Notes to Consolidated Financial Statements
Note 1. Nature of Operations
Leucadia National Corporation (“Leucadia” or the “Company”) is a diversified holding company focused on return on investment and 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 (a publicly traded company providing online foreign exchange trading), HomeFed (a publicly traded real estate company) and Foursight Capital and Chrome Capital (vehicle finance). We also own and have investments in a diverse array of other businesses, including National Beef (beef processing), HRG Group ("HRG"), formerly known as Harbinger (a publicly traded diversified holding company), Vitesse Energy and Juneau Energy (oil and gas exploration and development), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy), Conwed Plastics and Idaho Timber (manufacturing companies), and Golden Queen (a 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 operating subsidiaries, equity investments, receivables, 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 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, a joint venture with the Government of Singapore Investment Corporation, the Canada 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
th
fiscal year, 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 2016 for the purpose of evaluating whether financial statement disclosure or adjustments are required in this Quarterly Report on Form 10-Q, and we have included in our consolidated financial statements investments of
$126.5 million
made by Jefferies during March 2016, which were made after Jefferies fiscal quarter end but before March 31, 2016.
Leucadia Asset Management supports and develops focused alternative asset management businesses led by distinct management teams. These primarily include Folger Hill, a multi-manager discretionary long/short equity hedge fund platform; Topwater Capital, a first-loss hedge fund; and 54 Madison Capital, LLC ("54 Madison"), which targets real estate projects.
Our investment in FXCM Inc. and some of its subsidiaries (collectively, "FXCM") currently consists of a senior secured term loan due January 2017 (
$192.7 million
outstanding at
March 31, 2016
), with rights to a variable proportion of certain distributions in connection with an FXCM sale of assets or certain other events, and our right to require a sale of FXCM beginning in January 2018. On March 10, 2016, we and FXCM entered into a nonbinding memorandum of understanding that would amend the terms of the term loan and rights to certain distributions in connection with an FXCM sale of assets. See Note 3 to our consolidated financial statements for additional information.
Berkadia, our 50-50 equity method joint venture with Berkshire Hathaway Inc., is a commercial real estate company providing capital solutions, investment sales advisory, research and servicing for multifamily and commercial properties.
We own an approximate
65%
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
83%
of Chrome Capital, which provides leases on used Harley-Davidson motorcycles.
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 to customers in the food service and retail channels as well as direct to consumers 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.
We own approximately
23%
of HRG, a public company traded on the NYSE, and we reflect this investment at fair value based on quoted market prices. Its consumer products segment contains an approximate
58%
ownership stake in Spectrum Brands, a global consumer products company. Its insurance segment includes an approximate
81%
ownership stake in Fidelity & Guaranty Life ("FGL"). On November 8, 2015, FGL and Anbang Insurance Group Co., Ltd. ("Anbang") entered into a definitive merger agreement pursuant to which Anbang will acquire FGL for
$26.80
per share.
Vitesse Energy, LLC 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.
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. Juneau currently has interests in acreage in the Oklahoma and Texas Gulf Coast regions.
Garcadia is an equity method joint venture that owns and operates
27
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
56%
of Linkem's common equity. Linkem provides residential broadband services using WiMAX and 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 is our consolidated subsidiary that manufactures and markets lightweight plastic netting used for building and construction, erosion and sediment control, packaging, agricultural purposes, carpet padding, filtration, consumer products and other purposes.
Idaho Timber is our wholly-owned subsidiary engaged in the manufacture and distribution of various wood products, including the following principal product 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, a fully-permitted, open pit, heap leach gold and silver project in Kern County, California. 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:
|
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|
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Level 1:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
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|
|
|
|
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 whose fair value have been derived using a model where inputs to the model 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.
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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 as of 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 valued and that fair value measurements are reliable. 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 is charged with the final conclusions as to 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 concluded upon 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 of the trading desks’ 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; and the documentation includes benchmarking the assumptions underlying the valuation rationale against relevant analytic data.
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 has a process whereby it challenges the appropriateness of pricing information obtained from external data providers (including independent pricing services and brokers) in order 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, municipal debt securities, and loans, to the extent independent pricing services or broker quotes are utilized in our 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 not based on unobservable inputs or proprietary models. For mortgage- and other asset-backed securities and collateralized debt obligations, 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
. Where a pricing model is to be 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.
Receivables
At
March 31, 2016
and
December 31, 2015
, Receivables include receivables from brokers, dealers and clearing organizations of
$1,803.5 million
and
$1,616.3 million
, respectively, and receivables from customers of securities operations of
$1,177.3 million
and
$1,191.3 million
, respectively.
Payables, expense accruals and other liabilities
At
March 31, 2016
and
December 31, 2015
, Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of
$1,242.5 million
and
$2,757.2 million
, respectively, and payables to customers of securities operations of
$2,599.5 million
and
$2,780.5 million
, respectively.
Accounting Developments
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 originally was effective for interim and annual periods beginning after December 15, 2016. In August 2015, the FASB issued guidance that deferred the effective date by one year, with early adoption on the original effective date permitted. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
Consolidation.
In January 2016, we adopted the FASB's new guidance that amended the consolidation guidance including changes to both the variable and voting interest models used to evaluate whether an entity should be consolidated. This guidance also eliminates the deferral of certain consolidation standards for entities considered to be investment companies. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
Debt Issuance Costs.
In January 2016, we adopted the FASB's new guidance that requires debt issuance costs related to a recognized debt liability be presented in the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability. The guidance is effective retrospectively and we have adopted this guidance in the first quarter of 2016. The adoption of this guidance resulted in the following adjustments to the Consolidated Statement of Financial Condition on December 31, 2015: a decrease of
$8.6 million
to Other assets, a decrease of
$7.0 million
to Long-term debt and a decrease of
$1.6 million
to Other secured financings. The adoption of this guidance also resulted in the following adjustments to the Consolidated Statement of Operations for the first quarter of 2015: a decrease of
$1.0 million
to Selling, general and other expenses and an increase of
$1.0 million
to Interest.
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, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option and we have early adopted this guidance in the first quarter of 2016. This guidance did not have a material effect 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.
Share-Based Payments to Employees.
In March 2016, the FASB issued new guidance to simplify and improve accounting for share-based payments. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
Note 3. Fair Value Disclosures
The following is a summary of our financial instruments and trading liabilities that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on net asset value ("NAV") of
$32.8 million
and
$36.7 million
, respectively, by level within the fair value hierarchy at
March 31, 2016
and
December 31, 2015
(in thousands):
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|
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|
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|
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|
|
|
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|
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|
|
|
|
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|
|
|
March 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
|
$
|
2,432,334
|
|
|
$
|
140,168
|
|
|
$
|
30,540
|
|
|
$
|
—
|
|
|
$
|
2,603,042
|
|
|
Corporate debt securities
|
—
|
|
|
2,516,929
|
|
|
25,634
|
|
|
—
|
|
|
2,542,563
|
|
|
Collateralized debt obligations
|
—
|
|
|
61,290
|
|
|
67,348
|
|
|
—
|
|
|
128,638
|
|
|
U.S. government and federal agency securities
|
1,018,909
|
|
|
310,273
|
|
|
—
|
|
|
—
|
|
|
1,329,182
|
|
|
Municipal securities
|
—
|
|
|
609,169
|
|
|
—
|
|
|
—
|
|
|
609,169
|
|
|
Sovereign obligations
|
1,490,358
|
|
|
799,541
|
|
|
119
|
|
|
—
|
|
|
2,290,018
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
2,243,865
|
|
|
68,019
|
|
|
—
|
|
|
2,311,884
|
|
|
Commercial mortgage-backed securities
|
—
|
|
|
816,047
|
|
|
21,994
|
|
|
—
|
|
|
838,041
|
|
|
Other asset-backed securities
|
—
|
|
|
263,877
|
|
|
33,124
|
|
|
—
|
|
|
297,001
|
|
|
Loans and other receivables
|
—
|
|
|
820,132
|
|
|
155,442
|
|
|
—
|
|
|
975,574
|
|
|
Derivatives
|
938
|
|
|
6,173,287
|
|
|
22,975
|
|
|
(5,850,803
|
)
|
|
346,397
|
|
|
Investments at fair value
