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•	Earnings Releases and Other Public Announcements

•	Annual and interim reports on Form 10-K;

•	Quarterly reports on Form 10-Q;

•	Current reports on Form 8-K;

•	Code of Ethics;

•	Reportable waivers, if any, from our Code of Ethics by our executive officers;

•	Board of Directors Corporate Governance Guidelines;

•	Charter of the Corporate Governance and Nominating Committee of the Board of Directors;

•	Charter of the Compensation Committee of the Board of Directors;

•	Charter of the Audit Committee of the Board of Directors; and

•	Any amendments to the above-mentioned documents and reports.

•

Capital Markets includes our investment banking, sales and trading and other related services. Investment banking provides capital markets and financial advisory services to our clients across most industry sectors in the Americas, Europe and Asia. Our sales and trading businesses include market-making, sales and financing across the spectrum of equities, fixed income and foreign exchange products. Related services include, among other things, prime brokerage, research and corporate lending.

•	Asset Management provides investment management services to investors in the U.S. and overseas.

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•	A market downturn could lead to a decline in the volume of transactions executed for customers and, therefore, to a decline in the revenues we receive from commissions and spreads.

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Unfavorable conditions or changes in general political, economic or market conditions, including general uncertainty regarding the U.S. economic environment as a result of the recent U.S. presidential election, could reduce the number and size of transactions in which we provide underwriting, financial advisory and other services. Our investment banking revenues, in the form of financial advisory and sales and trading or placement fees, are directly related to the number and size of the transactions in which we participate and could therefore be adversely affected by unfavorable financial, economic or political conditions.

•	Adverse changes in the market could lead to losses from principal transactions and inventory positions.

•

Adverse changes in the market could also lead to a reduction in revenues from asset management fees and investment income from managed funds and losses on our own capital invested in managed funds. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.

•

Limitations on the availability of credit can affect our ability to borrow on a secured or unsecured basis, which may adversely affect our liquidity and results of operations. Global market and economic conditions have been particularly disrupted and volatile in the last several years and may be in the future. Our cost and availability of funding could be affected by illiquid credit markets and wider credit spreads.

•	New or increased taxes on compensation payments such as bonuses or on balance sheet items may adversely affect our profits.

•	Should one of our customers or competitors fail, our business prospects and revenue could be negatively impacted due to negative market sentiment causing customers to cease doing business with us and our lenders to cease loaning us money, which could adversely affect our business, funding and liquidity.

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•	the description of our business contained in this report under the caption “Business”;

•	the risk factors contained in this report under the caption “Risk Factors”;

•	the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein;

•	the discussion of our risk management policies, procedures and methodologies contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management” herein;

•	the notes to the consolidated financial statements contained in this report; and

•	cautionary statements we make in our public documents, reports and announcements.

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•	Net revenues for 2016 were $2,414.6 million, compared with $2,475.2 million for 2015, a decrease of $60.6 million, or 2.4%.

•	The results for 2016 were impacted by an extremely volatile bear market environment during the first three months of the year, with meaningful improvement over the rest of the year. Net revenues for the first quarter of 2016 declined $292.7 million, or 49.5%, compared to the first quarter of 2015.

•	Throughout 2016, we continued to maintain strong leverage ratios, capital base and liquidity.

•	The decrease in total net revenues for 2016, as compared to 2015, primarily reflects a 17% decline in investment banking net revenues, and lower results in non-core equities net revenues, partially offset by meaningfully increased net revenues in fixed income.

•

Lower investment banking results are attributable to lower new issue equity and leveraged finance capital markets revenues, partially offset by higher advisory revenues. Our investment banking results benefited from a record quarter of advisory fees in the fourth quarter of 2016, as well as improvement in our capital markets activity, which began in the late summer of 2016, leading to an increase in new issue transaction volume.

•	The increase in fixed income revenues was across most products, as a result of new hires, a reduction in our downside risk profile since mid-2015 and improved market conditions in 2016. 2015 was adversely impacted by lower levels of liquidity and deterioration in the global energy and distressed markets.

•

The decline in equities net revenues was primarily attributable to a net loss of $17.9 million recognized during 2016 from our investment in two equity positions, including KCG Holdings, Inc. (“KCG”), compared with a net gain of $49.2 million in 2015 from these two positions. The decline in results was also due to net mark-to-market gains from certain equity inventory positions during 2015, which were not repeated during 2016. Equities revenues also include a net loss of $9.3 million from our share of our Jefferies Finance joint venture in 2016, compared with net revenues of $41.4 million in 2015.

•	Net revenues for 2016 included investment income from managed funds of $4.7 million, compared with investment losses from managed funds of $23.8 million in 2015, primarily due to lower valuations in the energy and shipping sectors in 2015.

•	Non-interest expenses for 2016 increased $23.6 million, or 1.0%, to $2,384.6 million, compared with $2,361.0 million for 2015, reflecting an increase in Compensation and benefits expense, partially offset by a decrease in Non-compensation expenses.

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•	Compensation and benefits expense for 2016 was $1,568.9 million, an increase of $101.8 million, or 6.9%, from 2015. Compensation and benefits expense as a percentage of Net revenues was 65.0% for 2016 compared with 59.3% in 2015. The increase in the compensation ratio for 2016 as compared to 2015 is primarily due to the composition of revenue by business line in the first quarter of 2016.

•

Non-compensation expenses for 2016 were $815.7 million, a decrease of $78.2 million, or 8.7%, from 2015. The decrease in 2016 was due to our exiting the Bache business, which in 2015 generated $127.2 million of non-compensation expenses. There were no meaningful non-compensation expenses related to the Bache business in 2016. This reduction was partially offset by higher technology and professional fees related to investments in our trading platforms.

•	On April 9, 2015, we entered into an agreement to transfer certain of the client activities of our Jefferies Bache business to Société Générale S.A. During the second quarter of 2016, we completed the exit of the Futures business.

•	Net revenues globally from this business activity, which are included within our fixed income results, and expenses directly related to the Bache business, which are included within non-interest expenses, were $80.2 million and $214.8 million, respectively, for 2015. There were no meaningful revenues or expenses from the Bache business for 2016.

•	For further information, refer to Note 22, Exit Costs, in our consolidated financial statements included within this Annual Report on Form 10-K.

•	At November 30, 2016, we had 3,329 employees globally, a decrease of 228 employees from our headcount of 3,557 at November 30, 2015. Our headcount decreased, primarily as a result of exiting the Bache business, as well as continued discipline in headcount and productivity management and corporate services outsourcing.

•	Net revenues for 2015 were $2,475.2 million, compared with $2,990.1 million for 2014, a decrease of $514.9 million, or 17.2%.

•

The results primarily reflect challenging market conditions in fixed income throughout 2015 and lower revenues in investment banking, partially offset by increased revenues in equities. We saw record revenues in investment banking for 2014. In addition, net revenues from our Bache business for 2015, which are included within our fixed income results, were $80.2 million compared with $202.8 million in 2014.

•	Almost all our fixed income credit businesses were impacted by lower levels of liquidity due to the expectations of interest rate increases by the Federal Reserve and deterioration in the global energy and distressed markets. There were a number of periods of extreme volatility, which were followed by periods of low trading volumes.

•	Results in 2015 also include a net gain of $49.1 million from our investment in KCG, compared with a loss of $14.7 million from our investment in KCG and a gain of $19.9 million from our investment in Harbinger Group Inc. (“HRG”) in 2014. We sold HRG to Leucadia in March 2014.

•	Net revenues for 2015 included investment losses from managed funds of $23.8 million, compared with investment losses from managed funds of $9.6 million in 2014, primarily due to lower valuations in the energy and shipping sectors during 2015.

•	Non-interest expenses decreased $326.1 million, or 12.1%, to $2,361.0 million for 2015 compared with $2,687.1 million for 2014, reflecting a decrease in both Compensation and benefits expense and Non-compensation expenses.

•	Compensation and benefits expense for 2015 was $1,467.1 million, a decrease of $231.4 million, or 13.6%, from 2014. Compensation and benefits expenses as a percentage of Net revenues was 59.3% for 2015 compared with 56.8% in 2014.

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Non-compensation expenses for 2015 were $893.9 million, a decrease of $94.7 million, or 9.6%, from 2014, primarily due to a goodwill impairment loss of $51.9 million related to our Jefferies Bache business during 2014. In addition, during the fourth quarter of 2014, we recognized a bad debt provision, which primarily relates to a receivable of $52.3 million from a client to which we provided futures clearing and execution services, which declared bankruptcy.

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Total non-interest expenses, since the agreement on April 9, 2015, include costs of $73.1 million, on a pre-tax basis, related to our exit of the Bache business. The after-tax impact of these costs is $52.6 million. These costs consist primarily of severance, retention and benefit payments for employees, incremental amortization of outstanding restricted stock and cash awards, contract termination costs and incremental amortization expense of capitalized software expected to no longer be used subsequent to the wind-down of the business.

•

Net revenues from this business activity for 2015, which are included within our fixed income results, were $80.2 million compared with $202.8 million in 2014. This is comprised of commissions, principal transaction revenues and net interest revenues. Expenses directly related to the Bache business, which are included within non-interest expenses, for 2015 were $214.8 million compared with $348.2 million in 2014.

•	For further information, refer to Note 22, Exit Costs in our consolidated financial statements included within this Annual Report on Form 10-K.

•	At November 30, 2015, we had 3,557 employees globally, a decrease of 358 employees from our headcount at November 30, 2014 of 3,915. Since November 30, 2014, our headcount has decreased due to headcount reductions related to the exiting of the Bache business and corporate services outsourcing, partially offset by increases across our investment banking, equities and asset management businesses.

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•	cash equities,

•	electronic trading,

•	equity derivatives,

•	convertible securities,

•	prime brokerage,

•	securities finance and

•	alternative investment strategies.

•	Total equities net revenues were $549.6 million for 2016, a decrease of $207.9 million, compared with $757.4 million for 2015.

•	Results during 2016 include a net loss of $17.9 million from our investment in two equity positions, including KCG, compared with a net gain of $49.2 million in 2015 from these two positions. In addition, equities net revenues for 2015 included significant gains on additional securities positions, which were not repeated during 2016.

•

Equities commission revenues gained slightly with improved market share across various product and client segments. Commissions in our U.S. cash equities and equity derivatives businesses held firm, while global electronic trading commissions gained from increased volumes and client market share. In our global electronic trading business, we have market leading customized algorithms in over 40 countries. European equities commissions increased due to improved market share, while commissions in our Asia Pacific cash equities business declined because of a challenging market environment. Our global cash businesses were among the highest market share gainers compared with our peers and, in the U.S. and U.K., our platform remains in the top 10.

