
|
19,831,464
|
|
Jefferies receives securities as collateral under resale agreements, securities borrowing transactions and customer margin loans. Jefferies also receives securities as collateral in connection with securities-for-securities transactions in which it is the lender of securities. In many instances, Jefferies is permitted by contract to rehypothecate the securities received as collateral. These securities may be used to secure repurchase agreements, enter into securities lending transactions, satisfy margin requirements on derivative transactions or cover short positions. At
March 31, 2017
and
December 31, 2016
, the approximate fair value of securities received as collateral by Jefferies that may be sold or repledged was
$24.7 billion
and
$25.5 billion
, respectively. A substantial portion of these securities have been sold or repledged.
Note 6. Securitization Activities
Jefferies engages in securitization activities related to corporate loans, commercial mortgage loans, consumer loans and mortgage-backed and other asset-backed securities. In securitization transactions, Jefferies transfers assets to special purpose entities ("SPEs") and acts as the placement or structuring agent for the beneficial interests sold to investors by the SPE. A significant portion of the securitization transactions are securitization of assets issued or guaranteed by U.S. government agencies. These SPEs generally meet the criteria of VIEs; however, the SPEs are generally not consolidated as Jefferies is not considered the primary beneficiary for these SPEs.
Jefferies accounts for securitization transactions as sales provided it has relinquished control over the transferred assets. Transferred assets are carried at fair value with unrealized gains and losses reflected in Principal transactions revenues in the Consolidated Statements of Operations prior to the identification and isolation for securitization. Subsequently, revenues recognized upon securitization are reflected as net underwriting revenues. Jefferies generally receives cash proceeds in connection with the transfer of assets to an SPE. Jefferies may, however, have continuing involvement with the transferred assets, which is limited to retaining one or more tranches of the securitization (primarily senior and subordinated debt securities in the form of mortgage- and other asset-backed securities or CLOs), which are included within Trading assets and are generally initially categorized as Level 2 within the fair value hierarchy. Jefferies applies fair value accounting to the securities.
The following table presents activity related to Jefferies securitizations that were accounted for as sales in which it had continuing involvement during the
three months ended March 31, 2017 and 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Transferred assets
|
|
$
|
953.5
|
|
|
$
|
1,948.9
|
|
Proceeds on new securitizations
|
|
$
|
962.6
|
|
|
$
|
1,962.7
|
|
Cash flows received on retained interests
|
|
$
|
8.7
|
|
|
$
|
9.6
|
|
Jefferies has no explicit or implicit arrangements to provide additional financial support to these SPEs, has no liabilities related to these SPEs and has no outstanding derivative contracts executed in connection with these securitization activities at
March 31, 2017
and
December 31, 2016
.
The following table summarizes Jefferies retained interests in SPEs where it transferred assets and has continuing involvement and received sale accounting treatment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Securitization Type
|
Total
Assets
|
|
Retained
Interests
|
|
Total
Assets
|
|
Retained
Interests
|
U.S. government agency residential mortgage-backed securities
|
$
|
6,029.9
|
|
|
$
|
9.2
|
|
|
$
|
7,584.9
|
|
|
$
|
31.0
|
|
U.S. government agency commercial mortgage-backed securities
|
$
|
2,240.3
|
|
|
$
|
49.0
|
|
|
$
|
1,806.3
|
|
|
$
|
29.6
|
|
CLOs
|
$
|
2,759.9
|
|
|
$
|
18.5
|
|
|
$
|
4,102.2
|
|
|
$
|
37.0
|
|
Consumer and other loans
|
$
|
479.9
|
|
|
$
|
101.0
|
|
|
$
|
395.7
|
|
|
$
|
25.3
|
|
Total assets represent the unpaid principal amount of assets in the SPEs in which Jefferies has continuing involvement and are presented solely to provide information regarding the size of the transaction and the size of the underlying assets supporting its retained interests, and are not considered representative of the risk of potential loss. Assets retained in connection with a securitization transaction represent the fair value of the securities of one or more tranches issued by an SPE, including senior and subordinated tranches. Jefferies risk of loss is limited to this fair value amount which is included within total Trading assets in our Consolidated Statements of Financial Condition.
Although not obligated, in connection with secondary market-making activities Jefferies may make a market in the securities issued by these SPEs. In these market-making transactions, Jefferies buys these securities from and sells these securities to investors. Securities purchased through these market-making activities are not considered to be continuing involvement in these SPEs. To the extent Jefferies purchased securities through these market-making activities and Jefferies is not deemed to be the primary beneficiary of the VIE, these securities are included in agency and non-agency mortgage- and asset-backed securitizations in the nonconsolidated VIEs section presented in Note 8.
Foursight Capital also utilized SPEs to securitize automobile loans receivable. These SPEs are VIEs and our subsidiary is the primary beneficiary; the related assets and the secured borrowings are recognized in the Consolidated Statements of Financial Condition. These secured borrowings do not have recourse to our subsidiary’s general credit. See Note 8 for further information on securitization activities and VIEs.
Note 7. Available for Sale Securities
The amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as available for sale at
March 31, 2017
and
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
March 31, 2017
|
|
|
|
|
|
|
|
Bonds and notes:
|
|
|
|
|
|
|
|
U.S. government securities
|
$
|
293,286
|
|
|
$
|
—
|
|
|
$
|
144
|
|
|
$
|
293,142
|
|
Residential mortgage-backed securities
|
34,759
|
|
|
151
|
|
|
82
|
|
|
34,828
|
|
Commercial mortgage-backed securities
|
10,328
|
|
|
124
|
|
|
6
|
|
|
10,446
|
|
Other asset-backed securities
|
28,242
|
|
|
126
|
|
|
5
|
|
|
28,363
|
|
All other corporates
|
179
|
|
|
—
|
|
|
—
|
|
|
179
|
|
Total fixed maturities
|
366,794
|
|
|
401
|
|
|
237
|
|
|
366,958
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies
|
35,071
|
|
|
20,499
|
|
|
—
|
|
|
55,570
|
|
Industrial, miscellaneous and all other
|
17,946
|
|
|
22,029
|
|
|
—
|
|
|
39,975
|
|
Total equity securities
|
53,017
|
|
|
42,528
|
|
|
—
|
|
|
95,545
|
|
|
|
|
|
|
|
|
|
|
$
|
419,811
|
|
|
$
|
42,929
|
|
|
$
|
237
|
|
|
$
|
462,503
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
$
|
174,938
|
|
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
174,933
|
|
Residential mortgage-backed securities
|
19,129
|
|
|
108
|
|
|
104
|
|
|
19,133
|
|
Commercial mortgage-backed securities
|
8,275
|
|
|
64
|
|
|
2
|
|
|
8,337
|
|
Other asset-backed securities
|
18,918
|
|
|
124
|
|
|
—
|
|
|
19,042
|
|
All other corporates
|
180
|
|
|
—
|
|
|
1
|
|
|
179
|
|
Total fixed maturities
|
221,440
|
|
|
304
|
|
|
120
|
|
|
221,624
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies
|
35,071
|
|
|
15,115
|
|
|
—
|
|
|
50,186
|
|
Industrial, miscellaneous and all other
|
17,946
|
|
|
11,293
|
|
|
—
|
|
|
29,239
|
|
Total equity securities
|
53,017
|
|
|
26,408
|
|
|
—
|
|
|
79,425
|
|
|
|
|
|
|
|
|
|
|
$
|
274,457
|
|
|
$
|
26,712
|
|
|
$
|
120
|
|
|
$
|
301,049
|
|
The amortized cost and estimated fair value of investments classified as available for sale at
March 31, 2017
, by contractual maturity, are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
(In thousands)
|
Due within one year
|
$
|
293,286
|
|
|
$
|
293,142
|
|
Due after one year through five years
|
179
|
|
|
179
|
|
|
293,465
|
|
|
293,321
|
|
Mortgage-backed and asset-backed securities
|
73,329
|
|
|
73,637
|
|
|
$
|
366,794
|
|
|
$
|
366,958
|
|
At
March 31, 2017
, the unrealized losses on investments which have been in a continuous unrealized loss position for less than 12 months and 12 months or longer were not significant.
Note 8. Variable Interest Entities
VIEs are entities in which equity investors lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.
Our variable interests in VIEs include debt and equity interests, equity interests in associated companies, commitments, guarantees and certain fees. Our involvement with VIEs arises primarily from the following activities, but also includes other activities discussed below:
|
|
•
|
Purchases of securities in connection with our trading and secondary market-making activities,
|
|
|
•
|
Retained interests held as a result of securitization activities, including the resecuritization of mortgage- and other asset-backed securities and the securitization of commercial mortgage, corporate and consumer loans,
|
|
|
•
|
Acting as placement agent and/or underwriter in connection with client-sponsored securitizations,
|
|
|
•
|
Financing of agency and non-agency mortgage- and other asset-backed securities,
|
|
|
•
|
Real estate investments,
|
|
|
•
|
Warehousing funding arrangements for client-sponsored consumer loan vehicles and CLOs through participation certificates and revolving loan and note commitments, and
|
|
|
•
|
Loans to, investments in and fees from various investment vehicles.
|
We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and we reassess whether we are the primary beneficiary of a VIE on an ongoing basis. Our determination of whether we are the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires significant judgment. Our considerations in determining the VIE’s most significant activities and whether we have power to direct those activities include, but are not limited to, the VIE’s purpose and design and the risks passed through to investors, the voting interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design and the existence of explicit or implicit financial guarantees. In situations where we have determined that the power over the VIE’s significant activities is shared, we assess whether we are the party with the power over the most significant activities. If we are the party with the power over the most significant activities, we meet the "power" criteria of the primary beneficiary. If we do not have the power over the most significant activities or we determine that decisions require consent of each sharing party, we do not meet the "power" criteria of the primary beneficiary.
We assess our variable interests in a VIE both individually and in aggregate to determine whether we have an obligation to absorb losses of or a right to receive benefits from the VIE that could potentially be significant to the VIE. The determination of whether our variable interest is significant to the VIE requires significant judgment. In determining the significance of our variable interest, we consider the terms, characteristics and size of the variable interests, the design and characteristics of the VIE, our involvement in the VIE and our market-making activities related to the variable interests.
Consolidated VIEs
The following table presents information about the assets and liabilities of our consolidated VIEs, which are presented within our Consolidated Statements of Financial Condition in the respective asset and liability categories, as of
March 31, 2017
and
December 31, 2016
(in millions). The assets and liabilities in the table below are presented prior to consolidation and thus a portion of these assets and liabilities are eliminated in consolidation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Securitization Vehicles
|
|
Real Estate Investment Vehicles
|
|
Securitization Vehicles
|
|
Real Estate Investment Vehicles
|
Cash
|
$
|
6.7
|
|
|
$
|
2.7
|
|
|
$
|
18.4
|
|
|
$
|
2.2
|
|
Financial instruments owned
|
52.8
|
|
|
—
|
|
|
86.6
|
|
|
—
|
|
Securities purchased under agreement to resell (1)
|
570.2
|
|
|
—
|
|
|
733.5
|
|
|
—
|
|
Receivables
|
246.6
|
|
|
312.0
|
|
|
277.7
|
|
|
296.9
|
|
Loans to and investments in associated companies
|
—
|
|
|
120.0
|
|
|
—
|
|
|
108.7
|
|
Other
|
15.6
|
|
|
11.0
|
|
|
14.5
|
|
|
10.8
|
|
Total assets
|
$
|
891.9
|
|
|
$
|
445.7
|
|
|
$
|
1,130.7
|
|
|
$
|
418.6
|
|
|
|
|
|
|
|
|
|
Other secured financings (2)
|
$
|
856.5
|
|
|
$
|
—
|
|
|
$
|
1,083.8
|
|
|
$
|
—
|
|
Long-term debt
|
—
|
|
|
258.1
|
|
|
24.1
|
|
|
243.9
|
|
Other
|
35.0
|
|
|
8.2
|
|
|
22.3
|
|
|
11.7
|
|
Total liabilities
|
$
|
891.5
|
|
|
$
|
266.3
|
|
|
$
|
1,130.2
|
|
|
$
|
255.6
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
$
|
—
|
|
|
$
|
107.5
|
|
|
$
|
—
|
|
|
$
|
98.7
|
|
|
|
(1)
|
Securities purchased under agreement to resell represent an amount due under a collateralized transaction on a related consolidated entity, which is eliminated in consolidation.
|
|
|
(2)
|
Approximately
$19.5 million
and
$57.6 million
of the secured financing represents an amount held by Jefferies in inventory and eliminated in consolidation at
March 31, 2017
and
December 31, 2016
, respectively.
|
Securitization Vehicles.