|
—
|
|
|
54
|
|
|
275,389
|
|
|
—
|
|
|
275,443
|
|
|
Investment in FXCM
|
—
|
|
|
—
|
|
|
564,800
|
|
|
—
|
|
|
564,800
|
|
|
Total trading assets, excluding Investments at fair value based on NAV
|
$
|
4,942,539
|
|
|
$
|
14,754,632
|
|
|
$
|
1,265,384
|
|
|
$
|
(5,850,803
|
)
|
|
$
|
15,111,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
72,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
72,000
|
|
|
Corporate debt securities
|
—
|
|
|
4,539
|
|
|
—
|
|
|
—
|
|
|
4,539
|
|
|
U.S. government securities
|
302,428
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
302,428
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
9,866
|
|
|
—
|
|
|
—
|
|
|
9,866
|
|
|
Commercial mortgage-backed securities
|
—
|
|
|
2,126
|
|
|
—
|
|
|
—
|
|
|
2,126
|
|
|
Other asset-backed securities
|
—
|
|
|
7,897
|
|
|
—
|
|
|
—
|
|
|
7,897
|
|
|
Total available for sale securities
|
$
|
374,428
|
|
|
$
|
24,428
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
398,856
|
|
|
Cash and cash equivalents
|
$
|
2,604,066
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,604,066
|
|
|
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations (3)
|
$
|
679,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
679,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
1,637,749
|
|
|
$
|
75,166
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
1,712,953
|
|
|
Corporate debt securities
|
—
|
|
|
1,877,856
|
|
|
—
|
|
|
—
|
|
|
1,877,856
|
|
|
U.S. government and federal agency securities
|
1,299,982
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,299,982
|
|
|
Sovereign obligations
|
1,131,337
|
|
|
710,989
|
|
|
—
|
|
|
—
|
|
|
1,842,326
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
20,585
|
|
|
—
|
|
|
—
|
|
|
20,585
|
|
|
Loans
|
—
|
|
|
432,782
|
|
|
7,744
|
|
|
—
|
|
|
440,526
|
|
|
Derivatives
|
302
|
|
|
6,192,855
|
|
|
34,732
|
|
|
(5,879,190
|
)
|
|
348,699
|
|
|
Total trading liabilities
|
$
|
4,069,370
|
|
|
$
|
9,310,233
|
|
|
$
|
42,514
|
|
|
$
|
(5,879,190
|
)
|
|
$
|
7,542,927
|
|
|
Other secured financings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
538
|
|
|
$
|
—
|
|
|
$
|
538
|
|
|
Debt-structured notes
|
$
|
—
|
|
|
$
|
37,118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Level 1 (1)
|
|
Level 2 (1)
|
|
Level 3
|
|
Counterparty
and
Cash
Collateral
Netting (2)
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Trading assets, at fair value:
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
2,803,243
|
|
|
$
|
133,732
|
|
|
$
|
40,906
|
|
|
$
|
—
|
|
|
$
|
2,977,881
|
|
|
Corporate debt securities
|
—
|
|
|
2,867,165
|
|
|
25,876
|
|
|
—
|
|
|
2,893,041
|
|
|
Collateralized debt obligations
|
—
|
|
|
89,144
|
|
|
85,092
|
|
|
—
|
|
|
174,236
|
|
|
U.S. government and federal agency securities
|
2,555,018
|
|
|
90,633
|
|
|
—
|
|
|
—
|
|
|
2,645,651
|
|
|
Municipal securities
|
—
|
|
|
487,141
|
|
|
—
|
|
|
—
|
|
|
487,141
|
|
|
Sovereign obligations
|
1,251,366
|
|
|
1,407,955
|
|
|
120
|
|
|
—
|
|
|
2,659,441
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
2,731,070
|
|
|
70,263
|
|
|
—
|
|
|
2,801,333
|
|
|
Commercial mortgage-backed securities
|
—
|
|
|
1,014,913
|
|
|
14,326
|
|
|
—
|
|
|
1,029,239
|
|
|
Other asset-backed securities
|
—
|
|
|
118,629
|
|
|
42,925
|
|
|
—
|
|
|
161,554
|
|
|
Loans and other receivables
|
—
|
|
|
1,123,044
|
|
|
189,289
|
|
|
—
|
|
|
1,312,333
|
|
|
Derivatives
|
2,253
|
|
|
4,406,207
|
|
|
19,785
|
|
|
(4,165,446
|
)
|
|
262,799
|
|
|
Investments at fair value
|
—
|
|
|
26,224
|
|
|
199,794
|
|
|
—
|
|
|
226,018
|
|
|
Investment in FXCM
|
—
|
|
|
—
|
|
|
625,689
|
|
|
—
|
|
|
625,689
|
|
|
Total trading assets, excluding Investments at fair value based on NAV
|
$
|
6,611,880
|
|
|
$
|
14,495,857
|
|
|
$
|
1,314,065
|
|
|
$
|
(4,165,446
|
)
|
|
$
|
18,256,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
73,579
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73,579
|
|
|
Corporate debt securities
|
—
|
|
|
4,744
|
|
|
—
|
|
|
—
|
|
|
4,744
|
|
|
U.S. government securities
|
63,945
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63,945
|
|
|
Residential mortgage-backed securities
|
—
|
|
|
23,240
|
|
|
—
|
|
|
—
|
|
|
23,240
|
|
|
Commercial mortgage-backed securities
|
—
|
|
|
2,374
|
|
|
—
|
|
|
—
|
|
|
2,374
|
|
|
Other asset-backed securities
|
—
|
|
|
39,473
|
|
|
—
|
|
|
—
|
|
|
39,473
|
|
|
Total available for sale securities
|
$
|
137,524
|
|
|
$
|
69,831
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
207,355
|
|
|
Cash and cash equivalents
|
$
|
3,638,648
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,638,648
|
|
|
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
|
$
|
751,084
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
751,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
1,428,048
|
|
|
$
|
36,518
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
1,464,604
|
|
|
Corporate debt securities
|
—
|
|
|
1,556,941
|
|
|
—
|
|
|
—
|
|
|
1,556,941
|
|
|
Collateralized debt obligations
|
1,488,121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,488,121
|
|
|
U.S. government and federal agency securities
|
837,614
|
|
|
505,382
|
|
|
—
|
|
|
—
|
|
|
1,342,996
|
|
|
Sovereign obligations
|
—
|
|
|
117
|
|
|
—
|
|
|
—
|
|
|
117
|
|
|
Loans
|
—
|
|
|
758,939
|
|
|
10,469
|
|
|
—
|
|
|
769,408
|
|
|
Derivatives
|
364
|
|
|
4,456,334
|
|
|
19,543
|
|
|
(4,257,998
|
)
|
|
218,243
|
|
|
Total trading liabilities
|
$
|
3,754,147
|
|
|
$
|
7,314,231
|
|
|
$
|
30,050
|
|
|
$
|
(4,257,998
|
)
|
|
$
|
6,840,430
|
|
|
Other secured financings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
544
|
|
|
$
|
—
|
|
|
$
|
544
|
|
|
|
|
|
(1)
|
There were
no
material transfers between Level 1 and Level 2 during the
three months ended March 31, 2016
and during the year ended
December 31, 2015
.
|
|
|
|
|
(2)
|
Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.
|
|
|
|
|
(3)
|
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
at
March 31, 2016
.
|
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 or Level 3 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/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. 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 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 of comparable size, 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 comprise 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.
|
Collateralized Debt Obligations
Collateralized debt obligations 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 severities.
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 or Level 3 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 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 market transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on market 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 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 analyses 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 our defined benefit plan in Germany. Fair value for the insurance contracts is determined using a third party and is categorized within Level 3 of the fair value hierarchy.
Investment in FXCM
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 distributions in connection with an FXCM sale of assets or certain other events, and to require a sale of FXCM beginning in January 2018. FXCM is an online provider of foreign exchange trading and related services. 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. The variable proportion of distributions is as follows:
100%
until amounts due under the loan are repaid;
50%
of the next
$350 million
; then
90%
of the next
$500 million
(this was an amount initially set at a range between
$500 million
to
$680 million
and based on payments made by FXCM to us through April 16, 2015, this amount became
$500 million
); and
60%
of all amounts thereafter. During the
three months ended March 31, 2016
, we received
$7.7 million
of principal, interest and fees from FXCM and
$192.7 million
remained outstanding under the credit agreement as of
March 31, 2016
. Through the first quarter of 2016 interest accrued at
16.0%
per annum; in the second quarter of 2016 interest will accrue at
17.5%
per annum.
FXCM is considered a variable interest entity and our term loan with rights is a variable interest. 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.
We view the FXCM loan and associated rights as one integrated transaction; since the rights, as derivatives, are accounted for at fair value, we have elected the fair value option for the loan. The total amount of our investment in FXCM is 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, are included within Principal transactions in the Consolidated Statements of Operations. During the
three months ended March 31, 2016
and
2015
, we recorded in Principal transactions an aggregate
$(53.2) million
and
$686.6 million
, respectively, of unrealized and realized gains (losses), interest income and fees relating to our investment in FXCM. Our maximum exposure to loss as a result of our involvement with FXCM is limited to the carrying value of our investment (
$564.8 million
at
March 31, 2016
).
On March 10, 2016 we and FXCM entered into a nonbinding memorandum of understanding that would amend the terms of the FXCM loan and associated rights. Among other changes, the proposed amendments would extend the maturity of the term loan by
one
year to January 2018 to allow FXCM more time to optimize remaining asset sales; give Leucadia a
49.9%
common membership interest in FXCM Newco, LLC ("FXCM Newco") as well as non-voting preferred shares; create an
eight
-member board for FXCM Newco, comprised of
three
directors appointed by Leucadia,
three
directors appointed by FXCM, and
two
independent directors; and put in place a long-term incentive program for FXCM senior management. The nonbinding memorandum of understanding remains subject to the execution of definitive agreements and Board and regulatory approvals.
We engaged an independent valuation firm to assist management in estimating the fair value of our loan and rights in 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; implied total equity value, based primarily on the publicly traded FXCM stock price; volatility; risk-free rate; and term. Because of these inputs and the degree of judgment involved, we have categorized our FXCM investment in Level 3. The valuation is most significantly impacted by the inputs and assumptions related to the publicly traded stock price, volatility and the time to liquidity event. A
$1.00
change in the price of FXCM’s shares alone (representing about
9%
of the price at
March 31, 2016
of its common stock), would result in a change of about
$17 million
in this valuation, assuming no change in any other factors we considered. Likewise, a
10%
change in the assumed volatility would result in a change of about
$20 million
in this valuation, assuming no other change in any other factors. A
three
month change in the estimated time to liquidity event would result in a change of about
$7 million
in this valuation, assuming no change in any other factors. As we adjust to fair value each quarter, we anticipate there could be volatility in the FXCM valuation, which could materially impact our results in a given period.