•

Equities trading revenues were solid across most of our equities sales and trading businesses in 2016. Trading revenues from client market making improved in our U.S. and European cash equities businesses. Equity derivatives trading revenues declined due to a difficult volatility trading climate and convertibles trading revenues declined driven by weakness in the energy sector during 2016. In addition, certain strategic investments gained from exposures to energy, volatility, financial and currency markets.

•

Equities net revenues during 2016 included a net loss of $9.3 million from our share of Jefferies Finance, primarily due to the mark down of certain loans held for sale during the first part of 2016, compared with net revenues of $41.4 million in 2015. Net revenues from our share of Jefferies LoanCore also decreased during 2016 as compared to 2015 due to a decrease in loan closings and syndications.

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•	Total equities net revenues were $757.4 million for 2015, an increase of $61.2 million compared with $696.2 million for 2014.

•	Results in 2015 include a net gain of $49.1 million from our investment in KCG compared with a loss of $14.7 million from our investment in KCG and a gain of $19.9 million from our investment in HRG in 2014. We sold HRG to Leucadia in March 2014.

•

Strong revenues in 2015, as a result of increased trading volumes, from our electronic trading platform contributed to higher commissions revenues. Total equities net revenue also includes higher revenues from the Asia Pacific cash equities business and net mark-to-market gains from equity investments, as well as growth from our wealth management platform. This was partially offset by lower revenues from equity block trading results from our U.S. cash equities business and lower commissions in our European cash equities business.

•

Equities net revenue from our Jefferies LoanCore joint venture during 2015 includes higher revenues from an increase in loan closings and securitizations by the venture over 2014. Equities net revenue from our Jefferies Finance joint venture during 2015 includes lower revenues as a result of syndicate costs associated with the sell down of commitments, as well as reserves taken on certain loans held for investment as compared with 2014.

•	investment grade corporate bonds,

•	mortgage- and asset-backed securities,

•	government and agency securities,

•	interest rate derivatives,

•	municipal bonds,

•	emerging markets debt,

•	high yield and distressed securities,

•	bank loans,

•	foreign exchange and

•	commodities trading activities.

•	Fixed income net revenues totaled $640.0 million for 2016, an increase of $369.3 million, compared with net revenues of $270.8 million in 2015.

•	2015 included $80.2 million of net revenues globally from the Bache business activity. There were no meaningful revenues from the Bache business during 2016, as we completed the exit of the Bache business during the second quarter of 2016. Excluding revenues from the Bache business activity, revenues increased $449.5 million, or 235.8%.

•	We recorded higher revenues in 2016 as compared with 2015 due to improved trading conditions across most core businesses, partially offset by lower revenues in our international rates business due to lower trading volumes.

•

Revenues in our leveraged credit business were strong on increased trading volumes within high yield and distressed, as a result of an improved credit environment, as well as strategic growth in the business, compared with mark-to-market write-downs in 2015. Results in our emerging markets business during 2016 were higher due to an upgraded sales and trading team and increased levels of volatility and improved market conditions. Revenues from our corporates businesses increased as compared to 2015 due to increased client activity and higher demand for new issuances and higher yielding investments. Our mortgages businesses were positively impacted by increased demand for spread products, compared with the negative impact of market volatility as credit spreads tightened for these asset classes and expectations of future rate increases in 2015. The municipal securities business performed well during 2016, as improved trading activity was driven by market technicals, compared with net outflows in 2015. Volatility during 2016 due to fluctuating expectations as to future Federal Reserve interest rate increases contributed to increased revenues in our U.S. rates business.

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•	Fixed income net revenues were $270.8 million for 2015, a decrease of $476.8 million, compared with net revenues of $747.6 million in 2014.

•	2015 included $80.2 million of net revenues globally from the Bache business activity compared with $202.8 million in 2014. Excluding revenues from the Bache business activity, revenues decreased $354.2 million.

•	The lower revenues in 2015 were primarily due to tighter trading conditions across most core businesses and losses in our high yield distressed sales and trading business and international mortgages business, partially offset by higher revenues in our U.S. and international rates businesses, as well as our U.S. investment grade corporate credit business.

•

The higher revenues in our U.S. and international rates businesses, as well as our U.S. investment grade corporate credit business, resulted from higher transaction volumes as volatility caused attractive yields and interest in new issuances. However, that same volatility negatively impacted the municipal securities business as prices declined and the sector experienced overall net cash outflows. Most of our credit fixed income businesses were negatively impacted during 2015 by periods of extreme volatility and market conditions, as investors focused on liquidity, resulting in periods of low trading volume. In addition, results in our distressed trading businesses were negatively impacted by our position in the energy sector and led to mark-to-market write-downs in our inventory and results in our emerging markets business were lower due to slower growth in the emerging markets during 2015. Our mortgages business was also negatively impacted by market volatility as credit spreads tightened for these asset classes and expectations of future rate increases resulted in lower trading volumes and revenues.

•	Capital markets revenues include underwriting and placement revenues related to corporate debt, municipal bonds, mortgage- and asset-backed securities and equity and equity-linked securities.

•	Advisory revenues consist primarily of advisory and transaction fees generated in connection with merger, acquisition and restructuring transactions.

(1)	We acted as sole or joint bookrunner on 113, 176 and 159 offerings during 2016, 2015 and 2014, respectively.

(2)	The number of advisory deals completed includes 18, 13 and 12 restructuring and recapitalization transactions during 2016, 2015 and 2014, respectively.

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Total investment banking revenues were $1,194.0 million for 2016, 17.0% lower than 2015. Lower investment banking results were attributable to lower new issue equity and leveraged finance capital markets revenues. This was primarily as a result of the capital markets slowdown, which began in the second half of 2015 and continued for much of 2016. We generated $235.2 million and $304.6 million in equity and debt capital market revenues, respectively, for 2016, a decrease of 42.4% and 23.5%, respectively, from 2015.

•	Our reduced capital markets activity for 2016 was partially offset by record advisory revenues. Specifically, our advisory revenues for 2016 increased 3.5% compared to 2015, primarily through an increase in the number of M&A and restructuring transactions, including closing a record number of M&A transactions in excess of $1 billion.

•	Our investment banking results benefited both from a record fourth quarter of advisory fees in 2016, with our M&A and restructuring and recapitalization businesses showing continued momentum, and from improvement in capital markets activity, which began in the late summer of 2016, leading to an increase in new issue transaction volume.

•	Total investment banking revenue was $1,439.0 million for 2015, $90.3 million lower than 2014, reflecting lower debt capital market revenues, partially offset by record equity capital markets and advisory revenues.

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Overall, capital markets revenues for 2015 decreased 16.6% from 2014, primarily due to significantly lower transaction volume in the leveraged finance market. From equity and debt capital raising activities, we generated $408.5 million and $398.2 million in revenues, respectively, an increase of 20.3% and a decrease of 36.5%, respectively, from 2014. Record advisory revenues of $632.4 million for 2015, an increase of 12.5% from 2014, were primarily due to higher transaction volume.

•	management and performance fees from funds and accounts managed by us,

•	management and performance fees from related party managed funds and

•	accounts and investment income (loss) from our investments in these funds, accounts and related party managed funds.

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(1)

Fixed income asset management fees represent ongoing consideration we receive from the sale of contracts to manage certain collateralized loan obligations (“CLOs”) to Barings, LLC (formerly known as Babson Capital Management, LLC) in January 2010. As sale consideration, we are entitled to a portion of the asset management fees earned under the contracts for their remaining lives. Investment income (loss) from managed funds primarily is comprised of net unrealized markups (markdowns) in private equity funds managed by related parties.

(2)	During the fourth quarter of 2014, as part of a strategic review of our business, we decided to liquidate our International Asset Management business, which provided long only investment solutions in global convertible bonds to institutional investors. Asset management fees from this business comprise our convertibles asset strategy in the table above.

(1)	Assets under management include assets actively managed by us, including hedge funds and certain managed accounts. Assets under management do not include the assets of funds that are consolidated due to the level or nature of our investment in such funds.

•	Compensation and benefits expense consists of salaries, benefits, cash bonuses, commissions, annual cash compensation awards and the amortization of certain non-annual share-based and cash compensation awards to employees.

•

Cash and historical share-based awards and a portion of cash awards granted to employees as part of year end compensation generally contain provisions such that employees who terminate their employment or are terminated without cause may continue to vest in their awards, so long as those awards are not forfeited as a result of other forfeiture provisions (primarily non-compete clauses) of those awards. Accordingly, the compensation expense for a portion of awards granted at year end as part of annual compensation is recorded in the year of the award.

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Included within Compensation and benefits expense are share-based amortization expense for senior executive awards granted in September 2012 and February 2016, non-annual share-based and cash-based awards to other employees and certain year end awards that contain future service requirements for vesting. Senior executive awards contain market and performance conditions and are being amortized over their respective future service periods.

•	Refer to Note 15, Compensation Plans included within this Annual Report on Form 10-K, for further details on compensation and benefits.

•	Compensation and benefits expense was $1,568.9 million for 2016 compared with $1,467.1 million for 2015.

•	Compensation and benefits expense as a percentage of Net revenues was 65.0% for 2016 and 59.3% for 2015. The increase in the compensation ratio for 2016 as compared to 2015 is due to the composition of revenue by business line in the first quarter of 2016.

•	Compensation expense related to the amortization of share- and cash-based awards amounted to $287.3 million for 2016 compared with $307.1 million 2015.

•	Compensation and benefits expense directly related to the activities of our Bache business was $87.7 million for 2015 and not meaningful for 2016. Included within compensation and benefits expense for the Bache business for 2015 are severance, retention and related benefits costs of $38.2 million incurred as part of decisions surrounding the exit of this business.

•	Employee headcount was 3,329 globally at November 30, 2016, a decrease of 228 employees from our headcount of 3,557 at November 30, 2015. Our headcount has decreased, primarily as a result of exiting the Bache business, as well as continued discipline in headcount, productivity management and corporate services outsourcing.

•	Compensation and benefits expense was $1,467.1 million for 2015 compared with $1,698.5 million for 2014.

•	Compensation and benefits expense as a percentage of Net revenues was 59.3% for 2015 and 56.8% for 2014.

•	Compensation expense related to the amortization of share- and cash-based awards amounted to $307.1 million for 2015 compared with $284.3 million for 2014.

•	Compensation and benefits expense directly related to the activities of our Bache business was $87.7 million for 2015 and $98.6 million for 2014. Included within compensation and benefits expense for the Bache business for 2015 are severance, retention and related benefits costs of $38.2 million incurred as part of decisions surrounding the exit of this business.

•	At November 30, 2015, we had 3,557 employees globally, a decrease of 358 employees from our headcount at November 30, 2014 of 3,915. Since November 30, 2014, our headcount has decreased due to headcount reductions related to the exiting of the Bache business and corporate services outsourcing, partially offset by increases across our investment banking, equities and asset management businesses.