Jefferies is the primary beneficiary of securitization vehicles associated with their financing of consumer and small business loans. In the creation of the securitization vehicles, Jefferies was involved in the decisions made during the establishment and design of the entities and holds variable interests consisting of the securities retained that could potentially be significant. The assets of the VIEs consist of the small business loans and term loans backed by consumer installment receivables, which are available for the benefit of the vehicles' beneficial interest holders. The creditors of the VIEs do not have recourse to Jefferies general credit and the assets of the VIEs are not available to satisfy any other debt.
Jefferies is also the primary beneficiary of mortgage-backed financing vehicles to which Jefferies sells agency and non-agency residential and commercial mortgage loans and mortgage-backed securities pursuant to the terms of a master repurchase agreement. Jefferies manages the assets within these vehicles. Jefferies variable interests in these vehicles consist of its collateral margin maintenance obligations under the master repurchase agreement and retained interests in securities issued. The assets of these VIEs consist of reverse repurchase agreements, which are available for the benefit of the vehicle’s debt holders. The creditors of these VIEs do not have recourse to Jefferies general credit and each such VIE’s assets are not available to satisfy any other debt.
At
March 31, 2017
and
December 31, 2016
, Foursight Capital is the primary beneficiary of SPEs it utilized to securitize automobile loans receivable. Foursight Capital acts as the servicer for which it receives a fee, and owns an equity interest in the SPEs. The notes issued by the SPEs are secured solely by the assets of the SPEs and do not have recourse to Foursight Capital’s general credit and the assets of the VIEs are not available to satisfy any other debt.
Real Estate Investment Vehicles.
54 Madison, which we consolidate through our control of the 54 Madison investment committee, has real estate investments in which it is the primary beneficiary. 54 Madison was involved in the decisions made during the establishment and design of the investment entities. 54 Madison variable interests consist of its investment in and management of the assets within these entities. The assets of these VIEs consist primarily of financing note receivables and investments in associated companies, which are available for the benefit of the VIEs' debt holders. The debt holders of these VIEs have recourse to 54 Madison's general credit and the assets of the VIEs are not available to satisfy any other debt.
Nonconsolidated VIEs
The following tables present information about our variable interests in nonconsolidated VIEs as of
March 31, 2017
and
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement
Carrying Amount
|
|
Maximum
Exposure to Loss
|
|
VIE Assets
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
CLOs
|
$
|
37.7
|
|
|
$
|
1.5
|
|
|
$
|
285.7
|
|
|
$
|
3,279.9
|
|
Consumer loan vehicles
|
154.1
|
|
|
—
|
|
|
515.4
|
|
|
1,149.1
|
|
Related party private equity vehicles
|
36.3
|
|
|
—
|
|
|
62.0
|
|
|
149.3
|
|
Real estate investment vehicles
|
100.4
|
|
|
—
|
|
|
112.2
|
|
|
111.3
|
|
Other private investment vehicles
|
85.6
|
|
|
—
|
|
|
96.7
|
|
|
4,840.7
|
|
Total
|
$
|
414.1
|
|
|
$
|
1.5
|
|
|
$
|
1,072.0
|
|
|
$
|
9,530.3
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
CLOs
|
$
|
264.7
|
|
|
$
|
4.8
|
|
|
$
|
930.0
|
|
|
$
|
4,472.9
|
|
Consumer loan vehicles
|
90.3
|
|
|
—
|
|
|
219.6
|
|
|
985.5
|
|
Related party private equity vehicles
|
37.6
|
|
|
—
|
|
|
63.6
|
|
|
155.6
|
|
Real estate investment vehicles
|
90.3
|
|
|
—
|
|
|
101.8
|
|
|
85.6
|
|
Other private investment vehicles
|
84.0
|
|
|
—
|
|
|
95.8
|
|
|
4,529.7
|
|
Total
|
$
|
566.9
|
|
|
$
|
4.8
|
|
|
$
|
1,410.8
|
|
|
$
|
10,229.3
|
|
Our maximum exposure to loss often differs from the carrying value of the variable interests. The maximum exposure to loss is dependent on the nature of the variable interests in the VIEs and is limited to the notional amounts of certain loan and equity commitments and guarantees. Our maximum exposure to loss does not include the offsetting benefit of any financial instruments that may be utilized to hedge the risks associated with its variable interests and is not reduced by the amount of collateral held as part of a transaction with a VIE.
Collateralized Loan Obligations.
Assets collateralizing the CLOs include bank loans, participation interests and sub-investment grade and senior secured U.S. loans. Jefferies underwrites securities issued in CLO transactions on behalf of sponsors and provides advisory services to the sponsors. Jefferies may also sell corporate loans to the CLOs. Jefferies variable interests in connection with CLOs where it has been involved in providing underwriting and/or advisory services consist of the following:
|
|
•
|
Forward sale agreements whereby Jefferies commits to sell, at a fixed price, corporate loans and ownership interests in an entity holding such corporate loans to CLOs,
|
|
|
•
|
Warehouse funding arrangements in the form of participation interests in corporate loans held by CLOs and commitments to fund such participation interests,
|
|
|
•
|
Trading positions in securities issued in a CLO transaction,
|
|
|
•
|
Investments in variable funding notes issued by CLOs, and
|
|
|
•
|
A guarantee to a CLO managed by Jefferies Finance, whereby Jefferies guarantees certain of the obligations of Jefferies Finance to the CLO.
|
Consumer Loan Vehicles.
Jefferies provides financing and lending related services to certain client-sponsored VIEs in the form of revolving funding note agreements, revolving credit facilities and forward purchase agreements. The underlying assets, which are collateralizing the vehicles, are primarily comprised of unsecured consumer and small business loans. In addition, Jefferies may provide structuring and advisory services and act as an underwriter or placement agent for securities issued by the vehicles. Jefferies does not control the activities of these entities.
Related Party Private Equity Vehicles.
Jefferies committed to invest equity in private equity funds (the "JCP Funds") managed by Jefferies Capital Partners, LLC (the "JCP Manager"). Additionally, Jefferies committed to invest equity in the general partners of the JCP Funds (the "JCP General Partners") and the JCP Manager. Jefferies variable interests in the JCP Funds, JCP General Partners and JCP Manager (collectively, the "JCP Entities") consist of equity interests that, in total, provide Jefferies with limited and general partner investment returns of the JCP Funds, a portion of the carried interest earned by the JCP General Partners and a portion of the management fees earned by the JCP Manager. Jefferies total equity commitment in the JCP Entities was
$148.1
million
, of which
$125.4 million
and
$125.1 million
had been funded as of
March 31, 2017
and
December 31, 2016
, respectively. The carrying value of Jefferies equity investments in the JCP Entities was
$36.3 million
and
$37.6 million
at
March 31, 2017
and
December 31, 2016
, respectively. Jefferies exposure to loss is limited to the total of its carrying value and unfunded equity commitment. The assets of the JCP Entities primarily consist of private equity and equity related investments.
Jefferies has also provided a guarantee of a portion of Energy Partners I, LP's obligations under a credit agreement. Energy Partners I, LP, is a private equity fund owned and managed by certain of our employees. The maximum exposure to loss of the guarantee was
$3.0 million
and
$3.0 million
as of
March 31, 2017
and
December 31, 2016
, respectively. Energy Partners I, LP has assets consisting primarily of debt and equity investments.
Real Estate Investment Vehicles.
54 Madison has committed to invest
$108.0 million
in real estate investment vehicles, of which
$96.3 million
was funded as of
March 31, 2017
. 54 Madison's maximum exposure to loss is limited to its carrying value and unfunded equity commitment. 54 Madison is not the primary beneficiary of the investment vehicles as it does not have the power to control the most important activities of the VIEs. The assets of the VIEs consist primarily of investments in real estate projects.
Other Private Investment Vehicles.
We had commitments to invest
$100.6 million
and
$111.4 million
as of
March 31, 2017
and
December 31, 2016
, respectively, in various other private investment vehicles, of which
$89.6 million
and
$99.6 million
was funded as of
March 31, 2017
and
December 31, 2016
, respectively. The carrying amount of our equity investment was
$85.6 million
and
$84.0 million
at
March 31, 2017
and
December 31, 2016
, respectively. Our exposure to loss is limited to the total of our carrying value and unfunded equity commitment. These private investment vehicles have assets primarily consisting of private and public equity investments, debt instruments and various oil and gas assets.
Mortgage- and Other Asset-Backed Securitization Vehicles.
In connection with Jefferies secondary trading and market-making activities, Jefferies buys and sells agency and non-agency mortgage-backed securities and other asset-backed securities, which are issued by third party securitization SPEs and are generally considered variable interests in VIEs. Securities issued by securitization SPEs are backed by residential mortgage loans, U.S. agency collateralized mortgage obligations, commercial mortgage loans, CDOs and CLOs and other consumer loans, such as installment receivables, auto loans and student loans. These securities are accounted for at fair value and included in Trading assets in our Consolidated Statements of Financial Condition. Jefferies has no other involvement with the related SPEs and therefore does not consolidate these entities.
Jefferies also engages in underwriting, placement and structuring activities for third-party-sponsored securitization trusts generally through agency (FNMA ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") or GNMA ("Ginnie Mae")) or non-agency-sponsored SPEs and may purchase loans or mortgage-backed securities from third parties that are subsequently transferred into the securitization trusts. The securitizations are backed by residential and commercial mortgage, home equity and auto loans. Jefferies does not consolidate agency-sponsored securitizations as it does not have the power to direct the activities of the SPEs that most significantly impact their economic performance. Further, Jefferies is not the servicer of non-agency-sponsored securitizations and therefore does not have power to direct the most significant activities of the SPEs and accordingly, does not consolidate these entities. Jefferies may retain unsold senior and/or subordinated interests at the time of securitization in the form of securities issued by the SPEs.
Jefferies transfers existing securities, typically mortgage-backed securities, into resecuritization vehicles. These transactions in which debt securities are transferred to a VIE in exchange for new beneficial interests occur in connection with both agency and non-agency-sponsored VIEs. The consolidation analysis is largely dependent on Jefferies role and interest in the resecuritization trusts. Most resecuritizations in which Jefferies is involved are in connection with investors seeking securities with specific risk and return characteristics. As such, Jefferies has concluded that the decision-making power is shared between Jefferies and the investor(s), considering the joint efforts involved in structuring the trust and selecting the underlying assets as well as the level of security interests the investor(s) hold in the SPE; therefore, Jefferies does not consolidate the resecuritization VIEs.
At
March 31, 2017
and
December 31, 2016
, Jefferies held
$1,761.9 million
and
$1,002.2 million
of agency mortgage-backed securities, respectively, and
$351.9 million
and
$439.4 million
of non-agency mortgage- and other asset-backed securities, respectively, as a result of its secondary trading and market-making activities, underwriting, placement and structuring activities and resecuritization activities. Jefferies maximum exposure to loss on these securities is limited to the carrying value of its investments in these securities. Mortgage- and other asset-backed securitization vehicles discussed within this section are not included in the above table containing information about Jefferies variable interests in nonconsolidated VIEs.