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, convertible bond 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 and are measured based on NAV (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value (1)
|
|
Unfunded
Commitments
|
|
Redemption
Frequency
(if currently eligible)
|
|
March 31, 2016
|
|
|
|
|
|
|
Equity Long/Short Hedge Funds (2)
|
$
|
424,516
|
|
|
$
|
—
|
|
|
(2)
|
|
Fixed Income and High Yield Hedge Funds (3)
|
1,321
|
|
|
—
|
|
|
—
|
|
Fund of Funds (4)
|
279
|
|
|
—
|
|
|
—
|
|
Equity Funds (5)
|
39,496
|
|
|
20,512
|
|
|
—
|
|
Multi-strategy Fund (7)
|
114,040
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
579,652
|
|
|
$
|
20,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Equity Long/Short Hedge Funds (2)
|
$
|
482,570
|
|
|
$
|
—
|
|
|
(2)
|
|
Fixed Income and High Yield Hedge Funds (3)
|
1,703
|
|
|
—
|
|
|
—
|
|
Fund of Funds (4)
|
287
|
|
|
94
|
|
|
—
|
|
Equity Funds (5)
|
42,111
|
|
|
20,791
|
|
|
—
|
|
Convertible Bond Funds (6)
|
326
|
|
|
—
|
|
|
At Will
|
|
Multi-strategy Fund (7)
|
113,458
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
640,455
|
|
|
$
|
20,885
|
|
|
|
|
|
|
|
(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, 2016
and
December 31, 2015
, investments with a fair value of
$97.5 million
and
$107.1 million
are redeemable with
30
to
90
days prior written notice, and includes an investment in a private asset management fund managed by us with a fair value of
$54.4 million
and
$52.4 million
at
March 31, 2016
and
December 31, 2015
, respectively. At
March 31, 2016
and
December 31, 2015
, this category also includes investments in Folger Hill feeder funds that invest solely in a Folger Hill master fund that makes long/short equity investments, with broad industry and geographic diversification. Investment in these funds is subject to a lock-up until August 15, 2019, subject to certain release events and other withdrawal rights. Following this date, investments can be redeemed as of any calendar quarter-end with no less than
45
calendar days’ notice, subject to certain limitations. At
March 31, 2016
and
December 31, 2015
, our investments in these funds had an aggregate fair value of
$327.0 million
and
$375.5 million
, respectively.
|
|
|
|
|
(3)
|
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. At
March 31, 2016
and
December 31, 2015
, the underlying assets of
7%
and
8%
, respectively, of these funds are being liquidated and we are unable to estimate when the underlying assets will be fully liquidated.
|
|
|
|
|
(4)
|
Includes investments in fund of funds that invest in various private equity funds. At
March 31, 2016
and
December 31, 2015
, approximately
69%
and
95%
, respectively, of the fair value of investments in this category is managed by us and has no redemption provisions; instead distributions are received through the liquidation of the underlying assets of the fund of funds, which are estimated to start liquidating in the next
nine months
. For the remaining investments, we have requested redemption; however, we are unable to estimate when these funds will be received.
|
|
|
|
|
(5)
|
At
March 31, 2016
and
December 31, 2015
, approximately
99%
and
100%
, respectively, of the fair value of 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
eight
years.
|
|
|
|
|
(6)
|
Investment in the Jefferies Umbrella Fund, an open-ended investment company managed by Jefferies that invested primarily in convertible bonds. The remaining investments were in liquidation at
December 31, 2015
and the underlying assets were fully liquidated during the three months ended March 31, 2016.
|
|
|
|
|
(7)
|
Investment in private asset management fund managed by us that employs a variety of investment strategies and can invest in U.S. and non-U.S. equity and equity related securities, futures, exchange traded funds, fixed income securities, preferred securities, options, forward contracts and swaps. Withdrawals during any calendar quarter are limited to
25%
of the fund’s net asset value. This restriction can be waived by us, in our sole discretion.
|
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.
Debt-Structured Notes
Long-term debt includes variable rate and fixed to floating rate structured notes that contain payment terms and redemption values based on the performance of certain interest rate indices 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, 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 at 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
|
)
|
|
Collateralized debt obligations
|
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 attributed to:
|
|
|
|
•
|
Collateralized debt obligations 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 a 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 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;
|
|
|
|
|
•
|
Collateralized debt obligations 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
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 collateralized debt obligations, 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.
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, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
Balance, December 31, 2014
|
|
Total gains (losses)
(realized and unrealized) (1)
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
Issuances
|
|
Net transfers
into (out of)
Level 3
|
|
Balance, March 31, 2015
|
|
Changes in
unrealized gains (losses) relating to instruments still held at
March 31,
2015 (1)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
20,964
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
(168
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,649
|
)
|
|
$
|
18,210
|
|
|
$
|
243
|
|
|
Corporate debt securities
|
22,766
|
|
|
(311
|
)
|
|
469
|
|
|
(533
|
)
|
|
—
|
|
|
—
|
|
|
2,404
|
|
|
24,795
|
|
|
43
|
|
|
Collateralized debt obligations
|
124,650
|
|
|
(17,642
|
)
|
|
—
|
|
|
(13,519
|
)
|
|
(1,296
|
)
|
|
—
|
|
|
4,644
|
|
|
96,837
|
|
|
(17,506
|
)
|
|
Sovereign obligations
|
—
|
|
|
13
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
321
|
|
|
333
|
|
|
12
|
|
|
Residential mortgage-backed securities
|
82,557
|
|
|
(2,863
|
)
|
|
2,100
|
|
|
(1,375
|
)
|
|
(23
|
)
|
|
—
|
|
|
(443
|
)
|
|
79,953
|
|
|
783
|
|
|
Commercial mortgage-backed securities
|
26,655
|
|
|
(531
|
)
|
|
—
|
|
|
(382
|
)
|
|
(6,864
|
)
|
|
—
|
|
|
5,751
|
|
|
24,629
|
|
|
(1,369
|
)
|
|
Other asset-backed securities
|
2,294
|
|
|
(167
|
)
|
|
26
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
4,994
|
|
|
7,146
|
|
|
(167
|
)
|
|
Loans and other receivables
|
97,258
|
|
|
(5,033
|
)
|
|
40,019
|
|
|
(16,122
|
)
|
|
(15,448
|
)
|
|
—
|
|
|
10,736
|
|
|
111,410
|
|
|
(3,262
|
)
|
|
Investments at fair value
|
77,047
|
|
|
566
|
|
|
5,010
|
|
|
(184
|
)
|
|
(277
|
)
|
|
—
|
|
|
69,203
|
|
|
151,365
|
|
|
572
|
|
|
Investment in FXCM
|
—
|
|
|
686,627
|
|
|
279,000
|
|
|
—
|
|
|
(18,627
|
)
|
|
—
|
|
|
—
|
|
|
947,000
|
|
|
686,627
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
Corporate debt securities
|
223
|
|
|
(115
|
)
|
|
(6,683
|
)
|
|
6,698
|
|
|
—
|
|
|
—
|
|
|
(123
|
)
|
|
—
|
|
|
—
|
|
|
Net derivatives (2)
|
(4,638
|
)
|
|
6,938
|
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
1,072
|
|
|
—
|
|
|
3,314
|
|
|
(8,771
|
)
|
|
Loans
|
14,450
|
|
|
(39
|
)
|
|
(2,877
|
)
|
|
825
|
|
|
—
|
|
|
—
|
|
|
(3,032
|
)
|
|
9,327
|
|
|
39
|
|
|
Other secured financings
|
30,825
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,218
|
)
|
|
36,995
|
|
|
—
|
|
|
65,602
|
|
|
—
|
|
|
|
|
|
(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, 2015
During the
three months ended March 31, 2015
, transfers of assets of
$205.2 million
from Level 2 to Level 3 of the fair value hierarchy are attributed to:
|
|
|
|
•
|
Non-agency residential mortgage-backed securities of
$35.3 million
and commercial mortgage-backed securities of
$10.3 million
for which no recent trade activity was observed for purposes of determining observable inputs;
|
|
|
|
|
•
|
Loans and other receivables of
$16.4 million
due to a lower number of contributors comprising vendor quotes to support classification within Level 2;
|
|
|
|
|
•
|
Collateralized debt obligations of
$64.6 million
which have little to no transparency in trade activity;
|
|
|
|
|
•
|
Investments at fair value of
$69.2 million
due to lack of observable market transactions.
|
During the
three months ended March 31, 2015
, transfers of assets of
$110.2 million
from Level 3 to Level 2 are attributed to:
|
|
|
|
•
|
Non-agency residential mortgage-backed securities of
$35.7 million
for which market trades were observed in the period for either identical or similar securities;
|
|
|
|
|
•
|
Collateralized debt obligations of
$59.9 million
due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;
|
|
|
|
|
•
|
Corporate equity securities of
$4.4 million
due to an increase in observable market transactions.