•	Non-compensation expenses were $815.7 million for 2016, a decrease of $78.2 million, or 8.7%, compared with $893.9 million for 2015.

•	Non-compensation expenses as a percentage of Net revenues was 33.8% and 36.1% for 2016 and 2015, respectively.

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Non-compensation expenses for 2016 were $815.7 million, a decrease of $78.2 million, or 8.7%, from 2015. The decrease in 2016 was due to our exiting the Bache business, which in 2015 generated $127.2 million of non-compensation expenses, including accelerated amortization expense of $19.7 million related to capitalized software, $11.2 million in contract termination costs and professional services costs of approximately $2.5 million in connection with our actions related to exiting the Bache business. There were no meaningful non-compensation expenses related to the Bache business in 2016. This reduction in 2016 was partially offset by higher Technology and communications expenses, excluding the Bache business, and higher Professional services expenses, excluding the Bache business. Technology and communications expenses, excluding the Bache business, increased due to higher costs associated with the development of the various trading systems and projects associated with corporate support infrastructure. In both years, we continued to incur legal and consulting fees as part of implementing various regulatory requirements, which are recognized in Professional services expenses. During 2015, we also released $4.4 million in reserves related to the resolution of bankruptcy claims against Lehman Brothers Holdings, Inc., which is presented within Bad debt expenses.

•	Non-compensation expenses were $893.9 million for 2015, a decrease of $94.7 million, or 9.6%, compared with $988.6 million in 2014.

•	Non-compensation expenses as a percentage of Net revenues was 36.1% and 33.1% for 2015 and 2014, respectively.

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The decrease in non-compensation expenses was primarily due to lower other expenses primarily related to impairment losses and bad debt expenses recognized for 2014. Non-compensation expenses for 2014 include a goodwill impairment loss of $51.9 million related to our Jefferies Bache business, which constitutes our global futures sales and trading operations. In addition, a goodwill impairment loss of $2.1 million was recognized in 2014 related to our International Asset Management business. Additionally, $7.6 million in impairment losses were recognized related to customer relationship intangible assets within our Jefferies Bache and International Asset Management businesses, which is presented within Other expenses. During 2015, we also released $4.4 million in reserves related to the resolution of bankruptcy claims against Lehman Brothers Holdings, Inc., which is presented within Bad debt expenses. During the fourth quarter of 2014, we recognized a bad debt provision, which primarily relates to a receivable of $52.3 million from a client to which we provided futures clearing and execution services, which declared bankruptcy.

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Non-compensation expenses associated directly with the activities of the Bache business were $127.2 million for 2015 and $249.6 million for 2014. Technology and communications expenses for 2015 included accelerated amortization expense of $19.7 million related to capitalized software and $11.2 million in contract termination costs related to our Jefferies Bache business. During 2015, we incurred professional services costs of approximately $2.5 million in connection with our actions related to exiting the Bache business.

•	For 2016, the provision for income taxes was $14.6 million, an effective tax rate of 48.6%, compared with a provision for income taxes of $18.9 million, an effective tax rate of 16.5%, for 2015.

•	The change in the effective tax rate during 2016 as compared with 2015 is primarily attributable to excess stock detriments related to share-based compensation that was less than the compensation cost recognized for financial reporting purposes.

•	Given the uncertainty surrounding tax reform in the U.S., in December 2016, we repatriated earnings and associated foreign taxes from certain foreign subsidiaries. This will have a positive impact on our effective tax rate in 2017.

•	For 2015, the provision for income taxes was $18.9 million, an effective tax rate of 16.5%, compared with a provision for income taxes of $142.1 million, an effective tax rate of 46.9%, for 2014.

•	The change in the effective tax rate during 2015 as compared with 2014 is primarily due to net tax benefits related to the resolution of state income tax examinations and statute expirations during 2015, a change in the geographical mix of earnings and the impact of the goodwill impairment charge that was non-deductible in 2014.

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(1)	Adjusted assets is a non-GAAP financial measure and excludes certain assets that are considered of lower risk as they are generally self-financed by customer liabilities through our securities lending activities. We view the resulting measure of adjusted leverage, also a non-GAAP financial measure, as a more relevant measure of financial risk when comparing financial services companies.

(2)	As compared to November 30, 2015, the decrease to total member’s equity at November 30, 2016 is attributed to foreign currency translation adjustments, primarily due to the decline in the British pound rate of exchange against the U.S. dollar, partially offset by net earnings.

(3)	Leverage ratio equals total assets divided by total equity.

(4)	Tangible gross leverage ratio (a non-GAAP financial measure) equals total assets less goodwill and identifiable intangible assets divided by tangible member’s equity. The tangible gross leverage ratio is used by Rating Agencies in assessing our leverage ratio.

(5)	Adjusted leverage ratio (a non-GAAP financial measure) equals adjusted assets divided by tangible total equity.

•	repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance;

•	maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral;

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•	higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements;

•	liquidity outflows related to possible credit downgrade;

•	lower availability of secured funding;

•	client cash withdrawals;

•	the anticipated funding of outstanding investment and loan commitments; and

•	certain accrued expenses and other liabilities and fixed costs.

•	illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments;

•	a portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements) and

•	drawdowns of unfunded commitments.

•	Global recession, default by a medium-sized sovereign, low consumer and corporate confidence, and general financial instability.

•	Severely challenged market environment with material declines in equity markets and widening of credit spreads.

•	Damaging follow-on impacts to financial institutions leading to the failure of a large bank.

•	A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade.

•	Liquidity needs over a 30-day scenario.

•	A two-notch downgrade of our long-term senior unsecured credit ratings.

•	No support from government funding facilities.

•	A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a crisis.

•	No diversification benefit across liquidity risks. We assume that liquidity risks are additive.

•	All upcoming maturities of unsecured long-term debt, commercial paper, promissory notes and other unsecured funding products assuming we will be unable to issue new unsecured debt or rollover any maturing debt.

•	Repurchases of our outstanding long-term debt in the ordinary course of business as a market maker.

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•	A portion of upcoming contractual maturities of secured funding trades due to either the inability to refinance or the ability to refinance only at wider haircuts (i.e., on terms which require us to post additional collateral). Our assumptions reflect, among other factors, the quality of the underlying collateral and counterparty concentration.

•	Collateral postings to counterparties due to adverse changes in the value of our over-the-counter (“OTC”) derivatives and other outflows due to trade terminations, collateral substitutions, collateral disputes, collateral calls or termination payments required by a two-notch downgrade in our credit ratings.

•	Variation margin postings required due to adverse changes in the value of our outstanding exchange-traded derivatives and any increase in initial margin and guarantee fund requirements by derivative clearing houses.

•	Liquidity outflows associated with our prime brokerage business, including withdrawals of customer credit balances, and a reduction in customer short positions.

•	Liquidity outflows to clearing banks to ensure timely settlements of cash and securities transactions.

•	Draws on our unfunded commitments considering, among other things, the type of commitment and counterparty.

•	Other upcoming large cash outflows, such as tax payments.

(1)	Average balances are calculated based on weekly balances.

(2)

Consists of high quality sovereign government securities and reverse repurchase agreements collateralized by U.S. government securities and other high quality sovereign government securities; deposits with a central bank within the European Economic Area, Canada, Australia, Japan, Switzerland or the USA; and securities issued by a designated multilateral development bank and reverse repurchase agreements with underlying collateral comprised of these securities.

(3)	Other includes unencumbered inventory representing an estimate of the amount of additional secured financing that could be reasonably expected to be obtained from our financial instruments owned that are currently not pledged after considering reasonable financing haircuts.

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(4)	Other sources of liquidity at November 30, 2015 has been reduced by $141.2 million from what was previously disclosed, to reflect adjustments for certain securities that have subsequently been identified to have been encumbered.

(1)	Consists solely of agency mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. These securities include pass-through securities, securities backed by adjustable rate mortgages (“ARMs”), collateralized mortgage obligations, commercial mortgage-backed securities and interest- and principal-only securities.

(2)	Unencumbered liquid balances represent assets that can be sold or used as collateral for a loan, but have not been.

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Demand Loan Facility. On February 19, 2016, we entered into a demand loan margin financing facility (“Demand Loan Facility”) in a maximum principal amount of $25.0 million to satisfy certain of our margin obligations. Interest is based on an annual rate equal to the weighted average LIBOR as defined in the Demand Loan Facility agreement plus 150 basis points. The Demand Loan Facility was terminated with an effective date of November 30, 2016.

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Secured Revolving Loan Facilities. On October 29, 2015, we entered into a secured revolving loan facility (“First Secured Revolving Loan Facility”) whereby the lender agrees to make available a revolving loan facility in a maximum principal amount of $50.0 million in U.S. dollars to purchase eligible receivables that meet certain requirements as defined in the First Secured Revolving Loan Facility agreement. Interest is based on an annual rate equal to the lesser of the LIBOR rate plus three and three-quarters percent or the maximum rate as defined in the First Secured Revolving Loan Facility agreement. On December 14, 2015, we entered into a second secured revolving loan facility (“Second Revolving Loan Facility”, and together with the First Secured Revolving Loan Facility, “Secured Revolving Loan Facilities”) whereby the lender agrees to make available a revolving loan facility in a maximum principal amount of $50.0 million in U.S. dollars to purchase eligible receivables that meet certain requirements as defined in the Second Secured Revolving Loan Facility agreement. Interest is based on an annual rate equal to the lesser of the LIBOR rate plus four and one-quarter percent or the maximum rate as defined in the Second Secured Revolving Loan Facility agreement.

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Intraday Credit Facility. The Bank of New York Mellon agrees to make revolving intraday credit advances (“Intraday Credit Facility”) for an aggregate committed amount of $250.0 million in U.S. dollars. The Intraday Credit Facility contains a financial covenant, which includes a minimum regulatory net capital requirement. Interest is based on the higher of the Federal funds effective rate plus 0.5% or the prime rate. At November 30, 2016, we were in compliance with all debt covenants under the Intraday Credit Facility.

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(1)	These notes bear interest at a spread over one month LIBOR.

(2)	This note bears interest at a spread over three month LIBOR.

(3)	At November 30, 2016, this note is redeemable at the option of the noteholders.

(1)

Long-term capital at November 30, 2016 excludes $6.3 million of our Structured Notes, as these notes are redeemable on May 4, 2017, and $346.2 million of our 3.875% Convertible Senior Debentures, as these debentures are redeemable on November 1, 2017. Refer to Note 12, Long-Term Debt, in our consolidated financial statements included within this Annual Report on Form 10-K for further details on these notes.