We also have a variable interest in a nonconsolidated VIE consisting of our equity interest in an associated company, Golden Queen. See Note 9 for further discussion. In addition, we have a variable interest in a nonconsolidated VIE consisting of our senior secured term loan receivable and equity interest in FXCM. See Notes 3 and 9 for further discussion.
Note 9. Loans to and Investments in Associated Companies
A summary of Loans to and investments in associated companies accounted for under the equity method of accounting during the
three months ended March 31, 2017 and 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to and investments in associated companies as of January 1,
|
|
Income (losses) related to associated companies
|
|
Income (losses) related to associated companies classified as other revenues
|
|
Contributions to (distributions from) associated companies, net
|
|
Other, including foreign exchange and unrealized gains (losses)
|
|
Loans to and investments in associated companies as of March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Jefferies Finance
|
$
|
490,464
|
|
|
$
|
—
|
|
|
$
|
24,965
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
515,429
|
|
Jefferies LoanCore
|
154,731
|
|
|
—
|
|
|
2,332
|
|
|
(7,760
|
)
|
|
—
|
|
|
149,303
|
|
Berkadia
|
184,443
|
|
|
16,954
|
|
|
—
|
|
|
(1,924
|
)
|
|
102
|
|
|
199,575
|
|
FXCM
|
336,258
|
|
|
(149,900
|
)
|
|
—
|
|
|
—
|
|
|
349
|
|
|
186,707
|
|
Garcadia Companies
|
185,815
|
|
|
13,294
|
|
|
—
|
|
|
(12,588
|
)
|
|
—
|
|
|
186,521
|
|
Linkem
|
154,000
|
|
|
(8,148
|
)
|
|
—
|
|
|
31,996
|
|
|
3,520
|
|
|
181,368
|
|
HomeFed
|
302,231
|
|
|
336
|
|
|
—
|
|
|
31,316
|
|
|
—
|
|
|
333,883
|
|
Golden Queen (1)
|
111,302
|
|
|
(1,297
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
110,005
|
|
54 Madison (2)
|
161,400
|
|
|
(608
|
)
|
|
—
|
|
|
25,807
|
|
|
—
|
|
|
186,599
|
|
Other
|
44,454
|
|
|
795
|
|
|
(1,034
|
)
|
|
28,873
|
|
|
1
|
|
|
73,089
|
|
Total
|
$
|
2,125,098
|
|
|
$
|
(128,574
|
)
|
|
$
|
26,263
|
|
|
$
|
95,720
|
|
|
$
|
3,972
|
|
|
$
|
2,122,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Jefferies Finance
|
$
|
528,575
|
|
|
$
|
—
|
|
|
$
|
(22,806
|
)
|
|
$
|
(19,300
|
)
|
|
$
|
—
|
|
|
$
|
486,469
|
|
Jefferies LoanCore
|
288,741
|
|
|
—
|
|
|
(187
|
)
|
|
(27,073
|
)
|
|
—
|
|
|
261,481
|
|
Berkadia
|
190,986
|
|
|
13,054
|
|
|
—
|
|
|
(5,400
|
)
|
|
215
|
|
|
198,855
|
|
Garcadia Companies
|
172,660
|
|
|
15,327
|
|
|
—
|
|
|
(14,352
|
)
|
|
—
|
|
|
173,635
|
|
Linkem
|
150,149
|
|
|
(8,200
|
)
|
|
—
|
|
|
33,297
|
|
|
8,648
|
|
|
183,894
|
|
HomeFed
|
275,378
|
|
|
(1,288
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
274,090
|
|
Golden Queen
|
114,323
|
|
|
(355
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
113,968
|
|
54 Madison
|
—
|
|
|
1,227
|
|
|
—
|
|
|
107,679
|
|
|
3,642
|
|
|
112,548
|
|
Other
|
36,557
|
|
|
287
|
|
|
(423
|
)
|
|
2,109
|
|
|
—
|
|
|
38,530
|
|
Total
|
$
|
1,757,369
|
|
|
$
|
20,052
|
|
|
$
|
(23,416
|
)
|
|
$
|
76,960
|
|
|
$
|
12,505
|
|
|
$
|
1,843,470
|
|
|
|
(1)
|
At
March 31, 2017
and
December 31, 2016
, the balance reflects
$32.4 million
and
$32.8 million
, respectively, related to a noncontrolling interest.
|
|
|
(2)
|
At
March 31, 2017
and
December 31, 2016
, the balance reflects
$109.3 million
and
$95.3 million
, respectively, related to noncontrolling interests.
|
Income (losses) related to associated companies includes the following for the
three months ended March 31, 2017 and 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Berkadia
|
|
$
|
16,954
|
|
|
$
|
13,054
|
|
FXCM
|
|
(149,900
|
)
|
|
—
|
|
Garcadia companies
|
|
13,294
|
|
|
15,327
|
|
Linkem
|
|
(8,148
|
)
|
|
(8,200
|
)
|
HomeFed
|
|
336
|
|
|
(1,288
|
)
|
Golden Queen
|
|
(1,297
|
)
|
|
(355
|
)
|
54 Madison
|
|
(608
|
)
|
|
1,227
|
|
Other
|
|
795
|
|
|
287
|
|
Total
|
|
$
|
(128,574
|
)
|
|
$
|
20,052
|
|
Income (losses) related to associated companies classified as Other revenues includes the following for the
three months ended March 31, 2017 and 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Jefferies Finance
|
|
$
|
24,965
|
|
|
$
|
(22,806
|
)
|
Jefferies LoanCore
|
|
2,332
|
|
|
(187
|
)
|
Other
|
|
(1,034
|
)
|
|
(423
|
)
|
Total
|
|
$
|
26,263
|
|
|
$
|
(23,416
|
)
|
Jefferies Finance
In October 2004, Jefferies entered into an agreement with Massachusetts Mutual Life Insurance Company ("MassMutual") and Babson Capital Management LLC (now Barings, LLC) to form Jefferies Finance, a joint venture entity. Jefferies Finance is a commercial finance company whose primary focus is the origination and syndication of senior secured debt to middle market and growth companies in the form of term and revolving loans. Loans are originated primarily through the investment banking efforts of Jefferies. Jefferies Finance may also originate other debt products such as second lien term, bridge and mezzanine loans, as well as related equity co‑investments. Jefferies Finance also purchases syndicated loans in the secondary market and acts as an investment advisor for various loan funds.
Jefferies and MassMutual each had equity commitments to Jefferies Finance of
$600.0 million
. At
March 31, 2017
,
$493.9 million
of Jefferies commitment was funded. The investment commitment is scheduled to expire on March 1, 2018 with automatic
one year
extensions absent a
60
day termination notice by either party.
In addition, Jefferies and MassMutual have entered into a Secured Revolving Credit Facility, to be funded equally, to support loan underwritings by Jefferies Finance. The Secured Revolving Credit Facility bears interest based on the interest rates of the related Jefferies Finance underwritten loans and is secured by the underlying loans funded by the proceeds of the facility. The total Secured Revolving Credit Facility is for a total committed amount of
$500.0 million
at
March 31, 2017
and
December 31, 2016
. Advances are shared equally between Jefferies and MassMutual. The facility is scheduled to mature on March 1, 2018 with automatic
one year
extensions absent a
60
day termination notice by either party. At
March 31, 2017
and
December 31, 2016
,
$0.0 million
and
$0.0 million
, respectively, of Jefferies
$250.0 million
commitments were funded.
Jefferies engages in debt capital markets transactions with Jefferies Finance related to the originations and syndications of loans by Jefferies Finance. In connection with such services, Jefferies earned fees of
$66.2 million
and
$19.4 million
during the
three months ended March 31, 2017 and 2016
, respectively, which are recognized in Investment banking revenues in the Consolidated Statements of Operations. In addition, Jefferies paid fees to Jefferies Finance in respect of certain loans originated by Jefferies Finance of
$2.1 million
during the
three months ended March 31, 2017
, which are recognized within Selling, general and other expenses in the Consolidated Statement of Operations.
Jefferies acts as a placement agent for CLOs managed by Jefferies Finance, for which Jefferies recognized fees of
$2.7 million
during the
three months ended March 31, 2017
, which are included in Investment banking revenues in the Consolidated Statement of Operations. At
March 31, 2017
and
December 31, 2016
, Jefferies held securities issued by CLOs managed by Jefferies Finance, which are included within Trading assets, and provided a guarantee, whereby Jefferies is required to make certain payments to a CLO in the event Jefferies Finance is unable to meet its obligations to the CLO. Additionally, Jefferies has entered into participation agreements and derivative contracts with Jefferies Finance based upon certain securities issued by the CLO.
Under a service agreement, Jefferies charged Jefferies Finance
$20.2 million
and
$21.1 million
for services provided during the
three months ended March 31, 2017 and 2016
, respectively. At
March 31, 2017
, Jefferies had a receivable from Jefferies Finance, included within Other assets in the Consolidated Statement of Financial Condition, of
$18.0 million
. At
December 31, 2016
, Jefferies had a payable to Jefferies Finance, included within Payables, expense accruals and other liabilities in the Consolidated Statement of Financial Condition, of
$5.8 million
.
Jefferies LoanCore
In February 2011, Jefferies entered into a joint venture agreement with the Government of Singapore Investment Corporation ("GIC") and LoanCore, LLC and formed Jefferies LoanCore, a commercial real estate finance company. In March 2016, the Canada Pension Plan Investment Board acquired a
24%
equity interest in Jefferies LoanCore through a direct acquisition from the GIC. Jefferies LoanCore originates and purchases commercial real estate loans throughout the U.S. with the support of the investment banking and securitization capabilities of Jefferies and the real estate and mortgage investment expertise of the GIC and LoanCore, LLC. Jefferies LoanCore aggregate equity commitment was
$400.0 million
at
March 31, 2017
and
December 31, 2016
. At
March 31, 2017
and
December 31, 2016
, Jefferies had funded
$122.9 million
and
$70.1 million
, respectively, of its
$194.0 million
equity commitment, and has a
48.5%
voting interest in Jefferies LoanCore.
Jefferies LoanCore has entered into master repurchase agreements with Jefferies. During the
three months ended March 31, 2017 and 2016
, Jefferies recognized interest income and fees of
$0.6 million
and
$2.8 million
, respectively, related to these agreements. In connection with such master repurchase agreements, at
December 31, 2016
, Jefferies had securities purchased with agreements to resell from Jefferies LoanCore of
$68.1 million
.
No
amounts were outstanding at
March 31, 2017
.
Jefferies also enters into OTC foreign exchange contracts with Jefferies LoanCore. In connection with these contracts, Jefferies has
$5.4 million
and
$8.3 million
at
March 31, 2017
and
December 31, 2016
, respectively, recorded in Payables, expense accruals and other liabilities and
$1.0 million
at
March 31, 2017
recorded in Trading liabilities in the Consolidated Statements of Financial Condition.
Berkadia
Berkadia is a commercial mortgage banking and servicing joint venture formed in 2009 with Berkshire Hathaway. We and Berkshire Hathaway each contributed
$217.2 million
of equity capital to the joint venture and each have a
50%
equity interest in Berkadia. Through
March 31, 2017
, cumulative cash distributions received by Leucadia from this investment aggregated
$496.5 million
. Berkadia originates commercial/multifamily real estate loans that are sold to U.S. government agencies, and originates and brokers commercial/multifamily mortgage loans which are not part of government agency programs. Berkadia is an investment sales advisor focused on the multifamily industry. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions.
Berkadia uses all of the proceeds from the commercial paper sales of an affiliate of Berkadia to fund new mortgage loans, servicer advances, investments and other working capital requirements. Repayment of the commercial paper is supported by a
$1.5 billion
surety policy issued by a Berkshire Hathaway insurance subsidiary and corporate guaranty, and we have agreed to reimburse Berkshire Hathaway for
one-half
of any losses incurred thereunder. As of
March 31, 2017
, the aggregate amount of commercial paper outstanding was
$1.47 billion
.