|
Net gains on Level 3 assets were
$660.7 million
and net losses on Level 3 liabilities were
$6.8 million
for the
three months ended March 31, 2015
. Net gains on Level 3 assets were primarily due to increased valuations of our investment in FXCM and certain investments at fair value, partially offset by a decrease in valuation of certain collateralized debt obligations, loans and other receivables, residential and commercial mortgage-backed securities and corporate debt 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 offered 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 ranges of inputs are 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 quarters 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, 2016
|
|
Financial Instruments Owned
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
|
Corporate equity securities
|
|
$
|
27,079
|
|
|
|
|
|
|
|
|
|
|
Non-exchange traded securities
|
|
|
|
|
Market approach
|
|
EBITDA (a) multiple
|
|
15.2
|
|
—
|
|
|
|
|
|
|
|
|
Underlying stock price
|
|
$1.00 to $102
|
|
$
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
21,487
|
|
|
Convertible bond model
|
|
Discount rate/yield
|
|
13%
|
|
—
|
|
|
|
|
|
|
|
|
Volatility
|
|
40%
|
|
—
|
|
|
|
|
|
|
Comparable pricing
|
|
Comparable bond price
|
|
$39
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
$
|
38,604
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
10% to 20%
|
|
19
|
%
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
2% to 10%
|
|
3
|
%
|
|
|
|
|
|
|
|
|
Loss severity
|
|
25% to 70%
|
|
31
|
%
|
|
|
|
|
|
|
|
|
Yield
|
|
5% to 20%
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
68,019
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
0% to 50%
|
|
12
|
%
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
1% to 9%
|
|
1
|
%
|
|
|
|
|
|
|
|
|
Loss severity
|
|
25% to 70%
|
|
30
|
%
|
|
|
|
|
|
|
|
|
Yield
|
|
2% to 11%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
$
|
21,994
|
|
|
Discounted cash flows
|
|
Yield
|
|
8% to 29%
|
|
14
|
%
|
|
|
|
|
|
|
|
|
Cumulative loss rate
|
|
2% to 69%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities
|
|
$
|
27,298
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
0% to 20%
|
|
15
|
%
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
0% to 15%
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Loss severity
|
|
0% to 100%
|
|
83
|
%
|
|
|
|
|
|
|
|
|
Yield
|
|
4% to 24%
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and other receivables
|
|
$
|
120,475
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$100
|
|
—
|
|
|
|
|
|
|
|
Market approach
|
|
Discount rate/yield
|
|
2% to 51%
|
|
21
|
%
|
|
|
|
|
|
|
|
|
Transaction level
|
|
$81
|
|
—
|
|
|
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
6% to 100%
|
|
76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
22,975
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forwards
|
|
|
|
|
Market approach
|
|
Discount rate/yield
|
|
60%
|
|
—
|
|
|
|
|
|
|
|
|
Transaction level
|
|
$6,500,000
|
|
—
|
|
|
Unfunded commitment
|
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$100
|
|
—
|
|
|
Credit default swaps
|
|
|
|
|
Market approach
|
|
Credit spread
|
|
292 bps
|
|
—
|
|
|
Interest rate swaps
|
|
|
|
Market approach
|
|
Credit spread
|
|
667 bps to 800 bps
|
|
718 bps
|
|
|
Total return swaps
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$90
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity securities
|
|
$
|
35,455
|
|
|
Market approach
|
|
EBITDA (a) multiple
|
|
8.4
|
|
—
|
|
|
|
|
|
|
|
|
Transaction level
|
|
$0 to $74
|
|
$
|
55.0
|
|
|
|
|
|
|
|
|
Enterprise value
|
|
$5,200,000
|
|
—
|
|
|
|
|
|
|
|
|
Discount rate
|
|
15% to 30%
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in FXCM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
218,300
|
|
|
Discounted cash flows
|
|
Term based on the pay off
|
|
0 months to 1.25 years
|
|
0.9 years
|
|
Rights
|
|
346,500
|
|
|
Option pricing model
|
|
Volatility
|
|
100%
|
|
—
|
|
|
|
|
$
|
564,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Liabilities
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
|
Derivatives
|
|
$
|
34,732
|
|
|
|
|
|
|
|
|
|
|
|
Equity options
|
|
|
|
Option model
|
|
Volatility
|
|
45%
|
|
—
|
|
|
|
|
|
|
Default rate
|
|
Default probability
|
|
0%
|
|
—
|
|
|
Unfunded commitments
|
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$100
|
|
—
|
|
|
|
|
|
|
|
Market approach
|
|
Discount rate/yield
|
|
3% to 35%
|
|
26
|
%
|
|
Variable funding note swaps
|
|
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
20%
|
|
—
|
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
2%
|
|
—
|
|
|
|
|
|
|
|
|
|
Loss severity
|
|
25%
|
|
—
|
|
|
|
|
|
|
|
|
|
Yield
|
|
14%
|
|
—
|
|
|
Foreign exchange forwards
|
|
|
|
Market approach
|
|
Credit spread
|
|
500 bps
|
|
—
|
|
|
Total return swaps
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$90
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
7,744
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$100
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Financial Instruments Owned
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
|
Corporate equity securities
|
|
$
|
20,285
|
|
|
|
|
|
|
|
|
|
|
Non-exchange traded securities
|
|
|
|
|
Market approach
|
|
EBITDA (a) multiple
|
|
4.4
|
|
—
|
|
|
|
|
|
|
|
|
|
Transaction level
|
|
$1
|
|
—
|
|
|
|
|
|
|
|
|
Underlying stock price
|
|
$5 to $102
|
|
$19.0
|
|
Corporate debt securities
|
|
$
|
20,257
|
|
|
Convertible bond model
|
|
Discount rate/yield
|
|
86%
|
|
—
|
|
|
|
|
|
|
Market approach
|
|
Transaction level
|
|
$59
|
|
—
|
|
|
Collateralized debt obligations
|
|
$
|
49,923
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
5% to 20%
|
|
13
|
%
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
2% to 8%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
Loss severity
|
|
25% to 90%
|
|
52
|
%
|
|
|
|
|
|
|
|
|
Yield
|
|
6% to 13%
|
|
10
|
%
|
|
Residential mortgage-backed securities
|
|
$
|
70,263
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
0% to 50%
|
|
13
|
%
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
1% to 9%
|
|
3
|
%
|
|
|
|
|
|
|
|
|
Loss severity
|
|
25% to 70%
|
|
39
|
%
|
|
|
|
|
|
|
|
|
Yield
|
|
1% to 9%
|
|
6
|
%
|
|
Commercial mortgage-backed securities
|
|
$
|
14,326
|
|
|
Discounted cash flows
|
|
Yield
|
|
7% to 30%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
Cumulative loss rate
|
|
2% to 63%
|
|
23
|
%
|
|
Other asset-backed securities
|
|
$
|
21,463
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
6% to 8%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
3% to 5%
|
|
4
|
%
|
|
|
|
|
|
|
|
|
Loss severity
|
|
55% to 75%
|
|
62
|
%
|
|
|
|
|
|
|
|
|
Yield
|
|
7% to 22%
|
|
18
|
%
|
|
|
|
|
|
Over-collateralization
|
|
Over-collateralization percentage
|
|
117% to 125%
|
|
118
|
%
|
|
Loans and other receivables
|
|
$
|
161,470
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$99 to $100
|
|
$99.7
|
|
|
|
|
|
|
Market approach
|
|
Yield
|
|
2% to 17%
|
|
12
|
%
|
|
|
|
|
|
|
|
|
EBITDA (a) multiple
|
|
10.0
|
|
—
|
|
|
|
|
|
|
|
Scenario analysis
|
|
Estimated recovery percentage
|
|
6% to 100%
|
|
83
|
%
|
|
Derivatives
|
|
$
|
19,785
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forwards
|
|
|
|
|
Market approach
|
|
Discount rate/yield
|
|
47%
|
|
—
|
|
|
|
|
|
|
|
|
Transaction level
|
|
$9,500,000
|
|
—
|
|
|
Unfunded commitment
|
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$100
|
|
—
|
|
|
|
|
|
|
Market approach
|
|
Credit spread
|
|
298 bps
|
|
—
|
|
|
Total return swap
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$91.7 to $92.4
|
|
$92.1
|
|
Investments at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity securities
|
|
$
|
29,940
|
|
|
Market approach
|
|
Transaction level
|
|
$64
|
|
—
|
|
|
|
|
|
|
|
|
Enterprise value
|
|
$5,200,000
|
|
—
|
|
|
|
|
|
|
|
|
Discount rate
|
|
15% to 30%
|
|
23
|
%
|
|
Investment in FXCM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
203,700
|
|
|
Discounted cash flows
|
|
Term based on the pay off
|
|
0 months to 1.0 year
|
|
0.4 years
|
|
Rights
|
|
422,000
|
|
|
Option pricing model
|
|
Volatility
|
|
110%
|
|
—
|
|
|
|
|
$
|
625,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Liabilities
|
|
Fair Value
(in thousands)
|
|
Valuation
Technique
|
|
Significant
Unobservable Input(s)
|
|
Input/Range
|
|
Weighted
Average
|
|
Derivatives
|
|
$
|
19,543
|
|
|
|
|
|
|
|
|
|
|
|
Equity options
|
|
|
|
|
Option model
|
|
Volatility
|
|
45%
|
|
—
|
|
|
|
|
|
|
Default rate
|
|
Default probability
|
|
0%
|
|
—
|
|
|
Unfunded commitments
|
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$79 to $100
|
|
$82.6
|
|
|
|
|
|
Market approach
|
|
Discount rate/yield
|
|
3% to 10%
|
|
10
|
%
|
|
|
|
|
|
Discounted cash flows
|
|
Constant prepayment rate
|
|
20%
|
|
—
|
|
|
|
|
|
|
|
|
Constant default rate
|
|
2%
|
|
—
|
|
|
|
|
|
|
|
|
Loss severity
|
|
25%
|
|
—
|
|
|
|
|
|
|
|
|
Yield
|
|
11%
|
|
—
|
|
|
Total return swap
|
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$91.7 to $92.4
|
|
$92.1
|
|
Loans
|
|
$
|
10,469
|
|
|
Comparable pricing
|
|
Comparable loan price
|
|
$100
|
|
—
|
|
|
|
|
|
(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, 2016
and
December 31, 2015
, asset exclusions consisted of
$317.2 million
and
$280.6 million
, respectively, primarily comprised of certain corporate debt and equity securities, investments at fair value, private equity securities, derivative contracts, collateralized debt obligations, sovereign obligations and certain loans and other receivables. At
March 31, 2016
and
December 31, 2015
, liability exclusions consisted of
$0.5 million
and
$0.6 million
, respectively, of certain corporate debt and equity securities and other secured financings.