(2)	Long-term capital at November 30, 2015 excludes $353.0 million of our 5.5% Senior Notes, as these notes matured on March 15, 2016.

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(1)	On January 21, 2016, Moody’s affirmed our long-term debt rating of Baa3 and our rating outlook was changed from negative to stable. On March 15, 2016, Moody’s reaffirmed this rating and rating outlook.

(2)	On February 29, 2016, Fitch reaffirmed our long-term debt rating of BBB- and our rating outlook of stable.

(1)	On January 21, 2016, Moody’s affirmed these long-term debt ratings and the rating outlook was changed from negative to stable.

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(1)	For additional information on long-term debt, see Note 12, Long-Term Debt, in our consolidated financial statements included within this Annual Report on Form 10-K.

(2)	Amounts based on applicable interest rates at November 30, 2016.

(3)	For additional information on operating leases related to certain premises and equipment and a master sale and leaseback agreement, see Note 18, Commitments, Contingencies and Guarantees, in our consolidated financial statements included within this Annual Report on Form 10-K.

(4)	Purchase obligations for goods and services primarily include payments for outsourcing and computer and telecommunications maintenance agreements. Purchase obligations at November 30, 2016 reflect the minimum contractual obligations under legally enforceable contracts.

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•	Market Risk Policy- This policy sets out roles, responsibilities, processes and escalation procedures regarding market risk management.

•	Independent Price Verification Policy- This policy sets out roles, responsibilities, processes and escalation procedures regarding independent price verification for securities and other financial instruments.

•	Operational Risk Policy- This policy sets out roles, responsibilities, processes and escalation procedures regarding operational risk management.

•	Credit Risk Policy- This policy provides standards and controls for credit risk-taking throughout our global business activities. This policy also governs credit limit methodology and counterparty review.

•	Model Validation Policy- This policy sets out roles, processes and escalation procedures regarding model validation and model risk management.

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(1)	For the VaR numbers reported above, a one-day time horizon, with a one year look-back period, and a 95% confidence level were used.

(2)	The diversification effect is not applicable for the maximum and minimum VaR values as the firmwide VaR and the VaR values for the four risk categories might have occurred on different days during the year.

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•	defining credit limit guidelines and credit limit approval processes;

•	providing a consistent and integrated credit risk framework across the enterprise;

•	approving counterparties and counterparty limits with parameters set by the Risk Management Committee;

•	negotiating, approving and monitoring credit terms in legal and master documentation;

•	delivering credit limits to all relevant sales and trading desks;

•	maintaining credit reviews for all active and new counterparties;

•	operating a control function for exposure analytics and exception management and reporting;

•	determining the analytical standards and risk parameters for on-going management and monitoring of global credit risk books;

•	actively managing daily exposure, exceptions, and breaches;

•	monitoring daily margin call activity and counterparty performance (in concert with the Margin Department); and

•	setting the minimum global requirements for systems, reports, and technology.

•

Loans and lending arise in connection with our capital markets activities and represents the current exposure, amount at risk on a default event with no recovery of loans. Current exposure represents loans that have been drawn by the borrower and lending commitments that were outstanding. In addition, credit exposures on forward settling traded loans are included within our loans and lending exposures for consistency with the balance sheet categorization of these items.

•	Securities and margin finance includes credit exposure arising on securities financing transactions (reverse repurchase agreements, repurchase agreements and securities lending agreements) to the extent the fair value of the underlying collateral differs from the contractual agreement amount and from margin provided to customers.

•	Derivatives represent OTC derivatives, which are reported net by counterparty when a legal right of setoff exists under an enforceable master netting agreement. Derivatives are accounted for at fair value net of cash collateral received or posted under credit support agreements. In addition, credit exposures on forward settling trades are included within our derivative credit exposures.

•	Cash and cash equivalents include both interest-bearing and non-interest bearing deposits at banks.

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(1)	Loans and lending amounts have been recast to conform to the current period’s presentation. Loans and lending amounts include the current exposure, the amount at risk on a default event with no recovery of loans. Previously, loans and lending amounts represented the notional value.

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(1)	Includes income tax benefit of approximately $4.3 million for the year ended November 30, 2016.

(2)	Includes income tax benefit of approximately $0.3 million, $4.2 million and $0.5 million for the years ended November 30, 2016, 2015 and 2014, respectively.

(3)	None of the components of other comprehensive loss are attributable to noncontrolling interests.

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(1)	The components of other comprehensive income (loss) are attributable to Jefferies Group LLC. None of the components of other comprehensive income (loss) are attributable to noncontrolling interests.

(2)	There were no material reclassifications out of Accumulated other comprehensive income during the years ended November 30, 2016, 2015 and 2014.

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(1)	There were no material transfers between Level 1 and Level 2 for the year ended November 30, 2016.

(2)	Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

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(1)	There were no material transfers between Level 1 and Level 2 for the year ended November 30, 2015.

(2)	Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

(3)	Level 2 liabilities include $67.8 million of other secured financings that were previously not disclosed in our Annual Report on Form 10-K for the year ended November 30, 2015.

•	Exchange Traded Equity Securities: Exchange-traded equity securities are measured based on quoted closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy.

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Non-exchange Traded Equity Securities: Non-exchange traded equity securities are measured primarily using broker quotations, pricing data from external pricing services and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization (“EBITDA”), price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by 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).

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Equity Warrants: Non-exchange traded equity warrants are measured primarily using pricing data from external pricing services, prices observed for recently executed market transactions and broker quotations are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity warrants are generally categorized within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.

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Corporate Bonds: Corporate bonds are measured primarily using pricing data from external pricing services and broker quotations, where available, prices observed for recently executed market transactions and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are categorized within Level 3 of the fair value hierarchy and are a limited portion of our corporate bonds.

•

High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed for recently executed market transactions of comparable size. Where pricing data is less observable, valuations are categorized within Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

•	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.

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•	Agency Residential Mortgage-Backed Securities (“RMBS”): Agency RMBS 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.

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Agency Residential Interest-Only and Inverse Interest-Only Securities (“Agency Inverse IOs”): The fair value of Agency Inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to the underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer, and weighted average loan age. Agency Inverse IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing our assumptions, as appropriate.

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Non-Agency RMBS: 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.

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Agency Commercial Mortgage-Backed Securities (“CMBS”): 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 CMBS: Non-agency CMBS 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.

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Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by transaction data. Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.

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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.

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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.

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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.

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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.

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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.

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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.

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(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, primarily in equity securities in domestic and international markets in both the public and private sectors. At November 30, 2016, approximately 2% of the fair value of investments in this category is classified as being in liquidation.

(3)

This category includes investments in funds that invest in loans secured by a first trust deed on property, domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt, and private equity investments. There are no redemption provisions. At November 30, 2015, the underlying assets of 8% of these funds were being liquidated and we are unable to estimate when the underlying assets will be fully liquidated.

(4)

This category includes investments in fund of funds that invest in various private equity funds. At November 30, 2016 and 2015, approximately 100% and 95%, respectively, of the fair value of investments in this category are managed by us and have no redemption provisions. The investments in this category are gradually being liquidated or we have requested redemption; however, we are unable to estimate when these funds will be received.

(5)

At November 30, 2016 and 2015, 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 seven years.

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(6)	This category includes investments in hedge funds that invest long and short, primarily in multi-asset securities in domestic and international markets in both the public and private sectors. At November 30, 2016 and 2015, investments representing approximately 12% and 100%, respectively, of the fair value of investments in this category are redeemable with 30-90 days prior written notice.

(7)	Prior period amounts have been recast to conform to the current year’s presentation due to the presentation of multi-asset funds. Previously, these investments had been classified within equity long/short hedge funds.

(8)	This category represents an investment in the Jefferies Umbrella Fund, an open-ended investment company managed by us that invested primarily in convertible bonds. The underlying assets were fully liquidated during the year ended November 30, 2016.

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(1)	Realized and unrealized gains/losses are reported in Principal transaction revenues in the Consolidated Statements of Earnings.

(2)	Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased —Derivatives.

•	CDOs and CLOs of $19.4 million, RMBS of $17.5 million, CMBS of $17.4 million and other ABS of $16.9 million, for which no recent trade activity was observed for purposes of determining observable inputs;

•	Loans and other receivables of $13.8 million due to a lower number of contributors for certain vendor quotes supporting classification within Level 2;

•	Investments at fair value of $31.9 million, municipal securities of $28.7 million and corporate debt securities of $28.1 million due to a lack of observable market transactions.

•	RMBS of $26.8 million, other ABS of $26.8 million and CDOs and CLOs of $15.4 million, for which market trades were observed in the year for either identical or similar securities;

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•	Loans and other receivables of $37.8 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.

(1)	Realized and unrealized gains/losses are reported in Principal transaction revenues in the Consolidated Statements of Earnings.

(2)	Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased —Derivatives.

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•	CDOs and CLOs of $69.8 million, non-agency RMBS of $30.4 million and CMBS of $11.3 million, for which no recent trade activity was observed for purposes of determining observable inputs;

•	Municipal securities of $21.5 million and loans and other receivables of $20.1 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2;

•	Investments at fair value of $74.7 million and corporate debt securities of $7.4 million due to a lack of observable market transactions.

•	Non-agency RMBS of $16.3 million and CMBS of $6.3 million, for which market trades were observed in the period for either identical or similar securities;

•	CDOs and CLOs of $34.9 million and loans and other receivables of $4.7 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

•	Investments at fair value of $15.8 million due to an increase in observable market transactions;

•	Corporate equity securities of $7.7 million due to an increase in observable market transactions.

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(1)	Realized and unrealized gains/losses are reported in Principal transaction revenues in the Consolidated Statements of Earnings.

(2)	Net derivatives represent Financial instruments owned—Derivatives and Financial instruments sold, not yet purchased —Derivatives.

•	Non-agency RMBS of $30.3 million and CMBS of $16.6 million, for which no recent trade activity was observed for purposes of determining observable inputs;

•	Loans and other receivables of $8.5 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2;

•	CDOs and CLOs of $73.0 million which have little to no transparency related to trade activity.

•	Corporate equity securities of $9.7 million due to a lack of observable market transactions.

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•	Non-agency RMBS of $22.4 million, for which market trades were observed in the period for either identical or similar securities;

•	Loans and other receivables of $3.5 million and investments at fair value of $15.5 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

•	Corporate equity securities of $4.9 million and corporate debt securities of $7.5 million due to an increase in observable market transactions.

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•	Loans and other receivables, unfunded commitments, non-exchange traded securities, equity swaps and total return swaps using comparable pricing valuation techniques. A significant increase (decrease) in the comparable asset and underlying stock price in isolation would result in a significantly higher (lower) fair value measurement.