FXCM
As discussed more fully in Note 3, at
March 31, 2017
, Leucadia has a
49.9%
common membership interest in FXCM and a senior secured term loan to FXCM due January 2018. On September 1, 2016, we gained the ability to significantly influence FXCM through our common membership interest and our seats on the board of directors. As a result, we classify our equity investment in FXCM in our Consolidated Statements of Financial Condition as Loans to and investments in associated companies. Our term loan remains classified within Trading assets, at fair value. We account for our equity interest in FXCM on a one month lag.
Based on the February 2017 actions described further in Note 3, we evaluated in the first quarter of 2017 whether our equity method investment was fully recoverable. We engaged an independent valuation firm to assist management in estimating the fair value of FXCM. Our estimate of fair value was based on a discounted cash flow and comparable public company analysis. The result of our analysis indicated that the estimated fair value of our equity interest in FXCM was lower than our carrying value by
$130.2 million
. We concluded based on the regulatory actions, FXCM's restructuring plan described further in Note 3, investor perception and declines in the trading price of Global Brokerage's common shares and convertible debt, that the decline in fair value of our equity interest was other than temporary. As such, we impaired our equity investment in FXCM in the first quarter of 2017 by
$130.2 million
.
FXCM is considered a VIE and our term loan and equity interest are variable interests. We have determined that we are not the primary beneficiary of FXCM because we do not have the power to direct the activities that most significantly impact FXCM's performance. Therefore, we do not consolidate FXCM.
Garcadia
Garcadia is a joint venture between us and Garff Enterprises, Inc. ("Garff") that owns and operates
28
automobile dealerships comprised of domestic and foreign automobile makers. The Garcadia joint venture agreement specifies that we and Garff shall have equal board representation and equal votes on all matters affecting Garcadia, and that all cash flows from Garcadia will be allocated
65%
to us and
35%
to Garff, with the exception of
one
dealership from which we receive
83%
of all cash flows and
four
other dealerships from which we receive
71%
of all cash flows. Garcadia’s strategy is to acquire automobile dealerships in primary or secondary market locations meeting its specified return criteria.
Linkem
We own approximately
42%
of the common shares of Linkem, a fixed wireless broadband services provider in Italy. In addition, we own
5%
convertible preferred stock, which is automatically convertible to common shares in 2020. If all of our convertible preferred stock was converted, it would increase our ownership to approximately
53%
of Linkem’s common equity at
March 31, 2017
. The excess of our investment in Linkem’s common shares over our share of underlying book value is being amortized to expense over
12
years.
HomeFed
At
March 31, 2017
, we own
10,838,115
shares of HomeFed’s common stock, representing approximately
70%
of HomeFed’s outstanding common shares; however, we have agreed to limit our voting rights such that we will not be able to vote more than
45%
of HomeFed’s total voting securities voting on any matter, assuming all HomeFed shares not owned by us are voted. HomeFed develops and owns residential and mixed-use real estate properties. HomeFed is a public company traded on the NASD OTC Bulletin Board (Symbol: HOFD). As a result of a 1998 distribution to all of our shareholders, approximately
4.8%
of HomeFed is beneficially owned by our Chairman at
March 31, 2017
. Our Chairman also serves as HomeFed’s Chairman, and our President is a Director of HomeFed. Since we do not control HomeFed, our investment in HomeFed is accounted for as an investment in an associated company.
Golden Queen Mining Company
During 2014 and 2015, we invested
$83.0 million
, net in cash in a limited liability company (Gauss LLC) to partner with the Clay family and Golden Queen Mining Co. Ltd., to jointly fund, develop and operate the Soledad Mountain gold and silver mine project. Previously
100%
owned by Golden Queen Mining Co. Ltd., the project is a fully-permitted, open pit, heap leach gold and silver project located in Kern County, California, which commenced gold and silver production in March 2016. In exchange for a noncontrolling ownership interest in Gauss LLC, the Clay family contributed
$34.5 million
, net in cash. Gauss LLC invested both our and the Clay family’s net contributions totaling
$117.5 million
to the joint venture, Golden Queen, in exchange for a
50%
ownership interest. Golden Queen Mining Co. Ltd. contributed the Soledad Mountain project to the joint venture in exchange for the other
50%
interest.
As a result of our consolidating Gauss LLC, our Loans to and investments in associated companies reflects Gauss LLC’s net investment of
$117.5 million
in the joint venture, which includes both the amount we contributed and the amount contributed by the Clay family. The joint venture, Golden Queen, is considered a VIE as the voting rights of the investors are not proportional to their obligations to absorb the expected losses and their rights to receive the expected residual returns, given the provision of services to the joint venture by Golden Queen Mining Co. Ltd. Golden Queen Mining Co. Ltd. has entered into an agreement with the joint venture for the provision of executive officers, financial, managerial, administrative and other services, and office space and equipment. We have determined that we are not the primary beneficiary of the joint venture and are therefore not consolidating its results.
Our maximum exposure to loss as a result of our involvement with the joint venture is limited to our investment. The excess of Gauss LLC's investment in Golden Queen's underlying book value is being amortized to expense over the estimated life of mine gold and silver sales.
54 Madison
We own approximately
48.1%
of 54 Madison, which we consolidate through our control of the 54 Madison investment committee. 54 Madison seeks long-term capital appreciation through investment in real estate development and similar projects. 54 Madison invests both in projects which they consolidate and projects where they have significant influence and utilize the equity method of accounting. Through
March 31, 2017
, 54 Madison invested an aggregate of
$183.0 million
in projects accounted for under the equity method and
$107.1 million
of that was contributed from noncontrolling interests.
Note 10. Financial Statement Offsetting
In connection with Jefferies derivative activities and securities financing activities, Jefferies may enter into master netting agreements and collateral arrangements with counterparties. Generally, transactions are executed under standard industry agreements, including, but not limited to: derivative transactions – ISDA master netting agreements; securities lending transactions – master securities lending agreements; and repurchase transactions – master repurchase agreements. A master agreement creates a single contract under which all transactions between two counterparties are executed allowing for trade aggregation and a single net payment obligation. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due to a counterparty against all or a portion of an amount due from the counterparty or a third party.
Under Jefferies derivative ISDA master netting agreements, Jefferies typically will also execute credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted by or paid to a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of the counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. In addition, any collateral posted can be applied to the net obligations, with any excess returned; and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.
The conditions supporting the legal right of offset may vary from one legal jurisdiction to another and the enforceability of master netting agreements and bankruptcy laws in certain countries or in certain industries is not free from doubt. The right of offset is dependent both on contract law under the governing arrangement and consistency with the bankruptcy laws of the jurisdiction where the counterparty is located. Industry legal opinions with respect to the enforceability of certain standard provisions in respective jurisdictions are relied upon as a part of managing credit risk. In cases where Jefferies has not determined an agreement to be enforceable, the related amounts are not offset. Master netting agreements are a critical component of Jefferies risk management processes as part of reducing counterparty credit risk and managing liquidity risk.
Jefferies is also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open contracts or transactions.
The following table provides information regarding derivative contracts, repurchase agreements and securities borrowing and lending arrangements that are recognized in the Consolidated Statements of Financial Condition and 1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Consolidated Statements of Financial Condition as appropriate under GAAP and 2) the extent to which other rights of setoff associated with these arrangements exist and could have an effect on our consolidated financial position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross
Amounts
|
|
Netting in Consolidated Statements of Financial Condition
|
|
Net Amounts in Consolidated Statements of Financial Condition
|
|
Additional Amounts Available for Setoff (1)
|
|
Available Collateral (2)
|
|
Net Amount (3)
|
Assets at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
3,026,779
|
|
|
$
|
(2,826,763
|
)
|
|
$
|
200,016
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200,016
|
|
Securities borrowing arrangements
|
$
|
6,886,436
|
|
|
$
|
—
|
|
|
$
|
6,886,436
|
|
|
$
|
(671,142
|
)
|
|
$
|
(486,027
|
)
|
|
$
|
5,729,267
|
|
Reverse repurchase agreements
|
$
|
13,553,924
|
|
|
$
|
(9,085,430
|
)
|
|
$
|
4,468,494
|
|
|
$
|
(701,342
|
)
|
|
$
|
(3,711,705
|
)
|
|
$
|
55,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
3,190,909
|
|
|
$
|
(2,794,432
|
)
|
|
$
|
396,477
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
396,477
|
|
Securities lending arrangements
|
$
|
2,522,846
|
|
|
$
|
—
|
|
|
$
|
2,522,846
|
|
|
$
|
(671,142
|
)
|
|
$
|
(1,813,403
|
)
|
|
$
|
38,301
|
|
Repurchase agreements
|
$
|
16,400,889
|
|
|
$
|
(9,085,430
|
)
|
|
$
|
7,315,459
|
|
|
$
|
(701,342
|
)
|
|
$
|
(5,651,398
|
)
|
|
$
|
962,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
4,627,076
|
|
|
$
|
(4,255,998
|
)
|
|
$
|
371,078
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
371,078
|
|
Securities borrowing arrangements
|
$
|
7,743,562
|
|
|
$
|
—
|
|
|
$
|
7,743,562
|
|
|
$
|
(710,611
|
)
|
|
$
|
(647,290
|
)
|
|
$
|
6,385,661
|
|
Reverse repurchase agreements
|
$
|
14,083,144
|
|
|
$
|
(10,220,656
|
)
|
|
$
|
3,862,488
|
|
|
$
|
(176,275
|
)
|
|
$
|
(3,591,654
|
)
|
|
$
|
94,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
$
|
4,880,022
|
|
|
$
|
(4,229,213
|
)
|
|
$
|
650,809
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
650,809
|
|
Securities lending arrangements
|
$
|
2,819,132
|
|
|
$
|
—
|
|
|
$
|
2,819,132
|
|
|
$
|
(710,611
|
)
|
|
$
|
(2,064,299
|
)
|
|
$
|
44,222
|
|
Repurchase agreements
|
$
|
17,012,332
|
|
|
$
|
(10,220,656
|
)
|
|
$
|
6,791,676
|
|
|
$
|
(176,275
|
)
|
|
$
|
(5,780,909
|
)
|
|
$
|
834,492
|
|
|
|
(1)
|
Under master netting agreements with our counterparties, we have the legal right of offset with a counterparty, which incorporates all of the counterparty’s outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by a counterparty in the event of a counterparty’s default, but which are not netted in the balance sheet because other provisions of GAAP are not met. Further, for derivative assets and liabilities, amounts netted include cash collateral paid or received.
|
|
|
(2)
|
Includes securities received or paid under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty’s rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.
|
|
|
(3)
|
At
March 31, 2017
, amounts include
$5,695.3 million
of securities borrowing arrangements, for which we have received securities collateral of
$5,505.2 million
, and
$948.0 million
of repurchase agreements, for which we have pledged securities collateral of
$975.5 million
, which are subject to master netting agreements but we have not determined the agreements to be legally enforceable. At
December 31, 2016
, amounts include
$6,337.5 million
of securities borrowing arrangements, for which we have received securities collateral of
$6,146.0 million
, and
$810.4 million
of repurchase agreements, for which we have pledged securities collateral of
$834.2 million
, which are subject to master netting agreements but we have not determined the agreements to be legally enforceable.
|
Note 11. Intangible Assets, Net and Goodwill
A summary of Intangible assets, net and goodwill at
March 31, 2017
and
December 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Indefinite-lived intangibles:
|
|
|
|
Exchange and clearing organization membership interests and registrations
|
$
|
8,702
|
|
|
$
|
9,041
|
|
|
|
|
|
Amortizable intangibles:
|
|
|
|
|
|
Customer and other relationships, net of accumulated amortization of $205,957 and $198,674
|
370,829
|
|
|
378,136
|
|
Trademarks and tradename, net of accumulated amortization of $82,681 and $78,778
|
305,355
|
|
|
309,382
|
|
Supply contracts, net of accumulated amortization of $50,076 and $47,867
|
93,524
|
|
|
95,733
|
|
Other, net of accumulated amortization of $3,156 and $2,914
|
5,430
|
|
|
5,672
|
|
Total intangible assets, net
|
783,840
|
|
|
797,964
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
National Beef
|
14,991
|
|
|
14,991
|
|
Jefferies
|
1,696,413
|
|
|
1,696,864
|
|
Other operations
|
3,859
|
|
|
3,859
|
|
Total goodwill
|
1,715,263
|
|
|
1,715,714
|
|
|
|
|
|
Total Intangible assets, net and goodwill
|
$
|
2,499,103
|
|
|
$
|
2,513,678
|
|
Amortization expense on intangible assets was
$13.7 million
and
$15.8 million
for the
three months ended March 31, 2017 and 2016
, respectively. The estimated aggregate future amortization expense for the intangible assets for each of the next five years is as follows: 2017 (for the remaining nine months) -
$44.7 million
; 2018 -
$58.5 million
; 2019 -
$58.5 million
; 2020 -
$58.5 million
; and 2021 -
$58.1 million
.
