NEW YORK (S&P Global Ratings) May 19, 2020--, S&P Global Ratings said today it affirmed its 'BB-' issuer credit and senior secured debt ratings and its 'B+' senior unsecured debt ratings on Jefferies Finance LLC (JFIN). At the same time, we removed the ratings from CreditWatch, where we had placed them with negative implications on April 3, 2020. The outlook is negative.
The rating affirmation primarily reflects that JFIN has bolstered its funding and liquidity, and that we believe the market for syndicated loans has improved since we placed the ratings on CreditWatch with negative implications on April 3, 2020, and revolver draws will start to normalize. JFIN has added $1.2 billion of credit facilities, with $1.0 billion dedicated to underwriting commitments and $200 million to provide liquidity for revolver draws. In addition, we believe the company is making good progress de-risking its underwriting commitments.
As of Feb. 29, 2020, JFIN had $2.5 billion of undrawn commitments in its loan portfolio and $2.4 billion of underwriting commitments (net of $0.7 billion syndicated to third parties). As of Feb. 29, 2020, liquidity included $579 million of unrestricted cash, a $330 million corporate revolver ($69 million outstanding), $1.2 billion of collateralized loan obligation (CLO) and CLO warehouse capacity, and $1.345 billion of fronting lines ($0.6 billion outstanding). Also, JFIN had $195.2 million of undrawn equity capital commitments from members. In April, JFIN added the $1.0 billion warehouse facility and $200 million revolver warehouse facility.
While the company has bolstered its funding and liquidity, that comes at the expense of slightly higher leverage. Debt to adjusted total equity (ATE), our primary measure of leverage, increased to 4.6x as of February 2020 from 4.1x as of November 2019. We believe debt to ATE likely will increase to somewhat above 5.0x in the near term as JFIN funds draws on revolvers and funds underwriting commitments. However, we expect debt to ATE to decline to near 4.5x by November 2020, as draws on revolvers normalize and the company de-risks underwriting commitments over the remaining quarters this year.
Our ratings on JFIN reflect its concentration in leveraged lending, the market and credit risks of its originate-to-syndicate and balance-sheet investing strategies, and the implicit support of Jefferies Group LLC (Jefferies). We view the company's risk appetite as aggressive given that its unsyndicated origination commitments are, at times, in excess of its capacity to fund them. However, we also view the company's relatively good track record and its franchise as one of the largest U.S. syndicated loan originators as positive rating factors.
JFIN is a joint venture (JV) between Jefferies and MassMutual launched in 2004 that originates, syndicates, and invests in secured loans, largely to leveraged borrowers. JFIN's relationships with Jefferies and MassMutual support the execution of its syndication strategy and allow it to compete with much larger and better-funded banks. The JV owners provide sources of credit and operational support. Despite its relatively modest size, JFIN is one of the largest U.S. originators of syndicated leveraged loans because it sources loans directly through, and in support of, Jefferies' investment banking division. Our issuer credit rating on JFIN is one notch higher than the stand-alone assessment because we believe Jefferies would support JFIN under some circumstances of stress.
The negative outlook reflects JFIN's increased leverage, difficult market conditions, and continued economic fallout related to the COVID-19 pandemic. We expect that JFIN will maintain adequate funding and liquidity and that its increased leverage is temporary and will decline to close to 4.5x debt to ATE by November 2020. Also, we expect MassMutual and Jefferies to continue to support JFIN and the company to remain at least moderately strategically important to Jefferies.
We could lower the ratings within the next 12 months if:
- Liquidity becomes strained and is no longer adequate, in our view;
- Debt to ATE is expected to be above 4.5x beyond November 2020; or
- Jefferies reduces its commitment to JFIN.
We could affirm the ratings if funding and liquidity risks related to underwriting commitments and undrawn revolving credit commitments ease or are further mitigated and if the company maintains leverage within our expectations.