•	Corporate debt securities using a convertible bond model. A significant increase (decrease) in the bond discount rate/yield would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in volatility would result in a significantly higher (lower) fair value measurement.

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Non-exchange traded securities, corporate debt securities, loans and other receivables, unfunded commitments, commodity forwards, credit default swaps, other ABS and private equity securities using a market approach valuation technique. A significant increase (decrease) in the EBITDA or other multiples in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount rate/yield of a loan and other receivable 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, non-exchange traded security, corporate debt security, loan and other receivable or certain derivatives would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the underlying stock price of the non-exchange traded securities would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the credit spread of certain derivatives would result in a significantly lower (higher) fair value measurement. A significant increase (decrease) in the price of the private equity securities or other asset backed securities would result in a significantly higher (lower) fair value measurement.

•	Loans and other receivables and CDOs and CLOs 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.

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CDOs and CLOs, RMBS and CMBS and other ABS, variable funding notes and unfunded commitments using a discounted cash flow valuation technique. A significant increase (decrease) in isolation in the constant default rate, loss severity or cumulative loss rate would result in a significantly lower (higher) fair value measurement. The impact of changes in the constant prepayment rate would have differing impacts depending on the capital structure of the security. A significant increase (decrease) in the security yield would result in a significantly lower (higher) fair value measurement.

•	Certain other ABS 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 lower (higher) fair value measurement.

•	Non-exchange traded securities and loans and other receivables using a present value model. A significant increase (decrease) in average silver production would result in a significantly higher (lower) fair value measurement.

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(1)	Changes in instrument-specific credit risk related to structured notes are included in the Consolidated Statements of Comprehensive Income.

(2)	Other changes in fair value are included within Principal transactions revenues on the Consolidated Statements of Earnings.

(1)	Interest income is recognized separately from other changes in fair value and is included within Interest revenues on the Consolidated Statements of Earnings.

(2)	Amounts include loans and other receivables greater than 90 days past due of $64.6 million and $29.7 million at November 30, 2016 and 2015, respectively.

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(1)

Impairment losses of $1.3 million, $1.3 million and $0.2 million, were recognized in Other expenses, during the years ended November 30, 2016, 2015 and 2014, respectively, for exchange memberships, which represent ownership interests in market exchanges on which trading business is conducted, and registrations. The fair value of these exchange memberships is based on observed quoted sales prices for each individual membership. (See Note 10, Goodwill and Other Intangible Assets.)

(2)

Given management’s decision to pursue strategic alternatives for our Futures business, including possible disposal, as a result of the operating performance and margin challenges experienced by the business, an impairment analysis of the carrying amounts of goodwill, intangible assets and certain other assets employed directly by the business was performed at November 30, 2015 and 2014, respectively. (See Note 10, Goodwill and Other Intangible Assets.)

(3)

An impairment loss for goodwill allocated to our Futures business with a carrying amount of $51.9 million was recognized for the year ended November 30, 2014. The fair value of the Futures business was estimated 1) by comparison to similar companies using publicly traded price-to-tangible book multiples as the basis for valuation and 2) by utilizing a discounted cash flow methodology based on internally developed forecasts of profitability and an appropriate risk-adjusted discount rate.

(4)	See Note 10, Goodwill and Other Intangible Assets for further information.

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(5)	Given management’s decision to liquidate our International Asset Management business, an impairment analysis of the carrying amounts of goodwill, intangible assets and certain other assets employed directly by the business was performed at November 30, 2014. (See Note 10, Goodwill and Other Intangible Assets.

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(1)	Exchange traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty.

(2)	Amounts netted include both netting by counterparty and for cash collateral paid or received.

(3)	We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of Financial Condition.

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(1)	Exchange traded derivatives include derivatives executed on an organized exchange. Cleared OTC derivatives include derivatives executed bilaterally and subsequently novated to and cleared through central clearing counterparties. Bilateral OTC derivatives include derivatives executed and settled bilaterally without the use of an organized exchange or central clearing counterparty.

(2)	Amounts netted include both netting by counterparty and for cash collateral paid or received.

(3)	We have not received or pledged additional collateral under master netting agreements and/or other credit support agreements that is eligible to be offset beyond what has been offset in the Consolidated Statements of Financial Condition.

(4)

Bilateral OTC 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 bilateral OTC foreign exchange contracts from those amounts previously reported to correct for the classification of certain contracts. The total amount of bilateral OTC contracts remained unchanged.

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(1)	At November 30, 2016, we held exchange traded derivative assets and other credit agreements with a fair value of $25.4 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 on the Consolidated Statements of Financial Condition. At November 30, 2016, cash collateral received was $217.4 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.

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(1)	At November 30, 2016, we held exchange traded derivative liabilities and other credit agreements with a fair value of $414.2 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 on the Consolidated Statements of Financial Condition. At November 30, 2016, cash collateral pledged was $190.6 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.

(1)	We utilize internal credit ratings determined by our Risk Management department. Credit ratings determined by Risk Management use methodologies that produce ratings generally consistent with those produced by external rating agencies.

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(1)

Under master netting agreements with our counterparties, we have the legal right of offset with a counterparty, which incorporates all of the counterparty’s outstanding rights and obligations under the arrangement. These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty’s default, but which are not netted in the balance sheet because other netting provisions of U.S. GAAP are not met.

(2)	Includes securities received or paid under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty’s rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.

(3)	Amounts include $6,337.5 million of securities borrowing arrangements, for which we have received securities collateral of $6,146.0 million, and $810.4 million of repurchase agreements, for which we have pledged securities collateral of $834.2 million, which are subject to master netting agreements but we have not determined the agreements to be legally enforceable.

(4)	Amounts include $5,796.1 million of securities borrowing arrangements, for which we have received securities collateral of $5,613.3 million, and $1,807.2 million of repurchase agreements, for which we have pledged securities collateral of $1,875.3 million, which are subject to master netting agreements but we have not determined the agreements to be legally enforceable.

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•	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,

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•	Warehousing funding arrangements for client-sponsored consumer loan vehicles and CLOs through participation certificates and revolving loan and note commitments, and

•	Loans to, investments in and fees from various investment vehicles.

(1)	Securities purchased under agreement to resell represent an amount due under a collateralized transaction on a related consolidated entity, which is eliminated in consolidation.

(2)	Approximately $57.6 million and $22.1 million of the secured financing represents an amount held by us in inventory and is eliminated in consolidation at November 30, 2016 and 2015, respectively.

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•	Forward sale agreements whereby we commit 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, LLC (“Jefferies Finance”), whereby we guarantee certain of the obligations of Jefferies Finance to the CLO.

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(1)	Financial information for JCP Fund V within our financial position and results of operations at November 30, 2016 and 2015 and for the years ended November 30, 2016, 2015 and 2014 is included based on the presented periods.

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(1)

Accumulated goodwill impairments related to the Capital Markets segment were $51.9 million at December 1, 2016 and 2015, and goodwill prior to these impairments was $1,689.6 million and $1,705.5 million at December 1, 2016 and 2015, respectively. Accumulated goodwill impairments related to the Asset Management segment were $2.1 million at December 1, 2016 and 2015, and goodwill prior to these impairments was $5.1 million at both December 1, 2016 and 2015.

(1)

During the year ended November 30, 2015, we made correcting adjustments to decrease goodwill by $2.0 million. Goodwill had been overstated in the historical financial statements since we became an indirect wholly owned subsidiary of Leucadia on March 1, 2013. Financial instruments owned and Accrued expenses and other liabilities had been understated, while the net deferred tax asset and net income tax receivable, both of which are presented within Other assets on the face of the consolidated statements of financial condition, had been overstated. We do not believe this misstatement is material to our financial statements for any previously reported period.

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(1)	Activity is primarily related to the sale of certain exchange and clearing organization membership interests in the Futures reporting unit due to the exit of the business.

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(1)	Bank loans are payable on demand and must be repaid in one year or less. Amount at November 30, 2016 includes $10.3 million related to bank overdrafts.

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(1)	The change in fair value of the conversion feature, which is included within Principal transaction revenues in the Consolidated Statements of Earnings, was not material for the years ended November 30, 2016 and 2015, and amounted to a gain of $8.9 million for the year ended November 30, 2014.

(2)	Includes $248.9 million at fair value at November 30, 2016. A weighted average coupon rate is not meaningful, as substantially all of the structured notes are carried at fair value.

(3)	Of the $255.2 million of structured notes at November 30, 2016, $6.3 million matures in 2018, $10.7 million matures in 2019, and the remaining $238.2 million matures in 2024 or thereafter.

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(1)	The reduction is primarily related to the deconsolidation of the entity on December 1, 2015, due to the adoption of ASU No. 2015-02. (See Note 3, Accounting Developments, for further information on the adoption of this guidance.) No gain or loss was recognized upon deconsolidation. Noncontrolling interests attributed to Leucadia were $26.3 million at November 30, 2015.

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(1)	There are no plan assets classified within Level 3 of the fair value hierarchy.

(2)	Listed equity securities are diversified across a spectrum of primarily U.S. large-cap companies.

(1)	There are no plan assets classified within Level 3 of the fair value hierarchy.

(2)	Listed equity securities are diversified across a spectrum of primarily U.S. large-cap companies.

•	Cash equivalents are valued at cost, which approximates fair value and are categorized in Level 1 of the fair value hierarchy;

•	Listed equity securities are valued using the quoted prices in active markets for identical assets;

•	Fixed income securities:

◦

Corporate debt, mortgage- and asset-backed securities and other securities valuations use data readily available to all market participants and use inputs available for substantially the full term of the security. Valuation inputs include benchmark yields, reported trades, broker dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers, reference data, and industry and economic events;

◦	U.S. government and agency securities valuations generally include quoted bid prices in active markets for identical or similar assets.

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(1)

Total compensation cost associated with restricted stock and RSUs includes the amortization of sign-on, retention and senior executive awards, less forfeitures and clawbacks. Additionally, we recognize compensation cost related to the discount provided to employees in electing to defer compensation under the Deferred Compensation Plan. This compensation cost was approximately $150,000, $399,000 and $268,000 for the years ended November 30, 2016, 2015 and 2014, respectively.

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(1)	During the year ended November 30, 2015, we released $4.4 million in reserves related to the resolution of bankruptcy claims against Lehman Brothers Holdings, Inc. During the fourth quarter of 2014, we recognized a bad debt provision, which primarily relates to a receivable of $52.3 million from a client to which we provided futures clearing and execution services, which declared bankruptcy.

(2)	Goodwill impairment losses of $51.9 million and $2.1 million at November 30, 2014 were recognized in the Futures and International Asset Management reporting units at November 30, 2014, respectively. (See Note 10, Goodwill and Other Intangible Assets for further information.)