Note 12. Inventory
A summary of inventory at
March 31, 2017
and
December 31, 2016
which is classified as Other assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
Finished goods
|
$
|
246,079
|
|
|
$
|
243,488
|
|
Work in process
|
36,020
|
|
|
35,714
|
|
Raw materials, supplies and other
|
28,242
|
|
|
30,733
|
|
|
$
|
310,341
|
|
|
$
|
309,935
|
|
Note 13. Short-Term Borrowings
Jefferies short-term borrowings at
March 31, 2017
and
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
Bank loans (1)
|
$
|
326,496
|
|
|
$
|
372,301
|
|
Secured revolving loan facilities
|
—
|
|
|
57,086
|
|
Floating rate puttable notes
|
96,428
|
|
|
96,455
|
|
Total short-term borrowings
|
$
|
422,924
|
|
|
$
|
525,842
|
|
(1) Bank loans are payable on demand and must be repaid in one year or less. Amounts include
$14.5 million
and
$10.3 million
related to bank overdrafts at
March 31, 2017
and
December 31, 2016
, respectively.
At
March 31, 2017
and
December 31, 2016
, the weighted average interest rate on short-term borrowings outstanding is
1.37%
and
1.77%
per annum, respectively.
The Bank of New York Mellon agrees to make revolving intraday credit advances (“Intraday Credit Facility”) for an aggregate committed amount of
$250.0 million
. The Intraday Credit Facility contains a financial covenant, which includes a minimum regulatory net capital requirement. Interest is based on the higher of the Federal funds effective rate plus
0.5%
or the prime rate. At
March 31, 2017
, Jefferies was in compliance with debt covenants under the Intraday Credit Facility.
In October 2015, Jefferies entered into a secured revolving loan facility (“First Secured Revolving Loan Facility”) whereby the lender agreed to make available a revolving loan facility in a maximum principal amount of
$50.0 million
to purchase eligible receivables that met certain requirements as defined in the First Secured Revolving Loan Facility agreement. Interest was based on an annual rate equal to the lesser of the LIBOR rate plus
3.75%
or the maximum rate as defined in the First Secured Revolving Loan Facility agreement. In December 2015, Jefferies entered into a second secured revolving loan facility (“Second Secured Revolving Loan Facility”) whereby the lender agreed to make available a revolving loan facility in a maximum principal amount of
$50.0 million
to purchase eligible receivables that met certain requirements as defined in the Second Secured Revolving Loan Facility agreement. Interest was based on an annual rate equal to the lesser of the LIBOR rate plus
4.25%
or the maximum rate as defined in the Second Secured Revolving Loan Facility agreement. The First Secured Revolving Loan Facility was terminated with an effective date of December 6, 2016. The Second Secured Revolving Loan Facility was terminated with an effective date of January 24, 2017.
Note 14. Long-Term Debt
The principal amount (net of unamortized discounts and premiums), stated interest rate and maturity date of outstanding debt at
March 31, 2017
and
December 31, 2016
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Parent Company Debt:
|
|
|
|
Senior Notes:
|
|
|
|
5.50% Senior Notes due October 18, 2023, $750,000 principal
|
$
|
741,529
|
|
|
$
|
741,264
|
|
6.625% Senior Notes due October 23, 2043, $250,000 principal
|
246,638
|
|
|
246,627
|
|
Total long-term debt – Parent Company
|
988,167
|
|
|
987,891
|
|
|
|
|
|
Subsidiary Debt (non-recourse to Parent Company):
|
|
|
|
|
|
Jefferies:
|
|
|
|
|
|
5.125% Senior Notes, due April 13, 2018, $800,000 principal
|
814,623
|
|
|
817,813
|
|
8.50% Senior Notes, due July 15, 2019, $700,000 principal
|
771,253
|
|
|
778,367
|
|
2.375% Euro Medium Term Notes, due May 20, 2020, $529,825 and $529,975 principal
|
528,220
|
|
|
528,250
|
|
6.875% Senior Notes, due April 15, 2021, $750,000 principal
|
819,951
|
|
|
823,797
|
|
2.25% Euro Medium Term Notes, due July 13, 2022, $4,239 and $4,240 principal
|
3,863
|
|
|
3,848
|
|
5.125% Senior Notes, due January 20, 2023, $600,000 principal
|
617,704
|
|
|
618,355
|
|
4.85% Senior Notes, due January 15, 2027, $750,000 principal (1)
|
738,748
|
|
|
—
|
|
6.45% Senior Debentures, due June 8, 2027, $350,000 principal
|
377,313
|
|
|
377,806
|
|
3.875% Convertible Senior Debentures, due November 1, 2029, $345,000 principal
|
345,850
|
|
|
346,163
|
|
6.25% Senior Debentures, due January 15, 2036, $500,000 principal
|
512,309
|
|
|
512,396
|
|
6.50% Senior Notes, due January 20, 2043, $400,000 principal
|
421,249
|
|
|
421,333
|
|
Structured Notes (2)
|
316,408
|
|
|
255,203
|
|
National Beef Term Loan
|
266,250
|
|
|
273,811
|
|
National Beef Revolving Credit Facility
|
6,593
|
|
|
—
|
|
54 Madison Term Loans
|
387,822
|
|
|
406,028
|
|
Foursight Capital Credit Facilities
|
154,327
|
|
|
97,138
|
|
Other
|
127,769
|
|
|
132,244
|
|
Total long-term debt – subsidiaries
|
7,210,252
|
|
|
6,392,552
|
|
|
|
|
|
Long-term debt
|
$
|
8,198,419
|
|
|
$
|
7,380,443
|
|
(1) Amount includes a decrease of
$5.4 million
to the carrying value of long-term debt associated with an interest rate swap based on its designation as a fair value hedge. See Notes 2 and 4 for further information.
(2) Includes
$310.1 million
and
$248.9 million
at fair value at
March 31, 2017
and
December 31, 2016
, respectively.
Subsidiary Debt
:
Jefferies
3.875%
Convertible Senior Debentures due 2029 are convertible into our common shares; each
$1,000
are convertible into
22.8163
common shares (equivalent to a conversion price of approximately
$43.83
per share). The debentures are convertible at the holders’ option any time beginning on August 1, 2029 and convertible at any time if: 1) our common stock price is greater than or equal to
130%
of the conversion price for at least
20
trading days in a period of
30
consecutive trading days; 2) if the trading price per debenture is less than
95%
of the price of our common stock times the conversion ratio for any
10
consecutive trading days; 3) if the debentures are called for redemption; or 4) upon the occurrence of specific corporate actions. The debentures may be redeemed for par, plus accrued interest, on or after November 1, 2012 if the price of our common stock is greater than
130%
of the conversion price for at least
20
days in a period of
30
consecutive trading days and we may redeem the debentures for par, plus accrued interest, at our election any time on or after November 1, 2017. Holders may require us to repurchase the debentures for par, plus accrued interest, on November 1, 2017, 2019 and 2024. In addition to ordinary interest, commencing November 1, 2017, contingent interest will accrue at
0.375%
if the average trading price of a debenture for
5
trading days ending on and including the third trading day immediately preceding a six-month interest period equals or exceeds
$1,200
per
$1,000
debenture.
During the
three months ended March 31, 2017
, Jefferies issued structured notes with a total principal amount of approximately
$48.6 million
. Structured notes of
$310.1 million
and
$248.9 million
at
March 31, 2017
and
December 31, 2016
, respectively, contain various interest rate payment terms and are accounted for at fair value, with changes in fair value resulting from a change in the instrument specific credit risk presented in Accumulated other comprehensive income and changes in fair value resulting from non-credit components recognized in Principal transaction revenues.
In January 2017, Jefferies issued
4.85%
senior notes with a principal amount of
$750.0 million
, due 2027.
At
March 31, 2017
, National Beef’s credit facility consisted of a term loan with an outstanding balance of
$266.3 million
and a revolving credit facility with a commitment of
$285.0 million
, both of which mature in October 2018. The term loan and the revolving credit facility bear interest at the Base Rate or the LIBOR Rate (as defined in the credit facility), plus a margin ranging from
0.75%
to
2.75%
depending upon certain financial ratios and the rate selected. At
March 31, 2017
, the interest rate on the outstanding term loan was
2.53%
and the interest rate on the outstanding revolving credit facility was
4.75%
. The credit facility contains a minimum tangible net worth covenant; at
March 31, 2017
, National Beef met this covenant. The credit facility is secured by a first priority lien on substantially all of the assets of National Beef and its subsidiaries.
Borrowings under the revolving credit facility are available for National Beef’s working capital requirements, capital expenditures and other general corporate purposes. Unused capacity under the facility can also be used to issue letters of credit; letters of credit aggregating
$12.5 million
were outstanding at
March 31, 2017
. Amounts available under the revolver are subject to a borrowing base calculation primarily comprised of receivable and inventory balances. At
March 31, 2017
, after deducting outstanding amounts and issued letters of credit,
$216.5 million
of the unused revolver was available to National Beef.
54 Madison seeks long-term capital appreciation through real estate development and similar projects. Many of these development projects are funded through long-term debt at the project level. The debt holders do not have recourse to the Leucadia parent company. At
March 31, 2017
, 54 Madison had
$77.8 million
of
6.0%
term loan debt maturing in January 2018,
$129.7 million
of
5.5%
term loan debt maturing in February 2019,
$0.5 million
of
3.5%
term loan debt maturing in March 2019,
$78.3 million
of
4.15%
term loan debt maturing in April 2019,
$101.0 million
of
5.5%
term loan debt maturing in January 2020 and
$0.5 million
of
3.5%
term loan debt maturing in January 2020. As discussed further in Note 23, the majority of the debt holders are also investors in 54 Madison.
At
March 31, 2017
, Foursight Capital's credit facilities consisted of
two
warehouse credit commitments aggregating
$200.0 million
, which mature in December 2018 and March 2019. The 2018 credit facility bears interest based on the one-month LIBOR plus a credit spread fixed through its maturity and the 2019 credit facility bears interest based on the three-month LIBOR plus a credit spread fixed through its maturity. As a condition of the 2019 credit facility, Foursight Capital is obligated to maintain cash reserves in an amount equal to the quoted price of an interest rate cap sufficient to meet the hedging requirements of the credit commitment. The credit facilities are secured by first priority liens on auto loan receivables owed to Foursight Capital of approximately
$176.9 million
at
March 31, 2017
.