Sensitivity of Fair Values to Changes in Significant Unobservable Input
s
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:
|
|
|
|
•
|
Loans and other receivables, corporate debt securities, loan and unfunded commitments and total return swaps using comparable pricing valuation techniques. A significant increase (decrease) in the comparable loan or bond 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 or volatility would result in a significantly lower (higher) fair value measurement.
|
|
|
|
|
•
|
Non-exchange traded securities, corporate debt securities, loans and other receivables, unfunded commitments, commodity forwards, credit default swaps, interest rate swaps, foreign exchange forwards 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 corporate debt security, loan and other receivable 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, loan and other receivable or commodity forward would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the enterprise value of a private equity security 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.
|
|
|
|
|
•
|
Loans and other receivables 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.
|
|
|
|
|
•
|
Collateralized debt obligations, residential and commercial mortgage-backed securities and other asset-backed securities, variable funding notes and unfunded commitments using a discounted cash flow valuation technique. A significant increase (decrease) in isolation in the constant default rate, and loss severities or cumulative loss rate would result in a significantly lower (higher) fair value measurement. The impact of changes in the constant prepayment rate would have differing impacts depending on the capital structure of the security. A significant increase (decrease) in the loan or bond yield would result in a significantly lower (higher) fair value measurement.
|
|
|
|
|
•
|
Certain other asset-backed securities using an over-collateralization model. A significant increase (decrease) in the over-collateralization percentage would result in a significantly higher (lower) fair value measurement.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
Investment in FXCM using a discounted cash flow valuation technique and an option pricing model. A significant increase (decrease) in term based on the time to pay off the loan would result in a higher (lower) fair value measurement. A significant increase (decrease) in volatility or time to liquidity event would result in a significantly lower (higher) 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 loan commitments and fundings in connection with mortgage-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 and are accounted for on an amortized
cost basis. We have also elected the fair value option for certain financial instruments held by Jefferies 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 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, 2016 and 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
2016
|
|
2015
|
|
Financial Instruments Owned:
|
|
|
|
|
Loans and other receivables
|
$
|
(15,462
|
)
|
|
$
|
5,389
|
|
|
|
|
|
|
|
Financial Instruments Sold:
|
|
|
|
|
|
|
Loans
|
$
|
48
|
|
|
$
|
(1,022
|
)
|
|
Loan commitments
|
$
|
(3,746
|
)
|
|
$
|
(7,166
|
)
|
|
|
|
|
|
|
Long-term Debt:
|
|
|
|
|
|
|
Changes in instrument specific credit risk (1)
|
$
|
(302
|
)
|
|
$
|
—
|
|
|
Other changes in fair value (2)
|
$
|
6,816
|
|
|
$
|
—
|
|
(1) Changes in instrument-specific credit risk related to structured notes are included in the Consolidated Statements of Comprehensive Income (Loss).
(2) Other changes in fair value include
$6.9 million
included within Principal transactions revenues and
$42,000
included within Interest expense on 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, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
Financial Instruments Owned:
|
|
|
|
|
Loans and other receivables (1)
|
$
|
494,444
|
|
|
$
|
408,369
|
|
|
Loans and other receivables greater than 90 days past due (1)
|
$
|
29,555
|
|
|
$
|
29,720
|
|
|
Loans and other receivables on nonaccrual status (1) (2)
|
$
|
154,319
|
|
|
$
|
54,652
|
|
|
Long-term Debt
|
$
|
6,420
|
|
|
$
|
—
|
|
|
|
|
|
(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.
|
The aggregate fair value of loans and other receivables that were 90 days or more past due was
$11.0 million
and
$11.3 million
at
March 31, 2016
and
December 31, 2015
, respectively.
The aggregate fair value of loans and other receivables on nonaccrual status, which includes all loans and other receivables greater than 90 days or more past due, was
$131.8 million
and
$307.5 million
at
March 31, 2016
and
December 31, 2015
, respectively.
We have elected the fair value option for Jefferies investment in KCG Holdings, Inc. The change in the fair value of this investment was
$(38.1) million
and
$34.6 million
for
three months ended March 31, 2016 and 2015
, respectively
As of
March 31, 2016
and
December 31, 2015
, 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
$649.1 million
and
$631.9 million
at
March 31,
2016
and
December 31, 2015
, 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
$17.2 million
and
$(78.3) million
, respectively, during the
three months ended March 31, 2016 and 2015
which is included in other merchant banking businesses. We currently have
two
directors on HRG’s board.
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.
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 significant 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 legal right to offset exists under a master netting agreement. Net realized and unrealized gains and losses are primarily recognized in Principal transactions in the Consolidated Statements of Operations on a trade date basis and as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows. Acting in a trading capacity, Jefferies and our Leucadia Asset Management businesses may enter into derivative transactions to satisfy the needs of its clients and to manage its own exposure to market and credit risks resulting from trading activities. See Notes 3 and 21 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 and 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, 2016
and
December 31, 2015
. 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, 2016
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
4,788,299
|
|
|
42,354
|
|
|
$
|
4,674,681
|
|
|
61,289
|
|
|
Foreign exchange contracts
|
466,668
|
|
|
10,812
|
|
|
477,496
|
|
|
9,962
|
|
|
Equity contracts
|
887,959
|
|
|
2,613,741
|
|
|
1,020,669
|
|
|
2,236,505
|
|
|
Commodity contracts
|
18,363
|
|
|
3,420
|
|
|
2,274
|
|
|
1,830
|
|
|
Credit contracts: centrally cleared swaps
|
4,344
|
|
|
102
|
|
|
276
|
|
|
11
|
|
|
Credit contracts: other credit derivatives
|
31,567
|
|
|
115
|
|
|
52,493
|
|
|
92
|
|
|
Total
|
6,197,200
|
|
|
|
|
|
6,227,889
|
|
|
|
|
|
Counterparty/cash-collateral netting
|
(5,850,803
|
)
|
|
|
|
|
(5,879,190
|
)
|
|
|
|
|
Total per Consolidated Statement of Financial Condition
|
$
|
346,397
|
|
|
|
|
|
$
|
348,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
2,910,093
|
|
|
56,748
|
|
|
$
|
2,849,958
|
|
|
74,904
|
|
|
Foreign exchange contracts (1)
|
453,527
|
|
|
8,089
|
|
|
466,021
|
|
|
7,376
|
|
|
Equity contracts
|
1,017,611
|
|
|
3,057,754
|
|
|
1,094,597
|
|
|
2,947,416
|
|
|
Commodity contracts (1)
|
27,590
|
|
|
2,896
|
|
|
5,510
|
|
|
2,001
|
|
|
Credit contracts: centrally cleared swaps
|
2,447
|
|
|
299
|
|
|
841
|
|
|
44
|
|
|
Credit contracts: other credit derivatives
|
16,977
|
|
|
100
|
|
|
59,314
|
|
|
135
|
|
|
Total
|
4,428,245
|
|
|
|
|
|
4,476,241
|
|
|
|
|
|
Counterparty/cash-collateral netting
|
(4,165,446
|
)
|
|
|
|
|
(4,257,998
|
)
|
|
|
|
|
Total per Consolidated Statement of Financial Condition
|
$
|
262,799
|
|
|
|
|
|
$
|
218,243
|
|
|
|
|
|
|
|
|
(1)
|
Commodity contracts increased in assets by a fair value of
$19.3 million
and by
29
contracts and in liabilities by a fair value of
$4.6 million
and by
28
contracts with corresponding decreases in foreign exchange contracts from those amounts previously reported to correct for the classification of certain contracts. The total amount of contracts remained unchanged.