(3)

The amounts for the years ended November 30, 2016 and 2015 both include an impairment loss of $1.3 million on certain exchange memberships. The amount for the year ended November 30, 2014 includes impairment losses at November 30, 2014 of $7.5 million and $0.1 million in the Futures business and the International Asset Management business, respectively. (See Note 10, Goodwill and Other Intangible Assets for further information.)

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(1)	For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.

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(1)	Equity, loan and other unfunded commitments are presented by contractual maturity date. The amounts, however, are available on demand.

(2)	At November 30, 2016, $4,592.9 million within forward starting reverse repos and $2,464.6 million within repos settled within three business days.

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•	Net revenues and expenses directly associated with each reportable business segment are included in determining earnings before taxes.

•	Net revenues and expenses not directly associated with specific reportable business segments are allocated based on the most relevant measures applicable, including each reportable business segment’s net revenues, headcount and other factors.

•	Reportable business segment assets include an allocation of indirect corporate assets that have been fully allocated to our reportable business segments, generally based on each reportable business segment’s capital utilization.

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(1)	Substantially all relates to U.S. results.

(2)	Substantially all relates to U.K. results.

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•

Under a service agreement we charge Leucadia for certain services, which amounted to $27.6 million, $34.6 million and $22.3 million for the years ended November 30, 2016, 2015 and 2014, respectively. At November 30, 2016 and 2015, we had a receivable from Leucadia of $2.8 million and $10.2 million, respectively, which is included within Other assets on the Consolidated Statements of Financial Condition. At November 30, 2016 and 2015, we had a payable to Leucadia of $1.9 million and $0.6 million, respectively, related to certain services provided by Leucadia, which is included within Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

•	Pursuant to a tax sharing agreement entered into between us and Leucadia, payments are made between us and Leucadia to settle current tax assets and liabilities. At November 30, 2016 and 2015, a net current tax receivable from Leucadia of $80.1 million and $109.5 million, respectively, is included in Other assets on the Consolidated Statements of Financial Condition.

•	Of the total noncontrolling interests in asset management entities that are consolidated by us at November 30, 2015, $26.3 million are attributed to Leucadia.

•	In July 2016, Leucadia Funding LLC, a subsidiary of Leucadia, made a $30.0 million capital contribution to a hedge fund managed by us.

•	In March 2016, we made a capital contribution of $114.0 million to a hedge fund managed by a subsidiary of Leucadia.

•	On August 28, 2015, we sold an equity position to Leucadia at fair value of $124.4 million for cash. There was no gain or loss on the transaction.

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•	We provide capital markets and asset management services to Leucadia and its affiliates. The following table presents the revenues earned by type of services provided (in thousands):

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(c)	Financial Statement Schedules

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Table of Contents

 

 

 

Jefferies Finance LLC and Subsidiaries

Consolidated Balance Sheets as of November 30, 2016 and 2015 and Related Statements

of Earnings, Changes in Members’ Equity and Cash Flows for the Years Ended November 30,

2016, 2015 and 2014 and Independent Auditor’s Report

 

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Table of contents

 

 

 

		PAGE
Independent Auditors’ Report			1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets			2
Consolidated Statements of Earnings			4
Consolidated Statements of Changes in Members’ Equity			5
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7

 

 

 

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Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of

Jefferies Finance LLC and Subsidiaries

New York, NY

We have audited the accompanying consolidated financial statements of Jefferies Finance LLC and Subsidiaries (the “Company”), which comprise the consolidated balance sheets as of November 30, 2016 and 2015, and the related consolidated statements of earnings, changes in members’ equity, and cash flows for the years ended November 30, 2016, 2015 and 2014, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferies Finance LLC and Subsidiaries as of November 30, 2016 and 2015, and the results of their operations and their cash flows for the years ended November 30, 2016, 2015 and 2014 in accordance with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

New York, New York

January 26, 2017

 

 

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Table of Contents

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

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Table of Contents

JEFFERIES FINANCE LLC AND SUBSIDIARIES

Consolidated Balance Sheets

As of November 30, 2016 and 2015

(Dollars in thousands)

 

 

 

		NOVEMBER 30, 2016				NOVEMBER 30, 2015
ASSETS
Cash		$	656,556			$	1,491,833
Restricted cash			975,891				1,275,900
Loans receivable, net of deferred loan fees			4,409,558				3,915,273
Less allowance for loan losses			(65,897	)			(53,970	)
Loans receivable, net			4,343,661				3,861,303
Loans held for sale, net			930,462				247,853
Accrued interest receivable			32,794				32,349
Investments (includes restricted investments of  $156,780 and $215,809 at November 30, 2016 and 2015 respectively)			179,216				241,778
Other assets			158,752				141,043
TOTAL ASSETS		$	7,277,332			$	7,292,059
LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Credit facilities		$	346,862			$	381,956
Secured notes payable, net			3,916,792				4,034,711
Interest payable			34,122				27,825
Other liabilities			353,697				182,070
Due to affiliates			23,971				8,175
Long-term debt			1,660,829				1,662,548
Total liabilities			6,336,273				6,297,285
MEMBERS’ EQUITY			941,059				994,774
TOTAL LIABILITIES AND MEMBERS’ EQUITY		$	7,277,332			$	7,292,059

 

 

See notes to consolidated financial statements.

(Continued)

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Consolidated Balance Sheets (Continued)

As of November 30, 2016 and 2015

(Dollars in thousands)

The table below presents the carrying amount and classification of assets of consolidated variable interest entities (“VIEs”) that can be used only to settle obligations of the consolidated VIEs and the liabilities of consolidated VIEs for which creditors (or beneficial interest holders) do not have recourse to Jefferies Finance LLC assets. The assets and liabilities of these consolidated VIEs are included in the Consolidated Balance Sheets and are presented net of intercompany eliminations.

 

 

 

		NOVEMBER 30, 2016				NOVEMBER 30, 2015
ASSETS
Restricted cash		$	925,969			$	1,200,396
Loans receivable, net of deferred loan fees			3,825,255				3,388,328
Less allowance for loan losses			(56,089	)			(47,828	)
Loans receivable, net			3,769,166				3,340,500
Loans held for sale, net			4,034				2,579
Accrued interest receivable			20,867				19,388
Investments (includes restricted investments of  $156,780 and $215,809 at November 30, 2016 and 2015, respectively)			164,670				225,629
Other assets			125,169				92,386
TOTAL ASSETS		$	5,009,875			$	4,880,878
LIABILITIES
Credit Facilities		$	124,151			$	—
Secured notes payable, net			3,916,792				4,034,711
Interest payable			16,839				11,304
Other liabilities			256,601				129,941
Due to affiliates			181				266
TOTAL LIABILITIES		$	4,314,564			$	4,176,222

 

 

See notes to consolidated financial statements.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Consolidated Statements of Earnings

For the Years Ended November 30, 2016, 2015 and 2014

(Dollars in thousands)

 

 

 

		NOVEMBER 30, 2016				NOVEMBER 30, 2015				NOVEMBER 30, 2014
NET INTEREST AND FEE INCOME:
Fee income, net		$	130,356			$	170,679			$	172,314
Interest income			292,457				256,032				195,366
Total interest and fee income			422,813				426,711				367,680
Interest expense			273,833				232,841				144,928
Net interest and fee income			148,980				193,870				222,752
Provision for loan losses			37,880				29,900				7,979
Net interest and fee income after provision for loan losses			111,100				163,970				214,773
OTHER LOSSES, NET			(75,548	)			(16,640	)			(9,999	)
OTHER EXPENSES:
Compensation and benefits			24,533				32,620				33,029
General, administrative and other			32,148				27,850				27,640
Total other expenses			56,681				60,470				60,669
(LOSSES) EARNINGS BEFORE INCOME TAX EXPENSE			(21,129	)			86,860				144,105
INCOME TAX (BENEFIT) EXPENSE			(1,514	)			3,421				5,542
NET (LOSS) EARNINGS		$	(19,615	)		$	83,439			$	138,563

 

 

See notes to consolidated financial statements.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity

For the Years Ended November 30, 2016, 2015 and 2014

(Dollars in thousands)

 

 

 

		CLASS A MEMBERS				CLASS B MEMBERS				TOTAL MEMBERS’  EQUITY
BALANCE—November 30, 2014		$	914,157			$	78,178			$	992,335
Distributions			(64,800	)			(16,200	)			(81,000	)
Net earnings			66,752				16,687				83,439
BALANCE—November 30, 2015		$	916,109			$	78,665			$	994,774
Distributions			(27,280	)			(6,820	)			(34,100	)
Net loss			(15,693	)			(3,922	)			(19,615	)
BALANCE—November 30, 2016		$	873,136			$	67,923			$	941,059

 

 

See notes to consolidated financial statements.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended November 30, 2016, 2015 and 2014

(Dollars in thousands)

 

 

 

		NOVEMBER 30, 2016				NOVEMBER 30, 2015				NOVEMBER 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings		$	(19,615	)		$	83,439			$	138,563
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:
Amortization of deferred loan fees and discounts			(50,022	)			(46,518	)			(35,618	)
Amortization of deferred structuring fees			19,797				18,430				9,690
Amortization of discount on secured notes			9,611				7,418				3,763
Provision for loan losses			37,880				29,900				7,979
Realized loss (gain) on sale of loans held for sale			34,545				9,610				(5,429	)
Change in fair value of loans held for sale			8,267				1,552				8,859
Realized loss on sales of investments			24,597				2,437				114
Unrealized loss on investments			8,139				5,218				6,455
Deferred income tax expense (benefit)			55				(604	)			1,489
(Increase) decrease in operating assets:
Origination of loans held for sale			(9,570,812	)			(13,616,750	)			(13,937,341	)
Proceeds from sales of loans held for sale			8,842,177				14,392,732				13,843,178
Principal collections on loans held for sale			3,215				1,651				13,610
Accrued interest receivable			(445	)			(3,796	)			(6,005	)
Other assets			(15,211	)			(4,991	)			(15,645	)
Increase (decrease) in operating liabilities:
Interest payable			6,297				307				17,378
Other liabilities			4,679				275,142				11,044
Due to affiliates			15,796				(38,391	)			13,494
Net cash (used in) provided by operating activities			(641,050	)			1,116,786				75,578
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination and purchases of loans receivable			(3,824,179	)			(4,450,748	)			(3,658,903	)
Principal collections of loans receivable			2,714,137				3,088,609				1,936,162
Proceeds from sales of loans held for sale			790,602				576,147				369,983
Net change in restricted cash			300,009				(605,886	)			(592,060	)
Purchases of investments			(661,896	)			(475,235	)			(589,117	)
Proceeds from sales of investments			690,183				464,887				352,998
Net cash provided by (used in) investing activities			8,856				(1,402,226	)			(2,180,937	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital distributions			(34,100	)			(81,000	)			(71,124	)
Capital contributions			—				—				250,000
Repayments of secured notes payable			(454,780	)			(91,317	)			(89,028	)
Proceeds from sale of secured notes			—				—				12,925
Net proceeds from issuance of secured notes			326,304				1,275,970				1,885,611
Purchases of secured notes			(3,263	)			—				—
Net proceeds from long-term debt			—				208,666				832,552
Repayment of long-term debt			(2,150	)			—				—
Proceeds from borrowings on credit facilities			1,112,148				4,834,843				7,856,957
Repayments on credit facilities			(1,147,242	)			(4,946,111	)			(8,158,358	)
Net cash (used in) provided by financing activities			(203,083	)			1,201,051				2,519,535
NET (DECREASE) INCREASE IN CASH			(835,277	)			915,611				414,176
CASH—Beginning of the year			1,491,833				576,222				162,046
CASH—End of the year		$	656,556			$	1,491,833			$	576,222
SUPPLEMENTAL INFORMATION:
Cash paid for interest		$	237,719			$	208,498			$	114,252
Cash paid for income taxes, net		$	279			$	3,316			$	2,570
NONCASH ITEMS:
Conversion of loan receivable to investments		$	24,414			$	7,880			$	—

 

 

See notes to consolidated financial statements.

