Did Jefferies Tip Hat to Sean Egan with Asset Downsize?

Courtesy of Benzinga.

Jefferies (NYSE: JEF) may have had tough words a month ago for Sean Egan of Egan Jones following a downgrade, but today the company appeared to have acted on the very concerns the ratings agency had stressed on its report. The banner-head of what the company is calling a successful fourth quarter is its severe reduction of its balance sheet, primarily in its European sovereign debt assets, which initiated in November. After being pummeled to half its value at the beginning of the year, Jefferies is recouping back as much as 19 percent at the time of this writing, having emerged today with above-estimates earnings on top of a smaller balance sheet.

This mornings, the company posted EPS of $0.17 per share, handily beating estimates by three cents. Its balance sheet was reported to have been slimmed down to the tune of $10 billion or 25 percent. This was largely achieved by divestiture of its positions on European sovereign debt, which sent its leverage from 12.9:1 to 9.9:1.

It was its $6.3 billion European Sovereign debt that had painted the company as the next in line to fail following MF Global’s demise in October. Sean Egan of ratings firm Egan-Jones raised the most notable flag on Jefferies, as it viewed the firms’ 13:1 gross leverage to be excessive and that, short of a $1 billion in new equity, its credit rating would be reduced.

At the time heavily in defensive attack mode, Jefferies pounced to say that its leverage was comparable to competitors such as Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS), both much larger competitors. Jefferies CEO and Chairman Richard Handler was especially hands-on in protecting his firm, implying that flags raised by Egan-Jones were rumormongering from entities with potential short interest.

That was then, and today is different. Having laid down the punching gloves, Mr. Handler was in a joyful mood as it touted a fourth quarter performance that was admittedly lackluster in normal conditions, but that demonstrated his firm’s success in passing what in essence was a six-month stress test. There were no indications on whether he considered the effusive shedding of gross leverage as a tipping of the hat to “rumormongers.”

Sean Egan took note of the of the Jefferies report as he appeared on CNBC earlier today, and ackowledged that Jefferies’ risk profile was now substantially less than it had been in November. The company’s over-performance in cutting the balance sheet, as compared to the $5 billion his ratings firm had suggested, was not lost on Mr. Egan, who allowed that he would probably “back off” on the suggested $1 billion in new equity. He did not let the praise settle too long, however, as he reinforced that Jefferies will only have passed the test once they maintain their balance sheet low going forward and will not repeat MF Global’s failure to isolate customer margin funds with leveraged investments. The company’s over reliance on wholesale funding was also pinpointed as a cause for ongoing concern.

All of that will have to be tackled another day. For now, in pure Wall Street fashion, Jefferies and the markets are focusing on enjoying the win while they can. JEF is currently trading at $14.12 per share, up $2.28 or 19.66 percent up on the session.

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