|
The following table presents unrealized and realized gains (losses) on derivative contracts as reflected in the Consolidated Statements of Operations for the
three months ended March 31, 2016 and 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Interest rate contracts
|
|
$
|
(68,513
|
)
|
|
$
|
(42,793
|
)
|
|
Foreign exchange contracts
|
|
836
|
|
|
15,172
|
|
|
Equity contracts
|
|
(224,282
|
)
|
|
71,041
|
|
|
Commodity contracts
|
|
729
|
|
|
14,491
|
|
|
Credit contracts
|
|
(10,975
|
)
|
|
(6,042
|
)
|
|
Total
|
|
$
|
(302,205
|
)
|
|
$
|
51,869
|
|
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, 2016
(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
|
$
|
6,725
|
|
|
$
|
11,454
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,179
|
|
|
Equity swaps and options
|
35,094
|
|
|
2,870
|
|
|
—
|
|
|
—
|
|
|
37,964
|
|
|
Credit default swaps
|
—
|
|
|
6,472
|
|
|
—
|
|
|
(85
|
)
|
|
6,387
|
|
|
Total return swaps
|
24,628
|
|
|
297
|
|
|
—
|
|
|
(215
|
)
|
|
24,710
|
|
|
Foreign currency forwards, swaps and options
|
69,199
|
|
|
20,257
|
|
|
—
|
|
|
(8,067
|
)
|
|
81,389
|
|
|
Interest rate swaps, options and forwards
|
84,106
|
|
|
188,839
|
|
|
113,854
|
|
|
(76,104
|
)
|
|
310,695
|
|
|
Total
|
$
|
219,752
|
|
|
$
|
230,189
|
|
|
$
|
113,854
|
|
|
$
|
(84,471
|
)
|
|
479,324
|
|
|
Cross product counterparty netting
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTC derivative assets included in Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
472,352
|
|
|
|
|
|
(1)
|
At
March 31, 2016
, we held exchange traded derivative assets and other credit agreements with a fair value of
$36.1 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, 2016
cash collateral received was
$169.4 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
|
$
|
2,124
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,124
|
|
|
Equity swaps and options
|
7,929
|
|
|
20,068
|
|
|
617
|
|
|
—
|
|
|
28,614
|
|
|
Credit default swaps
|
—
|
|
|
8,421
|
|
|
1,094
|
|
|
(85
|
)
|
|
9,430
|
|
|
Total return swaps
|
16,379
|
|
|
4,124
|
|
|
—
|
|
|
(215
|
)
|
|
20,288
|
|
|
Foreign currency forwards, swaps and options
|
86,249
|
|
|
14,085
|
|
|
—
|
|
|
(8,067
|
)
|
|
92,267
|
|
|
Fixed income forwards
|
7,405
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,405
|
|
|
Interest rate swaps, options and forwards
|
48,138
|
|
|
102,141
|
|
|
127,194
|
|
|
(76,104
|
)
|
|
201,369
|
|
|
Total
|
$
|
168,224
|
|
|
$
|
148,839
|
|
|
$
|
128,905
|
|
|
$
|
(84,471
|
)
|
|
361,497
|
|
|
Cross product counterparty netting
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTC derivative liabilities included in Trading liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
354,525
|
|
|
|
|
|
(1)
|
At
March 31, 2016
, we held exchange traded derivative liabilities and other credit agreements with a fair value of
$170.0 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, 2016
, cash collateral pledged was
$197.8 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, 2016
, 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
|
$
|
224,130
|
|
|
BBB- to BBB+
|
84,878
|
|
|
BB+ or lower
|
71,655
|
|
|
Unrated
|
91,689
|
|
|
Total
|
$
|
472,352
|
|
|
|
|
|
(1)
|
We utilize internal credit ratings determined by Jefferies Risk Management. 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, 2016
and
December 31, 2015
is
$139.3 million
and
$114.5 million
, respectively, for which Jefferies has posted collateral of
$77.3 million
and
$97.2 million
, respectively, in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on
March 31, 2016
and
December 31, 2015
, Jefferies would have been required to post an additional
$68.0 million
and
$19.7 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 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 trading asset 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
Collateral Pledged
|
|
Securities Lending Arrangements
|
|
Repurchase Agreements
|
|
Total
|
|
Corporate equity securities
|
|
$
|
2,102,900
|
|
|
$
|
169,750
|
|
|
$
|
2,272,650
|
|
|
Corporate debt securities
|
|
524,824
|
|
|
1,542,462
|
|
|
2,067,286
|
|
|
Mortgage- and asset-backed securities
|
|
—
|
|
|
2,956,153
|
|
|
2,956,153
|
|
|
U.S. government and federal agency securities
|
|
42,887
|
|
|
7,543,014
|
|
|
7,585,901
|
|
|
Municipal securities
|
|
—
|
|
|
429,167
|
|
|
429,167
|
|
|
Sovereign securities
|
|
—
|
|
|
1,897,266
|
|
|
1,897,266
|
|
|
Loans and other receivables
|
|
—
|
|
|
441,170
|
|
|
441,170
|
|
|
Total
|
|
$
|
2,670,611
|
|
|
$
|
14,978,982
|
|
|
$
|
17,649,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
Collateral Pledged
|
|
Securities Lending Arrangements
|
|
Repurchase Agreements
|
|
Total
|
|
Corporate equity securities
|
|
$
|
2,200,273
|
|
|
$
|
271,519
|
|
|
$
|
2,471,792
|
|
|
Corporate debt securities
|
|
779,044
|
|
|
1,721,583
|
|
|
2,500,627
|
|
|
Mortgage- and asset-backed securities
|
|
—
|
|
|
3,537,812
|
|
|
3,537,812
|
|
|
U.S. government and federal agency securities
|
|
34,983
|
|
|
12,003,521
|
|
|
12,038,504
|
|
|
Municipal securities
|
|
—
|
|
|
357,350
|
|
|
357,350
|
|
|
Sovereign securities
|
|
—
|
|
|
1,804,103
|
|
|
1,804,103
|
|
|
Loans and other receivables
|
|
—
|
|
|
462,534
|
|
|
462,534
|
|
|
Total
|
|
$
|
3,014,300
|
|
|
$
|
20,158,422
|
|
|
$
|
23,172,722
|
|
The following tables set forth the carrying value of securities lending arrangements and repurchase agreements by remaining contractual maturity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
|
|
Overnight and Continuous
|
|
Up to 30 Days
|
|
30 to 90 Days
|
|
Greater than 90 Days
|
|
Total
|
|
Securities lending arrangements
|
|
$
|
1,391,681
|
|
|
$
|
—
|
|
|
$
|
1,278,930
|
|
|
$
|
—
|
|
|
$
|
2,670,611
|
|
|
Repurchase agreements
|
|
7,216,429
|
|
|
2,937,670
|
|
|
3,856,051
|
|
|
968,832
|
|
|
14,978,982
|
|
|
Total
|
|
$
|
8,608,110
|
|
|
$
|
2,937,670
|
|
|
$
|
5,134,981
|
|
|
$
|
968,832
|
|
|
$
|
17,649,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
Overnight and Continuous
|
|
Up to 30 Days
|
|
30 to 90 Days
|
|
Greater than 90 Days
|
|
Total
|
|
Securities lending arrangements
|
|
$
|
1,522,475
|
|
|
$
|
—
|
|
|
$
|
973,201
|
|
|
$
|
518,624
|
|
|
$
|
3,014,300
|
|
|
Repurchase agreements
|
|
7,848,231
|
|
|
5,218,059
|
|
|
5,291,729
|
|
|
1,800,403
|
|
|
20,158,422
|
|
|
Total
|
|
$
|
9,370,706
|
|
|
$
|
5,218,059
|
|
|
$
|
6,264,930
|
|
|
$
|
2,319,027
|
|
|
$
|
23,172,722
|
|
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 or custom 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, 2016
and
December 31, 2015
, the approximate fair value of securities received as collateral by Jefferies that may be sold or repledged was
$22.6 billion
and
$26.2 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 variable interest entities; however, the SPEs are generally not consolidated as Jefferies is not considered the primary beneficiary for these SPEs. Beginning in the third quarter of 2014, another of our subsidiaries utilized an SPE to securitize automobile loans receivable. This SPE is a variable interest entity 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 variable interest entities.
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 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 collateralized loan obligations), 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. If Jefferies has not relinquished control over the transferred assets, the assets continue to be recognized in Trading assets and a corresponding liability is recognized in Other secured financings. The related liabilities do not have recourse to Jefferies general credit.
The following table presents activity related to our securitizations that were accounted for as sales in which we had continuing involvement during the
three months ended March 31, 2016 and 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Transferred assets
|
|
$
|
1,948.9
|
|
|
$
|
1,562.9
|
|
|
Proceeds on new securitizations
|
|
1,962.7
|
|
|
1,564.5
|
|
|
Cash flows received on retained interests
|
|
9.6
|
|
|
2.4
|
|
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 securitizations at
March 31, 2016
and
December 31, 2015
.