 

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

1. ORGANIZATION AND BASIS OF PRESENTATION

Organizational Structure—Jefferies Finance LLC (“JFIN”), a limited liability company, was organized under the laws of Delaware and commenced operations on October 7, 2004. JFIN will continue in perpetuity unless sooner dissolved as provided in the Amended and Restated Limited Liability Company Agreement, dated May 31, 2011, as amended, modified and/or supplemented from time to time, among JFIN and its members: Massachusetts Mutual Life Insurance Company (“Mass Mutual”), Babson Capital Management LLC (“BCM”), and Jefferies Group LLC (“JGL” and, together with Mass Mutual and BCM, the “Members”). On June 1, 2016 the LLC agreement was amended to transfer BCM’s share of the Class B interest to Mass Mutual and BCM ceased to be a Member.

JFIN is a commercial finance company that structures, underwrites and syndicates primarily senior secured loans to corporate borrowers. JFIN’s operations are primarily conducted through two business lines, Underwriting & Arrangement and Portfolio & Asset Management. JFIN also purchases performing loans in the syndicated markets. JFIN may also originate second lien term loans, bridge loans, mezzanine loans as well as related equity co-investments and purchase stressed and distressed loans in the secondary markets. In addition, JFIN and two of its subsidiaries, Apex Credit Partners LLC and JFIN Asset Management LLC (“JFAM”), each act as investment advisers for several funds and are registered with the Securities and Exchange Commission as Registered Investment Advisers (“RIA”) under the Investment Advisers Act of 1940 since March 1, 2012, November 19, 2014, and February 5, 2016, respectively.

The accompanying consolidated financial statements refer to JFIN and all its subsidiaries (the “Company”), which includes all entities in which the Company has a controlling interest or is the primary beneficiary, including collateralized loan obligation funds (“CLOs”). See Note 8, Variable Interest Entities, for more information on the CLOs. JFIN Fund III LLC and JFIN Business Credit Fund I LLC are wholly owned subsidiaries created for the purpose of holding loans originated and purchased by JFIN which in general are subsequently securitized into CLOs.

JFIN’s capital structure consists of Class A members and Class B members, owning 80% and 20% of JFIN, respectively. Net earnings and losses are allocated on a pro rata basis across all Members, unless a loss allocation would cause a negative capital account.

Subsequent Events—The Company has evaluated events and transactions that occurred subsequent to November 30, 2016 through January 26, 2017, the date that these consolidated financial statements were issued. The Company determined that there were no events or transactions, during such period that would require recognition or disclosure in these consolidated financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates—The preparation of the consolidated financial statements is in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

U.S. GAAP requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. The most significant of these estimates relate to the allowance for loan losses and fair value measurements. These estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Principles of Consolidation—The accompanying consolidated financial statements reflect the Company’s consolidated accounts, including the subsidiaries and the related consolidated results of operations with all intercompany balances and transactions eliminated in consolidation. In addition, the Company consolidates entities which meet the definition of a VIE for which the Company is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has 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.

Revenue Recognition Policies

Interest and Fee Income—Interest and fee income are recorded on an accrual basis to the extent that such amounts are earned and expected to be collected. Premiums and discounts are amortized into interest income using a level yield over the contractual life of the loan.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

Deferred Loan Fees, Net—Direct loan underwriting fees, net of specific costs, are deferred and amortized using a level yield as adjustments to the related loan’s yield over the contractual life of the loan. Direct loan fees, net of specific costs, related to revolving credit facilities are amortized on a straight-line basis over the contractual life of the revolving credit facility as fee income.

Underwriting fees are recognized on a pro-rata basis as the corresponding loan is syndicated. If the Company retains a portion of the syndicated loan, a portion of the fee is deferred to produce a yield that is not less than the average yield on the portion of the syndicated loans that is held by the other syndicate members. In the event that a loan is prepaid before the scheduled maturity, all remaining deferred loan fees are recorded to interest income.

Cash and Restricted Cash—Cash represents overnight deposits. The Company maintained its cash and restricted cash balances of $1,632.4 million and $2,767.7 million at November 30, 2016 and 2015, respectively, at several financial institutions.

Restricted cash on deposit in respect of the Company’s credit facilities and CLOs represents the amount of principal and interest collections received. The use of principal cash is limited to purchasing eligible loans or the potential reduction of related debt. Cash on deposit in the interest account is limited to the payment of interest, fees and other expenses as outlined in the governing documents.

Loans Receivable, Net—Loans receivable are recorded at cost, adjusted for unamortized premiums or discounts, net of unamortized deferred underwriting fees and net of allowance for loan losses. The Company intends to hold the majority of its loans until maturity. Loans for which the Company has the intent and ability to hold for the foreseeable future or until maturity are classified as held for investment.

Allowance for Loan Losses—The allowance for loan losses is a reserve established through a charge to provision for loan losses. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio. The allowance for loan losses includes reserves calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, Receivables and allowance allocations calculated in accordance with ASC Topic 450, Contingencies. Further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses is presented in Note 4.

Loans Held for Sale, Net—The Company’s business includes the structuring and underwriting of loan products with the intent to syndicate the majority of the loan to third parties. During the primary syndication process, loans that have been committed to be purchased by third parties but not yet settled are classified as Loans held for sale, net. The Company may invest in a percentage of an originated loan based upon the management of risk with respect to the entire portfolio. When the Company’s position is larger than originally intended, the excess hold is also classified to Loans held for sale, net, on the Consolidated Balance Sheets.

Syndication activities and sales of loans held for sale are accounted for as sales based on the Company’s satisfaction of the criteria for such accounting which provides that, as transferor, among other requirements, the Company has surrendered control over the loans. The sale of loans transferred from loans receivable to loans held for sale of approximately $790.6 million are included in proceeds from sales of loans held for sale in investing activities in the Consolidated Statements of Cash Flows.

Loans held for sale, net are carried at the lower of cost or fair value, as determined on an individual loan basis, net of unamortized deferred underwriting fees and valuation allowances. Net unrealized losses or gains, if any, are recognized in a valuation allowance through charges to earnings in Other losses, net in the Consolidated Statements of Earnings.

Unamortized premiums, discounts, origination fees and direct costs on loans held for sale are recognized as a component of the gain or loss on sale. Gains and losses on sales of loans held for sale are recognized on trade dates and are determined by the difference between the sale proceeds and the carrying value of the loans and are recorded in Other losses, net, in the Consolidated Statements of Earnings.

Investments—Investments are recorded on a trade date basis. Investments, including financial derivative instruments are recorded on the Consolidated Balance Sheets at fair value with changes in value recorded as a component of Other losses, net, in the Consolidated Statements of Earnings.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

The Company has elected to carry its investments primarily at fair value under the fair value option election in accordance with ASC Topic 825, Financial Instruments. The Company’s election is done on an instrument-by-instrument basis. The election is made upon the acquisition of the eligible financial asset. The fair value election may not be revoked once an election is made.

The Company presents derivatives on the Consolidated Balance Sheets within Investments, with resulting gains or losses recognized in Other losses, net in the Consolidated Statements of Earnings. Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. 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, benchmarking model derived prices to quoted market prices and trade data for comparable securities. External pricing data is subject to evaluation for reasonableness 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. Derivative contracts are valued using models, whose input reflect the assumption that the Company believes market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data.

Deferred Structuring Fees—Deferred structuring fees on Credit facilities, Secured notes payable and Long-term debt are included in Other assets on the Consolidated Balance Sheets and are amortized to Interest expense in the Consolidated Statements of Earnings over the contractual term of the borrowing using a level yield.

Fair Value Hierarchy—In determining fair value, the Company maximizes the use of observable inputs and minimizes 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.

If unobservable inputs are used, the Company will use assumptions that reflect the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The Company applies a hierarchy to categorize its fair value measurements broken down into three levels based on the transparency of inputs as follows:

Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments, for which quoted prices are available but traded less frequently; derivative instruments whose fair values 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.

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.

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, the features of the financial instrument, such as its complexity or 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.

The Company’s fair value measurements involve third party pricing for the majority of its assets and liabilities. If third party pricing is unavailable, the Company may employ various valuation techniques and models, which involve inputs that are observable, when available. The Company’s valuation policies and procedures are reviewed at least annually and are updated as necessary. Further, the Company tracks the fair values of significant assets and liabilities using a variety of methods including third party vendors, comparison to previous trades and an assessment for overall reasonableness. See Note 7 for further information on fair value measurements.

 

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Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

New Accounting Developments

Revenue Recognition—In May 2014, the FASB issued ASU, No. 2014-09, Revenue from Contracts with Customers which defines how companies report revenues from contracts with customers, and also require enhanced disclosures. The guidance is effective beginning in the first quarter of fiscal year 2019. FASB issued ASU, No. 2015-14 which deferred the effective date by one year. Subsequently, it was updated with ASU No. 2016-10 and ASU No. 2016-12. The Company does not expect this guidance to have a material effect on the consolidated financial condition, results of operations or cash flows.

Presentation of Financial Statements—In August 2014, the FASB issued ASU, No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). The guidance is effective beginning in the first quarter of fiscal year 2017. The Company does not expect this guidance to have a material effect on the consolidated financial condition, results of operations or cash flows.