Note 15. Mezzanine Equity
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests primarily relate to National Beef and are held by its minority owners, USPB, NBPCo Holdings and the chief executive officer of National Beef. The holders of these interests share in the profits and losses of National Beef on a pro rata basis with us. However, the minority owners have the right to require us to purchase their interests under certain specified circumstances at fair value (put rights), and we also have the right to purchase their interests under certain specified circumstances at fair value (call rights). Each of the holders of the put rights has the right to make an election that requires us to purchase up to
one-third
of their interests on December 30, 2016,
one-third
on December 30, 2018, and
the remainder
on December 30, 2021. In addition, USPB may elect to exercise their put rights following the termination of the cattle supply agreement, and the chief executive officer following the termination of his employment. Holders of the put rights had from December 30, 2016 through January 29, 2017 to make an election that would require us to purchase up to
one-third
of their interests. The holders of the put rights did not make such election.
Our call rights with respect to USPB may be exercised following the termination of the cattle supply agreement or after USPB’s ownership interest is less than
20%
of their interest held at the time we acquired National Beef. Our call rights with respect to other members may be exercised after the
ten
year anniversary of our acquisition of National Beef if such member’s ownership interest is less than
50%
of the interest held at the time we acquired National Beef. Additionally, we may acquire the chief executive officer’s interest following the termination of his employment.
Redeemable noncontrolling interests in National Beef are reflected in the Consolidated Statements of Financial Condition at fair value. The following table reconciles National Beef’s redeemable noncontrolling interests activity during the
three months ended March 31, 2017 and 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
As of January 1,
|
$
|
321,962
|
|
|
$
|
189,358
|
|
Income allocated to redeemable noncontrolling interests
|
12,049
|
|
|
4,384
|
|
Distributions to redeemable noncontrolling interests
|
(7,117
|
)
|
|
—
|
|
Increase in fair value of redeemable noncontrolling interests
|
1,038
|
|
|
12,835
|
|
Balance, March 31,
|
$
|
327,932
|
|
|
$
|
206,577
|
|
At acquisition, we prepared a projection of future cash flows of National Beef, which was used along with other information to allocate the purchase price to National Beef’s individual assets and liabilities. At
March 31, 2017
, we calculated the fair value of the redeemable noncontrolling interests by updating our estimate of future cash flows. The projected future cash flows consider estimated revenue growth, cost of sales changes, capital expenditures and other unobservable inputs. However, the most significant unobservable inputs affecting the estimate of fair value are the discount rate (
10.6%
) and the terminal growth rate (
2.0%
) used to calculate the capitalization rate of the terminal value.
The table below is a sensitivity analysis which shows the fair value of the redeemable noncontrolling interests using the assumed discount and the terminal growth rates and fair values under different rate assumptions as of
March 31, 2017
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rates
|
Terminal Growth Rates
|
|
10.35%
|
|
10.60%
|
|
10.85%
|
|
|
|
|
|
|
|
1.75
|
%
|
|
$
|
332.7
|
|
|
$
|
323.4
|
|
|
$
|
314.6
|
|
2.00
|
%
|
|
$
|
337.6
|
|
|
$
|
327.9
|
|
|
$
|
318.8
|
|
2.25
|
%
|
|
$
|
342.8
|
|
|
$
|
332.7
|
|
|
$
|
323.2
|
|
The projection of future cash flows is updated with input from National Beef personnel. The estimate is reviewed by personnel at our corporate office as part of the normal process for the preparation of our quarterly and annual financial statements.
At
March 31, 2017
and
December 31, 2016
, redeemable noncontrolling interests also include the other redeemable noncontrolling interest of
$14.6 million
and
$14.8 million
, respectively, primarily related to our oil and gas exploration and development businesses.
Mandatorily Redeemable Convertible Preferred Shares
In connection with our acquisition of Jefferies in March 2013, we issued a new series of
3.25%
Cumulative Convertible Preferred Shares (“Preferred Shares”) (
$125.0 million
at mandatory redemption value) in exchange for Jefferies outstanding
3.25%
Series A-1 Cumulative Convertible Preferred Stock. The Preferred Shares have a
3.25%
annual, cumulative cash dividend and are currently convertible into
4,162,200
common shares, an effective conversion price of
$30.03
per share. The Preferred Shares are callable beginning in 2023 at a price of
$1,000
per share plus accrued interest and are mandatorily redeemable in 2038.
Note 16. Stock-Based Compensation Plans
Restricted Stock and Restricted Stock Units.
Restricted stock and restricted stock units (“RSUs”) may be granted to new employees as “sign-on” awards, to existing employees as “retention” awards and to certain executive officers as awards for multiple years. Sign-on and retention awards are generally subject to annual ratable vesting over a
four
-year service period and are amortized as compensation expense on a straight line basis over the related
four
years. Restricted stock and RSUs are granted to certain senior executives with market, performance and service conditions. Market conditions are incorporated into the grant-date fair value of senior executives awards using a Monte Carlo valuation model. Compensation expense for awards with market conditions is recognized over the service period and is not reversed if the market condition is not met. Awards with performance conditions are amortized over the service period if it is determined that it is probable that the performance condition will be achieved.
Senior Executive Compensation Plan.
In January 2017, the Compensation Committee of our Board of Directors approved an executive compensation plan for our CEO and our President (together, our "Senior Executives") in respect of 2017 that will be based on performance metrics achieved over a
three
-year period from 2017 through 2019. This executive compensation plan is identical to the 2016 executive compensation plan where cash incentive bonuses were eliminated.
100%
of each of our CEO and President's compensation beyond their base salaries will be composed entirely of performance based RSUs that will vest at the end of 2019 if certain performance criteria are met. Any vested RSUs will be subject to a post-vesting,
three
-year holding period such that no vested RSUs can be sold or transferred until the first quarter of 2023.
Performance-vesting of the award will be based equally on the compound annual growth rates of Leucadia's Total Shareholder Return ("TSR"), which will be measured from the December 30, 2016 stock price of
$23.25
, and Leucadia's Return on Tangible Deployable Equity ("ROTDE"), the annual, two- and three-year results of which will be used to determine vesting. TSR is based on annualized rate of return reflecting price appreciation plus reinvestment of dividends and distributions to shareholders. ROTDE is net income adjusted for amortization of intangible assets divided by tangible book value at the beginning of year adjusted for intangible assets and deferred tax assets.
If Leucadia's TSR and ROTDE annual compound growth rates are less than
4%
, our Senior Executives will not receive any incentive compensation. If Leucadia's TSR and ROTDE grow between
4%
and
8%
on a compounded basis over the
three
-year measurement period, each of our Senior Executives will be eligible to receive between
537,634
and
1,075,268
RSUs. If TSR and ROTDE growth rates are greater than
8%
, our Senior Executives are eligible to receive up to
50%
additional incentive compensation on a pro rata basis up to
12%
growth rates. When determining whether RSUs will vest, the calculation will be weighted equally between TSR and ROTDE. If TSR growth was below minimum thresholds, but ROTDE growth was above minimum thresholds, our Senior Executives would still be eligible to receive some number of vested RSUs based on ROTDE growth. The TSR award contains a market condition and compensation expense is recognized over the service period and will not be reversed if the market condition is not met. The ROTDE award contains a performance condition and compensation expense is recognized over the service period if it is determined that it is probable that the performance condition will be achieved.
Former Stock-Based Compensation Plans.
Prior to the acquisition of Jefferies, we had a fixed stock option plan, which provided for the issuance of stock options and stock appreciation rights to non-employee directors and certain employees at not less than the fair market value of the underlying stock at the date of grant. Options granted to employees under this plan were intended to qualify as incentive stock options to the extent permitted under the Internal Revenue Code and became exercisable in
five
equal annual installments starting one year from date of grant. Options granted to non-employee directors became exercisable in
four
equal annual installments starting one year from date of grant.
No
stock appreciation rights have been granted. In March 2014, we ceased issuing options and rights under our option plan.
No
shares remain available for future issuances under this plan. At
March 31, 2017
,
341,462
of our common shares were reserved for stock options.
Stock-Based Compensation Expense.
Compensation and benefits expense included
$10.0 million
and
$6.9 million
for the
three months ended March 31, 2017 and 2016
, respectively, for share-based compensation expense relating to grants made under our share-based compensation plans. Total compensation cost includes the amortization of sign-on, retention and senior executive awards, less forfeitures and clawbacks. The total tax benefit recognized in results of operations related to share-based compensation expenses was
$3.6 million
and
$2.5 million
for the
three months ended March 31, 2017 and 2016
, respectively. As of
March 31,
2017
, total unrecognized compensation cost related to nonvested share-based compensation plans was
$89.8 million
; this cost is expected to be recognized over a weighted-average period of
2.1
years.
At
March 31, 2017
, there were
1,442,000
shares of restricted stock outstanding with future service required,
5,666,000
RSUs outstanding with future service required (including target RSUs issuable under the senior executive compensation plan),
10,364,000
RSUs outstanding with no future service required and
689,000
shares issuable under other plans. Excluding shares issuable pursuant to outstanding stock options, the maximum potential increase to common shares outstanding resulting from these outstanding awards is
16,719,000
.
Note 17. Accumulated Other Comprehensive Income
Activity in accumulated other comprehensive income is reflected in the Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Changes in Equity but not in the Consolidated Statements of Operations. A summary of accumulated other comprehensive income, net of taxes at
March 31, 2017
and
December 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
Net unrealized gains on available for sale securities
|
$
|
571,658
|
|
|
$
|
561,497
|
|
Net unrealized foreign exchange losses
|
(179,557
|
)
|
|
(184,829
|
)
|
Net change in instrument specific credit risk
|
(16,189
|
)
|
|
(6,494
|
)
|
Net minimum pension liability
|
(60,275
|
)
|
|
(59,477
|
)
|
|
$
|
315,637
|
|
|
$
|
310,697
|
|
For the
three months ended March 31, 2017 and 2016
, significant amounts reclassified out of accumulated other comprehensive income to net income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income Components
|
|
Amount Reclassified from
Accumulated Other
Comprehensive Income
|
|
Affected Line Item in the
Consolidated Statements
of Operations
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on available for sale securities, net of income tax provision (benefit) of $(11) and $14
|
|
$
|
(18
|
)
|
|
$
|
26
|
|
|
Net realized securities gains
|
Net unrealized foreign exchange losses, net of income tax provision of $1,097 and $0
|
|
(5,290
|
)
|
|
—
|
|
|
Other income
|
Amortization of defined benefit pension plan actuarial gains (losses), net of income tax benefit of $(204) and $(178)
|
|
(433
|
)
|
|
(400
|
)
|
|
Compensation and benefits, which includes pension expense.
|
Other pension, net of income tax benefit of $(1,231) and $0
|
|
1,231
|
|
|
—
|
|
|
Income tax provision (benefit)
|
Total reclassifications for the period, net of tax
|
|
$
|
(4,510
|
)
|
|
$
|
(374
|
)
|
|
|
Note 18. Income Taxes
The aggregate amount of gross unrecognized tax benefits related to uncertain tax positions at
March 31, 2017
was
$197.9 million
(including
$50.1 million
for interest), of which
$149.7 million
related to Jefferies. The aggregate amount of gross unrecognized tax benefits related to uncertain tax positions at
December 31, 2016
was
$196.5 million
(including
$47.7 million
for interest), of which
$148.8 million
related to Jefferies. If recognized, such amounts would lower our effective tax rate. Accrued interest is included in Payables, expense accruals and other liabilities in the Consolidated Statements of Financial Condition. No material penalties were accrued for the
three months ended March 31, 2017
and the year ended December 31, 2016.
The statute of limitations with respect to our federal income tax returns has expired for all years through 2012. Our 2013 federal tax return is currently under examination by the Internal Revenue Service. Our New York State and New York City income tax returns are currently being audited for the 2012 to 2014 period and 2011 to 2012 period, respectively. Prior to becoming a wholly-owned subsidiary, Jefferies filed a consolidated U.S. federal income tax return with its qualifying subsidiaries and was subject to income tax in various states, municipalities and foreign jurisdictions. Jefferies is currently under examination by the Internal Revenue Service and other major tax jurisdictions. The statute of limitations with respect to Jefferies federal income tax returns has expired for all years through 2006.