The following table summarizes our retained interests in SPEs where Jefferies transferred assets and has continuing involvement and received sale accounting treatment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Securitization Type
|
Total
Assets
|
|
Retained
Interests
|
|
Total
Assets
|
|
Retained
Interests
|
|
U.S. government agency residential mortgage-backed securities
|
$
|
11,455.8
|
|
|
$
|
270.0
|
|
|
$
|
10,901.9
|
|
|
$
|
203.6
|
|
|
U.S. government agency commercial mortgage-backed securities
|
2,598.3
|
|
|
78.0
|
|
|
2,313.4
|
|
|
87.2
|
|
|
Collateralized loan obligations
|
4,514.4
|
|
|
40.5
|
|
|
4,538.4
|
|
|
51.5
|
|
|
Consumer and other loans
|
1,250.8
|
|
|
108.1
|
|
|
655.0
|
|
|
31.0
|
|
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, although the securities are included in Trading assets. To the extent Jefferies purchased securities through these market-making activities and Jefferies is not deemed to be the primary beneficiary of the variable interest entity, these securities are included in agency and non-agency mortgage- and asset-backed securitizations in the nonconsolidated variable interest entities section presented in Note 8.
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, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Bonds and notes:
|
|
|
|
|
|
|
|
|
U.S. government securities
|
$
|
302,407
|
|
|
$
|
29
|
|
|
$
|
8
|
|
|
$
|
302,428
|
|
|
Residential mortgage-backed securities
|
10,035
|
|
|
43
|
|
|
212
|
|
|
9,866
|
|
|
Commercial mortgage-backed securities
|
2,193
|
|
|
—
|
|
|
67
|
|
|
2,126
|
|
|
Other asset-backed securities
|
7,866
|
|
|
55
|
|
|
24
|
|
|
7,897
|
|
|
All other corporates
|
4,539
|
|
|
3
|
|
|
3
|
|
|
4,539
|
|
|
Total fixed maturities
|
327,040
|
|
|
130
|
|
|
314
|
|
|
326,856
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies
|
35,071
|
|
|
10,832
|
|
|
—
|
|
|
45,903
|
|
|
Industrial, miscellaneous and all other
|
17,946
|
|
|
8,151
|
|
|
—
|
|
|
26,097
|
|
|
Total equity securities
|
53,017
|
|
|
18,983
|
|
|
—
|
|
|
72,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
380,057
|
|
|
$
|
19,113
|
|
|
$
|
314
|
|
|
$
|
398,856
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
$
|
63,968
|
|
|
$
|
2
|
|
|
$
|
25
|
|
|
$
|
63,945
|
|
|
Residential mortgage-backed securities
|
23,033
|
|
|
308
|
|
|
101
|
|
|
23,240
|
|
|
Commercial mortgage-backed securities
|
2,392
|
|
|
—
|
|
|
18
|
|
|
2,374
|
|
|
Other asset-backed securities
|
39,633
|
|
|
—
|
|
|
160
|
|
|
39,473
|
|
|
All other corporates
|
4,794
|
|
|
7
|
|
|
57
|
|
|
4,744
|
|
|
Total fixed maturities
|
133,820
|
|
|
317
|
|
|
361
|
|
|
133,776
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies
|
35,071
|
|
|
10,201
|
|
|
—
|
|
|
45,272
|
|
|
Industrial, miscellaneous and all other
|
17,946
|
|
|
10,361
|
|
|
—
|
|
|
28,307
|
|
|
Total equity securities
|
53,017
|
|
|
20,562
|
|
|
—
|
|
|
73,579
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,837
|
|
|
$
|
20,879
|
|
|
$
|
361
|
|
|
$
|
207,355
|
|
The amortized cost and estimated fair value of investments classified as available for sale at
March 31, 2016
, 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
|
$
|
306,437
|
|
|
$
|
306,460
|
|
|
Due after one year through five years
|
509
|
|
|
507
|
|
|
Due after five years through ten years
|
—
|
|
|
—
|
|
|
Due after ten years
|
—
|
|
|
—
|
|
|
|
306,946
|
|
|
306,967
|
|
|
Mortgage-backed and asset-backed securities
|
20,094
|
|
|
19,889
|
|
|
|
$
|
327,040
|
|
|
$
|
326,856
|
|
At
March 31, 2016
, 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
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, an equity interest in an associated company, commitments, guarantees and certain fees. Our involvement with VIEs arises primarily from the following activities of Jefferies, 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 collateralized loan obligations (“CLOs”) through participation certificates and revolving loan and note commitments, and
|
|
|
|
|
•
|
Loans to, investments in and fees from various investment fund 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 tables present 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, 2016
and
December 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Securitization Vehicles
|
|
Real Estate Investment Vehicles
|
|
Airplane Financing Vehicle
|
|
Securitization Vehicles
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
1.6
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
Financial instruments owned
|
79.1
|
|
|
—
|
|
|
—
|
|
|
68.3
|
|
|
Securities purchased under agreement to resell (1)
|
878.1
|
|
|
—
|
|
|
—
|
|
|
717.3
|
|
|
Aircraft (2)
|
—
|
|
|
—
|
|
|
27.3
|
|
|
—
|
|
|
Receivables
|
—
|
|
|
123.3
|
|
|
—
|
|
|
—
|
|
|
Loans to and investments in associated companies
|
—
|
|
|
16.2
|
|
|
—
|
|
|
—
|
|
|
Other
|
143.0
|
|
|
9.3
|
|
|
—
|
|
|
158.6
|
|
|
Total assets
|
$
|
1,101.8
|
|
|
$
|
150.5
|
|
|
$
|
27.3
|
|
|
$
|
945.3
|
|
|
|
|
|
|
|
|
|
|
|
Other secured financings (3)
|
$
|
1,087.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
930.8
|
|
|
Long-term debt
|
—
|
|
|
104.5
|
|
|
22.7
|
|
|
—
|
|
|
Other
|
14.0
|
|
|
1.7
|
|
|
1.7
|
|
|
14.5
|
|
|
Total liabilities
|
$
|
1,101.8
|
|
|
$
|
106.2
|
|
|
$
|
24.4
|
|
|
$
|
945.3
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
$
|
—
|
|
|
$
|
27.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
(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)
|
Aircraft is included within Other assets in the Consolidated Statements of Financial Condition.
|
|
|
|
|
(3)
|
Approximately
$59.3 million
and
$22.1 million
of the secured financing represents an amount held by Jefferies in inventory and eliminated in consolidation at
March 31, 2016
and
December 31, 2015
, 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. 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, 2016
and
December 31, 2015
, another of our subsidiaries is the primary beneficiary of SPEs it utilized to securitize automobile loans receivable. Our subsidiary acts as the servicer for which it receives a fee, and owns the 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 our subsidiary’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 an investment in
an associated company, 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.
Aircraft Financing Vehicle.
Jefferies is the primary beneficiary of a secured financing vehicle associated with the purchase and lease of aircraft. Jefferies is the owner participant and maintains an equity interest in the vehicle and was involved in the decisions made during the purchase of the aircraft and the establishment of the terms of the leases. The assets of the VIE primarily consist of the aircraft and related operating leases, which are available for the benefit of the vehicle's unrelated third party debt holders. The creditors of the VIE do not have recourse to Jefferies general credit and the VIE's assets 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, 2016 and December 31, 2015 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement
Carrying Amount
|
|
Maximum
Exposure to Loss
|
|
VIE Assets
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Collateralized loan obligations
|
$
|
65.8
|
|
|
$
|
2.7
|
|
|
$
|
700.1
|
|
|
$
|
5,841.8
|
|
|
Consumer loan vehicles
|
304.5
|
|
|
—
|
|
|
963.4
|
|
|
1,676.1
|
|
|
Related party private equity vehicles
|
37.1
|
|
|
0.1
|
|
|
63.2
|
|
|
153.9
|
|
|
Real estate investment vehicle
|
87.6
|
|
|
—
|
|
|
99.1
|
|
|
96.2
|
|
|
Other private investment vehicles
|
73.5
|
|
|
—
|
|
|
76.3
|
|
|
4,397.6
|
|
|
Total
|
$
|
568.5
|
|
|
$
|
2.8
|
|
|
$
|
1,902.1
|
|
|
$
|
12,165.6
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized loan obligations
|
$
|
73.6
|
|
|
$
|
0.2
|
|
|
$
|
458.1
|
|
|
$
|
6,368.7
|
|
|
Consumer loan vehicles
|
188.3
|
|
|
—
|
|
|
845.8
|
|
|
1,133.0
|
|
|
Related party private equity vehicles
|
39.3
|
|
|
—
|
|
|
65.8
|
|
|
168.2
|
|
|
Other private investment vehicles
|
88.0
|
|
|
—
|
|
|
91.4
|
|
|
4,846.1
|
|
|
Total
|
$
|
389.2
|
|
|
$
|
0.2
|
|
|
$
|
1,461.1
|
|
|
$
|
12,516.0
|
|
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 collateralized loan obligations 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 guarantee certain of the obligations of Jefferies Finance to the CLO
|
In addition, Jefferies owns variable interests in CLOs previously managed by Jefferies. These variable interests consist of debt securities and a right to a portion of the CLOs’ management and incentive fees. Jefferies exposure to loss from these CLOs is
limited to its investments in the debt securities held. Management and incentives fees are accrued as the amounts become realizable. These CLOs represent interests in assets consisting primarily of senior secured loans, unsecured loans and high yield bonds.
