Jefferies Group LLC - 10-Q filing on 2016-07-08

Investments

6 Months Ended

May 31, 2016

Equity Method Investments and Joint Ventures [Abstract]

We have investments in Jefferies Finance and Jefferies LoanCore LLC (“Jefferies LoanCore”). Our investments in Jefferies Finance and Jefferies LoanCore are accounted for under the equity method and are included in Loans to and investments in related parties on the Consolidated Statements of Financial Condition with our share of the investees’ earnings recognized in Other revenues in the Consolidated Statements of Earnings. We have limited partnership interests of 11% and 50% in Jefferies Capital Partners V L.P. and the SBI USA Fund L.P. (together, “JCP Fund V”), respectively, which are private equity funds managed by a team led by Brian P. Friedman, one of our directors and our Chairman of the Executive Committee.

Jefferies Finance

On October 7, 2004, we entered into an agreement with Massachusetts Mutual Life Insurance Company (“MassMutual”) and Babson Capital Management 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.

At May 31, 2016, we and MassMutual each have equity commitments to Jefferies Finance of $600.0 million for a combined total commitment of $1.2 billion. At May 31, 2016, we have funded $497.4 million of our $600.0 million commitment, leaving $102.6 million unfunded. The investment commitment is scheduled to expire on March 1, 2017 with automatic one year extensions absent a 60 day termination notice by either party.

Jefferies Finance has executed a Secured Revolving Credit Facility with us and MassMutual, 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 is a committed amount of $500.0 million at May 31, 2016. Advances are shared equally between us and MassMutual. The facility is scheduled to mature on March 1, 2017 with automatic one year extensions absent a 60 day termination notice by either party. At May 31, 2016 and November 30, 2015, we have funded $0.0 and $19.3 million, respectively, of each of our $250.0 million and $250.0 million commitments, respectively.

The following is a summary of selected financial information for Jefferies Finance (in millions):



	May 31, 2016		November 30, 2015
Total assets	$	7,056.1	$	7,292.1
Total liabilities	6,140.2		6,297.3
Total equity	915.9		994.8
Our total equity balance	458.0		497.4

The results of Jefferies Finance were a net loss of $33.2 million and $77.8 million for the three and six months ended May 31, 2016, respectively, and net earnings of $40.6 million and $62.0 million for the three and six months ended May 31, 2015, respectively.

We engage in debt capital markets transactions with Jefferies Finance related to the originations of loans by Jefferies Finance. In connection with such transactions, we earned fees of $3.7 million and $23.1 million during the three and six months ended May 31, 2016, respectively, and $39.9 million and $55.5 million during the three and six months ended May 31, 2015, respectively, recognized in Investment banking revenues in the Consolidated Statements of Earnings. In addition, we paid fees to Jefferies Finance in respect of certain loans originated by Jefferies Finance of $1.6 million and $1.6 million during the three and six months ended May 31, 2016, respectively, and $0.9 million and $1.6 million during the three and six months ended May 31, 2015, respectively, which are recognized as Business development expenses in the Consolidated Statements of Earnings.

We acted as placement agent in connection with several CLOs managed by Jefferies Finance for which we recognized fees of $3.1 million and $3.1 million during the three and six months ended May 31, 2015, respectively, which are included in Investment banking revenues on the Consolidated Statement of Earnings. At May 31, 2016 and November 30, 2015, we held securities issued by CLOs managed by Jefferies Finance, which are included within Financial instruments owned, and provided a guarantee whereby we are required to make certain payments to a CLO in the event that Jefferies Finance is unable to meet its obligations to the CLO. Additionally, we have entered into participation agreements and derivative contracts with Jefferies Finance whose underlying is based on certain securities issued by the CLO. We have recognized a loss of $36,000 during the three months ended May 31, 2016 and revenue of $1.3 million during the six months ended May 31, 2016, relating to the derivative contracts.

We acted as underwriter in connection with senior notes issued by Jefferies Finance, for which we recognized underwriting fees of $1.3 million for the three months ended May 31, 2015.

Under a service agreement, we charged Jefferies Finance $7.5 million and $28.6 million for services provided during the three and six months ended May 31, 2016, respectively, and $7.1 million and $34.9 million during the three and six months ended May 31, 2015, respectively. Receivables from Jefferies Finance, included within Other assets on the Consolidated Statements of Financial Condition, were $2.4 million and $7.8 million at May 31, 2016 and November 30, 2015, respectively.

Jefferies LoanCore

On February 23, 2011, we 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. During the second quarter of 2016, Jefferies LoanCore aggregate equity commitments were reduced from $600.0 million to $400.0 million. At May 31, 2016 and November 30, 2015, we had funded $78.3 million and $207.4 million, respectively, of each of our $194.0 million and $291.0 million equity commitments, respectively, and have a 48.5% voting interest in Jefferies LoanCore.

The following is a summary of selected financial information for Jefferies LoanCore (in millions):



	May 31, 2016		November 30, 2015
Total assets	$	1,215.3	$	2,069.1
Total liabilities	886.1		1,469.8
Total equity	329.2		599.3
Our total equity balance	159.7		290.7

The net earnings of Jefferies LoanCore were $17.3 million and $22.7 million for the three and six months ended May 31, 2016, respectively, and $16.5 million and $36.5 million for the three and six months ended May 31, 2015, respectively.

Under a service agreement, we charged Jefferies LoanCore $47,000 and $95,000 for the three and six months ended May 31, 2016, respectively, and $48,000 and $96,000 for the three and six months ended May 31, 2015, respectively. Receivables from Jefferies LoanCore, included within Other assets on the Consolidated Statements of Financial Condition, were $15,800 and $15,800 at May 31, 2016 and November 30, 2015, respectively.

In connection with the securitization of commercial real estate loans originated by Jefferies LoanCore, we earned placement fees of $0.2 million and $0.6 million during the three and six months ended May 31, 2015, respectively.

JCP Fund V

The amount of our investments in JCP Fund V included within Investments in managed funds on the Consolidated Statements of Financial Condition was $22.8 million and $29.7 million at May 31, 2016 and November 30, 2015, respectively. We account for these investments at fair value based on the NAV of the funds provided by the fund managers (see Note 2, Summary of Significant Accounting Policies). Losses from these investments were $4.2 million and $7.2 million for the three and six months ended May 31, 2016, respectively, and gains of $0.6 million and losses of $22.9 million for the three and six months May 31, 2015, respectively, and are included in Asset management fees and investment income (loss) from managed funds in the Consolidated Statements of Earnings.

At May 31, 2016 and November 30, 2015, we were committed to invest equity of up to $85.0 million in JCP Fund V. At May 31, 2016, our unfunded commitment relating to JCP Fund V was $11.5 million.

The following is a summary of selected financial information for 100% of JCP Fund V, in which we own effectively 35.2% of the combined equity interests (in thousands):



	March 31, 2016 (1)			December 31, 2015 (1)
Total assets	$	64,725		$	76,555
Total liabilities	74			99
Total partners' capital	64,651			76,456

	Three Months Ended March 31, 2016 (1)			Three Months Ended December 31, 2015 (1)			Three Months Ended March 31, 2015 (1)		Three Months Ended December 31, 2014 (1)
Net increase (decrease) in net assets resulting from operations	$	(11,806	)	$	(7,886	)	$	1,478	$	(65,700	)


(1)	Financial information for JCP Fund V within our financial position and results of operations at May 31, 2016 and November 30, 2015 and for the three and six months ended May 31, 2016 and May 31, 2015 is included based on the presented periods.