We do not expect that resolution of these examinations will have a significant effect on our consolidated financial position, but could have a significant impact on the consolidated results of operations for the period in which resolution occurs.
For the
three months ended March 31, 2017 and 2016
, the provision (benefit) for income taxes includes
$31.8 million
and
$0.7 million
, respectively, for state income taxes and
$8.8 million
and
$(2.3) million
, respectively, for foreign taxes. Our
March 31, 2017
provision for income taxes was reduced by a
$31.9 million
benefit resulting from the repatriation of Jefferies earnings from certain of its foreign subsidiaries, along with their associated foreign tax credits.
Note 19. Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per share amounts were calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The numerators and denominators used to calculate basic and diluted earnings (loss) per share are as follows for the
three months ended March 31, 2017 and 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Numerator for earnings (loss) per share:
|
|
|
|
|
Net income (loss) attributable to Leucadia National Corporation common shareholders
|
|
$
|
281,408
|
|
|
$
|
(222,880
|
)
|
Allocation of earnings to participating securities (1)
|
|
(1,138
|
)
|
|
—
|
|
Net income (loss) attributable to Leucadia National Corporation common shareholders for basic earnings (loss) per share
|
|
280,270
|
|
|
(222,880
|
)
|
Adjustment to allocation of earnings to participating securities related to diluted shares (1)
|
|
8
|
|
|
—
|
|
Mandatorily redeemable convertible preferred share dividends
|
|
1,016
|
|
|
—
|
|
Net income (loss) attributable to Leucadia National Corporation common shareholders for diluted earnings (loss) per share
|
|
$
|
281,294
|
|
|
$
|
(222,880
|
)
|
|
|
|
|
|
Denominator for earnings (loss) per share:
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share – weighted average shares
|
|
369,267
|
|
|
372,367
|
|
Stock options
|
|
16
|
|
|
—
|
|
Warrants
|
|
—
|
|
|
—
|
|
Senior executive compensation plan awards
|
|
2,276
|
|
|
—
|
|
Mandatorily redeemable convertible preferred shares
|
|
4,162
|
|
|
—
|
|
3.875% Convertible Senior Debentures
|
|
—
|
|
|
—
|
|
Denominator for diluted earnings (loss) per share
|
|
375,721
|
|
|
372,367
|
|
|
|
(1)
|
Represents dividends declared during the period on participating securities plus an allocation of undistributed earnings to participating securities. Net losses are not allocated to participating securities. Participating securities represent
|
restricted stock and RSUs for which requisite service has not yet been rendered and amounted to weighted average shares of
1,500,000
and
2,899,000
for the
three months ended March 31, 2017 and 2016
, respectively. Dividends declared on participating securities were not material during
three months ended March 31, 2017 and 2016
. Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.
Options to purchase
661,300
weighted-average shares of common stock were outstanding during the
three months ended March 31, 2016
but were not included in the computation of diluted per share amounts as the effect was antidilutive. Amounts for the
three months ended March 31, 2017
were not material.
In the table above, the denominator for diluted earnings (loss) per share does not include weighted-average common shares of
3,000,000
during the
three months ended March 31, 2016
, related to outstanding warrants to purchase common shares at
$33.33
per share, as the effect was antidilutive. The warrants expired in the first quarter of 2016.
For the
three months ended March 31, 2017 and 2016
, shares related to the
3.875%
Convertible Senior Debentures were not included in the computation of diluted per share amounts as the conversion price exceeded the average market price. For the
three months ended March 31, 2016
, shares related to the mandatorily redeemable convertible preferred shares were not included in the computation of diluted per share amounts as the effect was antidilutive.
Note 20. Commitments, Contingencies and Guarantees
Commitments
The following table summarizes commitments associated with certain business activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
|
2017
|
|
2018
|
|
2019
and
2020
|
|
2021
and
2022
|
|
2023
and
Later
|
|
Maximum
Payout
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity commitments (1)
|
$
|
25.8
|
|
|
$
|
26.4
|
|
|
$
|
12.9
|
|
|
$
|
—
|
|
|
$
|
242.3
|
|
|
$
|
307.4
|
|
Loan commitments (1)
|
302.8
|
|
|
16.9
|
|
|
65.0
|
|
|
56.2
|
|
|
—
|
|
|
440.9
|
|
Mortgage-related and other purchase commitments
|
—
|
|
|
—
|
|
|
217.0
|
|
|
—
|
|
|
—
|
|
|
217.0
|
|
Underwriting commitments
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Forward starting reverse repos (2)
|
3,346.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,346.5
|
|
Forward starting repos (2)
|
2,609.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,609.3
|
|
Other unfunded commitments (1)
|
135.0
|
|
|
124.7
|
|
|
4.6
|
|
|
36.2
|
|
|
12.7
|
|
|
313.2
|
|
|
$
|
6,419.5
|
|
|
$
|
168.0
|
|
|
$
|
299.5
|
|
|
$
|
92.4
|
|
|
$
|
255.0
|
|
|
$
|
7,234.4
|
|
|
|
(1)
|
Equity commitments, loan commitments and other unfunded commitments are presented by contractual maturity date. The amounts are however mostly available on demand.
|
|
|
(2)
|
At
March 31, 2017
,
$3,303.6 million
within forward starting reverse repos and
$2,609.3 million
within forward starting repos settled within three business days.
|
Equity Commitments.
Equity commitments include commitments to invest in Jefferies joint ventures, Jefferies Finance and Jefferies LoanCore, and commitments to invest in private equity funds and in Jefferies Capital Partners, LLC, the manager of the private equity funds, which consists of a team led by Brian P. Friedman, our President and a Director. As of
March 31, 2017
, Jefferies outstanding commitments relating to Jefferies Capital Partners, LLC and its private equity funds were
$22.8 million
.
See Note 9 for additional information regarding Jefferies investments in Jefferies Finance and Jefferies LoanCore.
Our equity commitments also include our commitment to invest in 54 Madison, a fund which targets real estate projects. We plan to invest a cumulative total of
$225.0 million
to this fund, of which we have already contributed
$130.4 million
. Capital commitments are contingent upon approval of the related investment by the investment committee, which we control. Through
March 31, 2017
, approved unfunded commitments totaled
$36.0 million
.
Additionally, as of
March 31, 2017
, we have other equity commitments to invest up to
$19.5 million
in various other investments.
Loan Commitments.
From time to time Jefferies makes commitments to extend credit to investment banking and other clients in loan syndication, acquisition finance and securities transactions and to SPE sponsors in connection with the funding of CLO and other asset-backed transactions. These commitments and any related drawdowns of these facilities typically have fixed maturity dates and are contingent on certain representations, warranties and contractual conditions applicable to the borrower. As of
March 31, 2017
, Jefferies has
$177.5 million
of outstanding loan commitments to clients.
Loan commitments outstanding as of
March 31, 2017
, also include Jefferies portion of the outstanding secured revolving credit facility provided to Jefferies Finance to support loan underwritings by Jefferies Finance. At
March 31, 2017
,
$0.0 million
of Jefferies
$250.0 million
commitment was funded.
In August 2014, we and Solomon Kumin established Folger Hill; we committed to provide Folger Hill with a
three
-year,
$20 million
revolving credit facility to fund its start-up and initial operating expenses. As of
March 31, 2017
,
$11.6 million
has been provided to Folger Hill under the revolving credit facility.
Mortgage-Related and Other Purchase Commitments.
Jefferies enters into forward contracts to purchase mortgage participation certificates, mortgage-backed securities and consumer loans. The mortgage participation certificates evidence interests in mortgage loans insured by the Federal Housing Administration and the mortgage-backed securities are insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Jefferies frequently securitizes the mortgage participation certificates and mortgage-backed securities. The fair value of mortgage-related and other purchase commitments recorded in the Consolidated Statement of Financial Condition at
March 31, 2017
was
$14.4 million
.
Underwriting Commitments.
In connection with investment banking activities, Jefferies may from time to time provide underwriting commitments to our clients in connection with capital raising transactions.
Forward Starting Reverse Repos and Repos.
Jefferies enters into commitments to take possession of securities with agreements to resell on a forward starting basis and to sell securities with agreements to repurchase on a forward starting basis that are primarily secured by U.S. government and agency securities.
Other Unfunded Commitments.
Other unfunded commitments include obligations in the form of revolving notes to provide financing to asset-backed and CLO vehicles. Upon advancing funds, drawn amounts are collateralized by the assets of an entity.
Contingencies
We and our subsidiaries are parties to legal and regulatory proceedings that are considered to be either ordinary, routine litigation incidental to their business or not significant to our consolidated financial position. We and our subsidiaries are also involved, from time to time, in other exams, investigations and similar reviews (both formal and informal) by governmental and self-regulatory agencies regarding our businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions. We do not believe that any of these actions will have a significant adverse effect on our consolidated financial position or liquidity, but any amounts paid could be significant to results of operations for the period.
Guarantees
Derivative Contracts.
Jefferies dealer activities cause it to make markets and trade in a variety of derivative instruments. Certain derivative contracts that Jefferies has entered into meet the accounting definition of a guarantee under GAAP, including credit default swaps, written foreign currency options and written equity put options. On certain of these contracts, such as written interest rate caps and foreign currency options, the maximum payout cannot be quantified since the increase in interest or foreign exchange rates are not contractually limited by the terms of the contract. As such, we have disclosed notional values as a measure of Jefferies maximum potential payout under these contracts.
The following table summarizes the notional amounts associated with our derivative contracts meeting the definition of a guarantee under GAAP as of
March 31, 2017
(in millions) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
Guarantee Type
|
2017
|
|
2018
|
|
2019
and
2020
|
|
2021
and
2022
|
|
2023
and
Later
|
|
Notional/
Maximum
Payout
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts – non-credit related
|
$
|
17,839.8
|
|
|
$
|
1,562.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
421.7
|
|
|
$
|
19,823.6
|
|
Written derivative contracts – credit related
|
—
|
|
|
53.4
|
|
|
11.5
|
|
|
294.3
|
|
|
—
|
|
|
359.2
|
|
Total derivative contracts
|
$
|
17,839.8
|
|
|
$
|
1,615.5
|
|
|
$
|
11.5
|
|
|
$
|
294.3
|
|
|
$
|
421.7
|
|
|
$
|
20,182.8
|
|
The external credit ratings of the underlying or referenced assets for our credit related derivatives contracts as of
March 31, 2017
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Credit Rating
|
|
|
|
AAA/
Aaa
|
|
AA/
Aa
|
|
A
|
|
BBB/Baa
|
|
Below
Investment
Grade
|
|
Notional/
Maximum
Payout
|
Credit related derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Index credit default swaps
|
$
|
4.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.0
|
|
Single name credit default swaps
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
115.1
|
|
|
$
|
59.9
|
|
|
$
|
180.2
|
|
|
$
|
355.2
|
|
The derivative contracts deemed to meet the definition of a guarantee under GAAP are before consideration of hedging transactions and only reflect a partial or "one-sided" component of any risk exposure. Written equity options and written credit default swaps are often executed in a strategy that is in tandem with long cash instruments (e.g., equity and debt securities). Jefferies substantially mitigates its exposure to market risk on these contracts through hedges, such as other derivative contracts and/or cash instruments and Jefferies manages the risk associated with these contracts in the context of its overall risk management framework. Jefferies believes notional amounts overstate its expected payout and that fair value of these contracts is a more relevant measure of its obligations. The fair value of derivative contracts meeting the definition of a guarantee is approximately
$134.1 million
as of
March 31, 2017
.
Berkadia.