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 has committed to invest equity in private equity funds (the "JCP Funds") managed by Jefferies Capital Partners, LLC (the "JCP Manager"). Additionally, Jefferies has 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 which, 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 is
$148.1 million
, of which
$124.9 million
and
$124.6 million
was funded as of
March 31, 2016
and
December 31, 2015
, respectively. The carrying value of Jefferies equity investments in the JCP Entities was
$37.1 million
and
$39.3 million
at
March 31, 2016
and
December 31, 2015
, respectively. Jefferies exposure to loss is limited to its 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 our employees. The maximum exposure to loss of the guarantee was
$3.0 million
and
$3.0 million
as of
March 31, 2016
and
December 31, 2015
, respectively. Energy Partners I, LP has assets consisting primarily of debt and equity investments.
Real Estate Investment Vehicle.
In the first quarter of 2016, 54 Madison committed to invest
$98.0 million
in a real estate investment vehicle, of which
$86.5 million
was funded as of March 31, 2016. 54 Madison's maximum exposure to loss is limited to its equity commitment. 54 Madison is not the primary beneficiary of the investment vehicle as it does not have the power to control the most important activities of the VIE. The assets of the VIE consist primarily of an investment in a real estate project.
Other Private Investment Vehicles.
We have commitments to invest
$76.4 million
in various other private investment vehicles, of which
$73.6 million
and
$73.0 million
was funded as of
March 31, 2016
and
December 31, 2015
, respectively. The carrying amount of our equity investment was
$73.5 million
and
$88.0 million
at
March 31, 2016
and
December 31, 2015
, respectively. Our exposure to loss is limited to our 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 Vehicles.
In connection with Jefferies secondary trading and market-making activities, Jefferies buys and sells agency and non-agency mortgage-backed 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, collateralized debt obligations 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 (Fannie Mae, Freddie Mac and 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, we have 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, 2016
and
December 31, 2015
, Jefferies held
$2,709.7 million
and
$3,359.1 million
of agency mortgage-backed securities, respectively, and
$559.9 million
and
$630.5 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 our 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, at
March 31, 2016
and
December 31, 2015
, we have a variable interest in a nonconsolidated VIE consisting of our senior secured term loan receivable with rights with FXCM. See Note 3 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 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jefferies Finance
|
|
Jefferies LoanCore
|
|
Berkadia
|
|
Garcadia Companies
|
|
Linkem
|
|
HomeFed
|
|
Golden Queen (1)
|
|
54 Madison (2)
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to and investments in associated companies as of December 31, 2014
|
$
|
508,891
|
|
|
$
|
258,947
|
|
|
$
|
208,511
|
|
|
$
|
167,939
|
|
|
$
|
159,054
|
|
|
$
|
271,782
|
|
|
$
|
103,598
|
|
|
$
|
—
|
|
|
$
|
33,846
|
|
|
$
|
1,712,568
|
|
|
2015 Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (losses) related to associated companies
|
—
|
|
|
—
|
|
|
32,343
|
|
|
15,253
|
|
|
(4,788
|
)
|
|
(2,098
|
)
|
|
(287
|
)
|
|
—
|
|
|
28
|
|
|
40,451
|
|
|
Income (losses) related to associated companies classified as other revenues
|
11,311
|
|
|
9,858
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(480
|
)
|
|
20,689
|
|
|
Contributions to (distributions from) associated companies, net
|
—
|
|
|
32,744
|
|
|
(18,852
|
)
|
|
(12,316
|
)
|
|
5,859
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(290
|
)
|
|
7,145
|
|
|
Other, including foreign exchange and unrealized gain (losses)
|
1
|
|
|
—
|
|
|
(2,985
|
)
|
|
—
|
|
|
(15,312
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154
|
|
|
(18,142
|
)
|
|
Loans to and investments in associated companies as of March 31, 2015
|
$
|
520,203
|
|
|
$
|
301,549
|
|
|
$
|
219,017
|
|
|
$
|
170,876
|
|
|
$
|
144,813
|
|
|
$
|
269,684
|
|
|
$
|
103,311
|
|
|
$
|
—
|
|
|
$
|
33,258
|
|
|
$
|
1,762,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to and investments in associated companies as of December 31, 2015
|
$
|
528,575
|
|
|
$
|
288,741
|
|
|
$
|
190,986
|
|
|
$
|
172,660
|
|
|
$
|
150,149
|
|
|
$
|
275,378
|
|
|
$
|
114,323
|
|
|
$
|
—
|
|
|
$
|
36,557
|
|
|
$
|
1,757,369
|
|
|
2016 Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (losses) related to associated companies
|
—
|
|
|
—
|
|
|
13,054
|
|
|
15,327
|
|
|
(8,200
|
)
|
|
(1,288
|
)
|
|
(355
|
)
|
|
1,227
|
|
|
287
|
|
|
20,052
|
|
|
Income (losses) related to associated companies classified as other revenues
|
(22,806
|
)
|
|
(187
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(423
|
)
|
|
(23,416
|
)
|
|
Contributions to (distributions from) associated companies, net
|
(19,300
|
)
|
|
(27,073
|
)
|
|
(5,400
|
)
|
|
(14,352
|
)
|
|
33,297
|
|
|
—
|
|
|
—
|
|
|
107,679
|
|
|
2,109
|
|
|
76,960
|
|
|
Other, including foreign exchange and unrealized gain (losses)
|
—
|
|
|
—
|
|
|
215
|
|
|
—
|
|
|
8,648
|
|
|
—
|
|
|
—
|
|
|
3,642
|
|
|
—
|
|
|
12,505
|
|
|
Loans to and investments in associated companies as of March 31, 2016
|
$
|
486,469
|
|
|
$
|
261,481
|
|
|
$
|
198,855
|
|
|
$
|
173,635
|
|
|
$
|
183,894
|
|
|
$
|
274,090
|
|
|
$
|
113,968
|
|
|
$
|
112,548
|
|
|
$
|
38,530
|
|
|
$
|
1,843,470
|
|
|
|
|
|
(1)
|
At
March 31, 2016
and
December 31, 2015
, the balance reflects
$33.6 million
and
$33.7 million
, respectively, related to a noncontrolling interest.
|
|
|
|
|
(2)
|
At March 31, 2016, the balance reflects
$63.0 million
related to noncontrolling interests.
|
Jefferies Finance
In October 2004, Jefferies 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.
Jefferies and MassMutual each have equity commitments to Jefferies Finance of
$600.0 million
. At
March 31, 2016
, approximately
$474.4 million
of Jefferies commitment was funded. The investment commitment is scheduled to mature on March 1, 2017 with automatic
one year
extensions subject to 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 Secured Revolving Credit Facility is for a total committed amount of
$500.0 million
at
March 31, 2016
and
December 31, 2015
. Advances are shared equally between Jefferies and MassMutual. The facility is scheduled to mature on March 1, 2017 with automatic
one year
extensions subject to a
60
day termination notice by either party. At
March 31, 2016
and
December 31, 2015
,
$0.0
and
$19.3 million
, respectively, of Jefferies
$250.0 million
commitments were funded.
Jefferies engages in debt capital markets transactions with Jefferies Finance related to the originations of loans by Jefferies Finance. In connection with such transactions, Jefferies earned fees of
$19.4 million
and
$15.6 million
during the
three months ended March 31, 2016 and 2015
, 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
$0.7 million
during the
three months ended March 31, 2015
, which are recognized within Selling, general and other expenses in the Consolidated Statements of Operations.
At
March 31, 2016
and
December 31, 2015
, Jefferies held securities issued by the CLOs managed by Jefferies Finance, which are included within Trading assets, and provided a guarantee, whereby Jefferies is required to make 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 whose underlying is based on certain securities issued by the CLO. Jefferies recognized revenue of
$1.4 million
during
three months ended March 31, 2016
relating to the derivative contracts.
Under a service agreement, Jefferies charged Jefferies Finance
$21.1 million
and
$27.8 million
for services provided during the
three months ended March 31, 2016 and 2015
, respectively. Receivables from Jefferies Finance, included within Other assets in the Consolidated Statements of Financial Condition, were
$6.0 million
and
$7.8 million
at
March 31, 2016
and
December 31, 2015
, respectively.
Jefferies LoanCore
In February 2011, Jefferies entered into a joint venture agreement with the Government of Singapore Investment Corporation and LoanCore, LLC and formed Jefferies LoanCore, a commercial real estate finance company. In the first quarter of 2016, the Canada Pension Plan Investment Board acquired a
24%
equity interest in Jefferies LoanCore through a direct acquisition from the Government of Singapore Investment Corporation. 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 Government of Singapore Investment Corporation and LoanCore, LLC. Jefferies LoanCore has aggregate equity commitments of
$600.0 million
. At
March 31, 2016
and
December 31, 2015
, Jefferies had funded
$184.7 million
and
$207.4 million
, respectively, of its
$291.0 million
equity commitment and has a
48.5%
voting interest in Jefferies LoanCore.
Berkadia
Berkadia Commercial Mortgage LLC 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, 2016
, cumulative cash distributions received by Leucadia from this investment aggregated
$399.3 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
$2.5 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, 2016
, the aggregate amount of commercial paper outstanding was
$1.47 billion
.
Garcadia
Garcadia is a joint venture between us and Garff Enterprises, Inc. ("Garff") that owns and operates
27
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
five
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
56%
of Linkem’s common equity. 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, 2016
, we own
9,974,226
shares of HomeFed’s common stock, representing approximately
65%
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, 2016
. 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. Construction is complete and mining activities and project commissioning commenced in the fourth quarter of 2015. 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.
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. In the first quarter of 2016, 54 Madison invested
$107.7 million
in projects accounted for under the equity method.