We have agreed to reimburse Berkshire Hathaway for up to one-half of any losses incurred under a
$1.5 billion
surety policy securing outstanding commercial paper issued by an affiliate of Berkadia. As of
March 31, 2017
, the aggregate amount of commercial paper outstanding was
$1.47 billion
.
Loan Guarantee
. Jefferies has provided a guarantee to Jefferies Finance that matures in January 2021, whereby Jefferies is required to make certain payments to a SPE sponsored by Jefferies Finance in the event that Jefferies Finance is unable to meet its obligations to the SPE. The maximum amount payable under the guarantee is
$17.8 million
at
March 31, 2017
. Jefferies has also provided a guarantee of a portion of Energy Partners I, LP’s obligations under a credit agreement. At
March 31, 2017
, the maximum exposure to loss of the guarantee is
$3.0 million
.
Other Guarantees.
Jefferies is a member of various exchanges and clearing houses. In the normal course of business Jefferies provides guarantees to securities clearinghouses and exchanges. These guarantees generally are required under the standard membership agreements, such that members are required to guarantee the performance of other members. Additionally, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet these shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral. Jefferies obligations under such guarantees could exceed the collateral amounts posted. Jefferies maximum potential liability under these arrangements cannot be quantified; however, the potential for Jefferies to be required to make payments under such guarantees is deemed remote. Accordingly, no liability has been recognized for these arrangements.
Indemnification.
In connection with the 2013 sale of Empire Insurance Company, we agreed to indemnify the buyer for certain of Empire’s lease obligations that were assumed by another subsidiary of ours as part of the sale of Empire. Our subsidiary was subsequently sold in 2014 to HomeFed as part of the real estate transaction with HomeFed. Although HomeFed has agreed to indemnify us for these lease obligations, our indemnification obligation under the Empire transaction remains. The primary lease expires in 2018 and the aggregate amount of lease obligation as of
March 31, 2017
was approximately
$18.0 million
. Substantially
all of the space under the primary lease has been sublet to various third-party tenants for the full length of the lease term in amounts in excess of the obligations under the primary lease.
Standby Letters of Credit.
At
March 31, 2017
, Jefferies provided guarantees to certain counterparties in the form of standby letters of credit in the amount of
$63.2 million
. Standby letters of credit commit Jefferies to make payment to the beneficiary if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary. Since commitments associated with these collateral instruments may expire unused, the amount shown does not necessarily reflect the actual future cash funding requirement. Other subsidiaries of ours have outstanding letters of credit aggregating
$13.6 million
at
March 31, 2017
. Primarily all letters of credit expire within
one
year.
Note 21. Net Capital Requirements
Jefferies operates broker-dealers registered with the SEC and member firms of the Financial Industry Regulatory Authority ("FINRA"). Jefferies LLC and Jefferies Execution are subject to the Securities and Exchange Commission Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital and have elected to calculate minimum capital requirements using the alternative method as permitted by Rule 15c3-1 in calculating net capital. Jefferies LLC is also registered as a futures commission merchant ("FCM") and is subject to Rule 1.17 of the CFTC which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registered U.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17.
Jefferies LLC and Jefferies Execution’s net capital and excess net capital as of
March 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Net Capital
|
|
Excess
Net Capital
|
Jefferies LLC
|
$
|
1,359,023
|
|
|
$
|
1,277,401
|
|
Jefferies Execution
|
$
|
9,158
|
|
|
$
|
8,908
|
|
FINRA is the designated self-regulatory organization (“DSRO”) for Jefferies U.S. broker-dealers and the National Futures Association is the DSRO for Jefferies LLC as an FCM.
Certain other U.S. and non-U.S. subsidiaries of Jefferies are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is authorized and regulated by the Financial Conduct Authority in the United Kingdom.
The regulatory capital requirements referred to above may restrict our ability to withdraw capital from Jefferies regulated subsidiaries. Some of our other consolidated subsidiaries also have credit agreements which may restrict the payment of cash dividends, or the ability to make loans or advances to the parent company.
Note 22. Other Fair Value Information
The carrying amounts and estimated fair values of our principal financial instruments that are not recognized at fair value on a recurring basis are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Receivables:
|
|
|
|
|
|
|
|
Notes and loans receivable (1)
|
$
|
970,810
|
|
|
$
|
963,311
|
|
|
$
|
962,938
|
|
|
$
|
958,377
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (2)
|
$
|
422,924
|
|
|
$
|
422,924
|
|
|
$
|
525,842
|
|
|
$
|
525,842
|
|
Long-term debt (2)
|
$
|
7,888,362
|
|
|
$
|
8,133,128
|
|
|
$
|
7,131,587
|
|
|
$
|
7,221,459
|
|
|
|
(1)
|
Notes and loans receivable: The fair values are primarily measured using Level 2 and 3 inputs principally based on discounted future cash flows using market interest rates for similar instruments.
|
|
|
(2)
|
Short-term borrowings and long-term debt: The fair values of short-term borrowings are estimated to be the carrying amount. The fair values of non-variable rate debt are estimated using quoted prices and estimated rates that would be available for debt with similar terms. The fair value of variable rate debt is estimated to be the carrying amount.
|
Note 23. Related Party Transactions
Jefferies Capital Partners Related Funds.
Jefferies has equity investments in the JCP Manager and in private equity funds, which are managed by a team led by Brian P. Friedman, our President and a Director ("Private Equity Related Funds"). Reflected in our Consolidated Statements of Financial Condition at
March 31, 2017
and
December 31, 2016
are Jefferies equity investments in Private Equity Related Funds of
$36.7 million
and
$37.7 million
, respectively. Net gains (losses) aggregating
$(1.3) million
and
$(2.6) million
for the
three months ended March 31, 2017 and 2016
, respectively, were recorded related to the Private Equity Related Funds. For further information regarding our commitments and funded amounts to the Private Equity Related Funds, see Notes 8 and 20
.
Berkadia Commercial Mortgage, LLC.
At
March 31, 2017
and
December 31, 2016
, Jefferies has commitments to purchase
$654.2 million
and
$817.0 million
, respectively, in agency commercial mortgage-backed securities from Berkadia.
Officers, Directors and Employees.
We have
$40.4 million
and
$41.2 million
of loans outstanding to certain employees (none of whom are an executive officer or director of the Company) at
March 31, 2017
and
December 31, 2016
, respectively. Receivables from and payables to customers include balances arising from officers, directors and employees individual security transactions. These transactions are subject to the same regulations as all customer transactions and are provided on substantially the same terms. At
March 31, 2017
and
December 31, 2016
, Jefferies provided a guarantee of a credit agreement for a private equity fund owned by Jefferies employees.
National Beef.
National Beef participates in a cattle supply agreement with a minority owner and holder of a redeemable noncontrolling interest in National Beef. Under this agreement National Beef has agreed to purchase
735,385
head of cattle each year (subject to adjustment), from the members of the minority owner, with prices based on those published by the U.S. Department of Agriculture, subject to adjustments for cattle performance. National Beef obtained approximately
26%
and
36%
of its cattle requirements under this agreement during the
three months ended March 31, 2017 and 2016
, respectively.
National Beef also enters into transactions with an affiliate of another minority owner and holder of a redeemable noncontrolling interest in National Beef to buy and sell a limited number of beef products. During the
three months ended March 31, 2017
, sales to this affiliate were
$7.1 million
and purchases were
$2.8 million
. During the
three months ended March 31, 2016
, sales to this affiliate were
$6.0 million
and purchases were
$3.2 million
. At
March 31, 2017
and
December 31, 2016
, amounts due from and payable to these related parties were not significant.
HomeFed.
During 2014, we sold to HomeFed substantially all of our real estate properties and operations as well as cash of approximately
$14.0 million
, in exchange for
7,500,000
newly issued unregistered HomeFed common shares. As discussed in Note 9, as a result of a 1998 distribution to all of our shareholders, approximately
4.8%
of HomeFed is beneficially owned by our Chairman at
March 31, 2017
. Our Chairman also serves as HomeFed’s Chairman and our President is a Director of HomeFed.
54 Madison.
At
March 31, 2017
and
December 31, 2016
, approximately
$230.2 million
and
$230.2 million
, respectively, of long-term debt held by 54 Madison is owed to minority owners of 54 Madison. The interest rate on these long-term notes range between
4.2%
and
6.0%
.
The employees of the asset manager of 54 Madison and employees of certain asset managers of 54 Madison's investments are also employees of Leucadia. These employees are also minority owners of 54 Madison.
See Note 9 for information on transactions with Jefferies Finance and Jefferies LoanCore.
Note 24. Segment Information
Our operating segments consist of our consolidated businesses, which offer different products and services and are managed separately. Our reportable segments, based on qualitative and quantitative requirements, are Jefferies, National Beef, and Corporate and other. Jefferies is a global full-service, integrated securities and investment banking firm. National Beef processes and markets fresh boxed beef, case-ready beef, beef by-products and wet blue leather for domestic and international markets.
Corporate and other assets primarily consist of financial instruments owned, the deferred tax asset (exclusive of Jefferies deferred tax asset), cash and cash equivalents and Corporate and other revenues primarily consist of interest, other income and net realized securities gains and losses. We do not allocate Corporate and other revenues or overhead expenses to the operating units.
All other consists of our other financial services businesses and investments and our other merchant banking businesses and investments. Our other financial services businesses and investments include the Leucadia Asset Management platform, Foursight
Capital, and our investments in Berkadia, HomeFed and FXCM. Our other merchant banking businesses and investments primarily include Idaho Timber, Conwed, Vitesse, JETX, real estate, and our investments in HRG, Linkem, Garcadia and Golden Queen.
Certain information concerning our segments for the
three months ended March 31, 2017 and 2016
is presented in the following table. Consolidated subsidiaries are reflected as of the date a majority controlling interest was acquired. As discussed above, Jefferies is reflected in our consolidated financial statements utilizing a one month lag.
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Net Revenues:
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
Jefferies
|
|
$
|
797,386
|
|
|
$
|
300,786
|
|
National Beef
|
|
1,561,456
|
|
|
1,634,451
|
|
Corporate and other
|
|
7,690
|
|
|
66,856
|
|
Total net revenues related to reportable segments
|
|
2,366,532
|
|
|
2,002,093
|
|
All other
|
|
501,450
|
|
|
13,013
|
|
Total consolidated net revenues
|
|
$
|
2,867,982
|
|
|
$
|
2,015,106
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
|
|
Jefferies
|
|
$
|
132,270
|
|
|
$
|
(245,797
|
)
|
National Beef
|
|
57,103
|
|
|
21,409
|
|
Corporate and other
|
|
(14,504
|
)
|
|
47,736
|
|
Income (loss) before income taxes related to reportable segments
|
|
174,869
|
|
|
(176,652
|
)
|
All other
|
|
237,958
|
|
|
(110,597
|
)
|
Parent Company interest
|
|
(14,730
|
)
|
|
(14,714
|
)
|
Total consolidated income (loss) before income taxes
|
|
$
|
398,097
|
|
|
$
|
(301,963
|
)
|
|
|
|
|
|
Depreciation and amortization expenses:
|
|
|
|
|
|
|
Reportable Segments:
|
|
|
|
|
|
|
Jefferies
|
|
$
|
15,601
|
|
|
$
|
14,590
|
|
National Beef
|
|
22,399
|
|
|
22,626
|
|
Corporate and other
|
|
867
|
|
|
943
|
|
Total depreciation and amortization expenses related to reportable segments
|
|
38,867
|
|
|
38,159
|
|
All other
|
|
10,643
|
|
|
11,451
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
49,510
|
|
|
$
|
49,610
|
|
Interest expense classified as a component of Net revenues relates to Jefferies. For the
three months ended March 31, 2017 and 2016
, interest expense classified as a component of Expenses was primarily comprised of National Beef (
$1.8 million
and
$4.0 million
, respectively), parent company interest (
$14.7 million
and
$14.7 million
, respectively) and all other (
$10.8 million
and
$3.6 million
, respectively).