Consolidation—In February 2015, the FASB issued ASU, No. 2015-02, Amendments to Consolidation Analysis which requires companies to reevaluate whether they should consolidate certain entities. Subsequently, it was updated with ASU No. 2016-17. The guidance is effective beginning in the first quarter of fiscal year 2017 and early adoption is permitted. The Company early adopted this guidance in fiscal year 2015. The adoption of this guidance did not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

Presentation of Debt Issuance Costs—In April 2015, the FASB issued ASU, No. 2015-03, Amendments to Simplifying the Presentation of Debt Issuance Costs which requires companies to present debt issue costs as a direct deduction from that debt liability. The guidance is effective beginning in the first quarter of fiscal year 2017 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the Company’s consolidated financial statements. The Company does not expect this guidance to have a material effect on the consolidated financial condition, results of operations or cash flows.

Financial Instruments—In January 2016, the FASB issued ASU, No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal year 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company is currently evaluating the impact of the new guidance on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU, No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective in the first quarter of fiscal year 2021 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the Company’s consolidated financial statements.

Statement of Cash Flows—In August 2016, the FASB issued ASU, No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The guidance provides specific guidance on eight cash flow classification issues. The guidance is effective in the first quarter of fiscal year 2019 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the Company’s consolidated financial statements. In November 2016, the FASB issued ASU, No. 2016-18, Statement of Cash Flows: Restricted Cash. The guidance provides specific guidance on classification and presentation of changes in restricted cash on the statement of cash flows. The guidance is effective in the first quarter of fiscal year 2019 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the Company’s consolidated financial statements.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

3. RESTRICTED CASH

The following is a summary of restricted cash as of November 30, 2016 and 2015 (in thousands):

 

 

 

		2016				2015
Principal and interest collections on loans held in credit facilities and CLOs		$	217,146			$	202,098
Reserves held in credit facilities and CLOs to support future commitments			758,745				1,073,802
Total restricted cash		$	975,891			$	1,275,900

 

 

As of November 30, 2016 there was $765.0 million of cash and investments in the revolver CLOs to support future drawdowns. The CLOs require the cash on deposit in interest accounts to be used to pay senior management fees, interest to note holders, subordinate management fees and any residual to the subordinate note holders, providing the structure is in compliance with the collateralization tests. In the event the CLOs were not in compliance with the collateralization tests, cash in the interest accounts would be used to pay senior management fees, interest to the note holders and the residual could be diverted to reduce the secured notes outstanding.

4. LOANS RECEIVABLE, NET

The Company’s loan receivable portfolio consists primarily of senior secured loans in various industries. The portfolio is segmented into originated and secondary loans which reflect how the portfolio is managed. Originated is a designation that indicates that the Company has had a major role in underwriting the loan either as an arranger or other title. Secondary is a designation that indicates that the Company acquired the loans through primary syndications conducted by other arrangers or purchased in the open market.

The following is a summary of outstanding loan balances as of November 30, 2016 and 2015 (in thousands):

 

 

 

		2016				2015
Loans receivable:
Originated		$	1,991,214			$	2,104,665
Secondary			2,572,418				1,950,678
Total loans receivable			4,563,632				4,055,343
Less: original issue discount			(64,964	)			(50,691	)
Total loans receivable, net of original issue discount			4,498,668				4,004,652
Less: deferred loan fees			(89,110	)			(89,379	)
Total loans receivable, net of deferred loan fees			4,409,558				3,915,273
Less: allowance for loan losses			(65,897	)			(53,970	)
Total loans receivable, net		$	4,343,661			$	3,861,303

 

 

As of November 30, 2016 there was $33.3 million and $31.7 million of original issue discount included in originated and secondary loans, respectively. As of November 30, 2015 there was $31.8 million and $18.9 million of original issue discount included in originated and secondary loans, respectively.

As of November 30, 2016 and 2015, $4.3 billion and $3.9 billion of loans receivable were pledged as collateral against the Company’s credit facilities and secured notes issued by the CLOs, respectively.

Nonaccrual Loans—If a loan is 90 days or more past due or the borrower is not able to service its debt and other obligations, the loan is placed on nonaccrual status. When a loan is placed on nonaccrual status, interest previously recognized as interest income but not yet paid is reversed and the recognition of interest income on that loan will stop until

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

factors indicating doubtful collection no longer exist and the loan has been brought current. Exceptions to this policy will be made if the loan is well secured and in the process of collection. Payments received on nonaccrual loans are typically applied to principal outstanding unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. On the date the borrower pays in full all overdue amounts, the borrower’s loan will emerge from nonaccrual status and all overdue interest, including those from prior years, will be recognized as interest income in the current period.

The following is an analysis of past due loans at November 30, 2016 (in thousands):

 

 

 

		LOANS   30-89 DAYS    PAST DUE				LOANS   90 OR MORE    DAYS PAST DUE				TOTAL   PAST DUE    LOANS				CURRENT     LOANS				TOTAL       LOANS
Originated		$	21,214			$	6,003			$	27,217			$	1,930,723			$	1,957,940
Secondary			—				8,797				8,797				2,531,931				2,540,728
Total		$	21,214			$	14,800			$	36,014			$	4,462,654			$	4,498,668

 

 

The following is an analysis of past due loans as of November 30, 2015 (in thousands):

 

 

 

		LOANS   30-89 DAYS   PAST DUE				LOANS   90 OR MORE   DAYS PAST DUE				TOTAL   PAST DUE   LOANS				CURRENT     LOANS				TOTAL       LOANS
Originated		$	—			$	—			$	—			$	2,072,898			$	2,072,898
Secondary			13,563				—				13,563				1,918,191				1,931,754
Total		$	13,563			$	—			$	13,563			$	3,991,089			$	4,004,652

 

 

Impaired Loans—Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on an individual loan basis. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s effective rate or at the fair value of collateral if repayment is expected solely from the collateral.

Payments received on impaired loans are typically applied to principal outstanding unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans will be charged off against the allowance when full collection of the principal from the sale of collateral, if applicable, or the enforcement of guarantees is remote. The Company does not necessarily wait until the final resolution of a loan to charge off the uncollectible balance.

The following is a summary of impaired loans as of November 30, 2016 (in thousands):

 

 

 

		RECORDED   INVESTMENT				UNPAID PRINCIPAL     BALANCE				RELATED   ALLOWANCE				AVERAGE RECORDED   INVESTMENT
With allowance recorded:
Originated		$	62,301			$	66,848			$	20,816			$	50,551
Secondary			12,912				26,512				10,243				28,211
Total		$	75,213			$	93,360			$	31,059			$	78,762

 

 

 

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Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

The following is a summary of impaired loans as of November 30, 2015 (in thousands):

 

 

 

		RECORDED   INVESTMENT				UNPAID PRINCIPAL     BALANCE				RELATED   ALLOWANCE				AVERAGE RECORDED   INVESTMENT
With allowance recorded:
Originated		$	38,801			$	42,701			$	6,418			$	11,651
Secondary			43,509				44,883				22,321				22,427
Total		$	82,310			$	87,584			$	28,739			$	34,078

 

 

The average recorded investment reflects the change in the balance of impaired loans as of November 30, 2016 and 2015.

As of November 30, 2016 and 2015, each individual impaired loan had a specific allowance recorded.

Interest income was not recognized on impaired and nonaccrual loans during the years ended November 30, 2016, 2015 and 2014. If the impaired and nonaccrual loans had been performing, an additional $3.9 million, $1.5 million and $0.6 million of interest income would have been recorded for the years ended November 30, 2016, 2015 and 2014, respectively.

Allowance for Loan Losses—The Company’s allowance for loan losses reflects management’s estimate of net loan losses inherent in the loan portfolio. The allowance for general loan losses is calculated as the aggregate loan loss reserve for losses inherent in the portfolio that have not yet been identified.

Reserve factors are assigned to the loans in the portfolio, which dictate the percentage of the total outstanding loan balance that is reserved. The loan portfolio information is regularly reviewed to determine whether it is necessary to revise the reserve factors.

The reserve factors used in the calculation are determined by analyzing the following elements:

 

∎

the types of loans;

 

∎

the expected loss with regard to the loan type;

 

∎

the internal credit rating assigned to the loans; and

 

∎

type of industry for a given loan.

The Company has a policy to reserve for impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loan’s expected cash flow or the estimated fair value of the underlying collateral where applicable. The Company considers market value of the loan in its determination of the loan losses for impaired loans. There is no threshold when evaluating for impaired loans. Loans will be charged off against the allowance when full collection of the principal from the sale of collateral or the enforcement of guarantees is remote. The Company does not necessarily wait until the final resolution of a loan to charge off the uncollectible balance.

The Company regularly tests the allowance for loan losses for reasonableness. In determining reasonableness, trends in the elements analyzed in establishing the reserve factors described above are reviewed. In addition, the Company continues to monitor the market to corroborate the reserve levels on similar loan products. The Company also computes an allowance for unfunded lending commitments using a methodology that is similar to that used for loans. The table below summarizes the Company’s reporting of its allowance for loan losses:

 

 

 

		CONSOLIDATED         BALANCE SHEETS		CONSOLIDATED         STATEMENTS OF EARNINGS
Allowance for loan losses on:
Loans		Allowance for loan losses		Provision for loan losses
Unfunded loan commitments		Other liabilities		General, administrative and other

 

 

 

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Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

The following is a summary of the activity in the allowance for loan losses for the year ended November 30, 2016 (in thousands):

 

 

 

		ORIGINATED				SECONDARY				TOTAL
Balance, November 30, 2015		$	17,454			$	36,516			$	53,970
Provision for loan losses—general			3,751				5,857				9,608
Provision for loan losses—specific			15,045				13,227				28,272
Transfers to loans held for sale, net			—				(12,654	)			(12,654	)
Charge-offs			(647	)			(12,652	)			(13,299	)
Balance, November 30, 2016			35,603				30,294				65,897
Balance, end of period—general		$	14,787			$	20,051			$	34,838
Balance, end of period—specific		$	20,816			$	10,243			$	31,059
Loans receivable:
Loans collectively evaluated—general		$	1,895,992			$	2,527,816			$	4,423,808
Loans individually evaluated—specific			61,948				12,912				74,860
Total		$	1,957,940			$	2,540,728			$	4,498,668

 

 

The following is a summary of the activity in the allowance for loan losses for the year ended November, 2015 (in thousands):

 

 

 

		ORIGINATED				SECONDARY				TOTAL
Balance, November 30, 2014		$	10,373			$	17,597			$	27,970
Provision for (recovery of) loan losses—general			2,243				(2	)			2,241
Provision for loan losses—specific			8,738				18,921				27,659
Charge-offs			(3,900	)			—				(3,900	)
Balance, November 30, 2015			17,454				36,516				53,970
Balance, end of period—general		$	11,036			$	14,195			$	25,231
Balance, end of period—specific		$	6,418			$	22,321			$	28,739
Loans receivable:
Loans collectively evaluated—general		$	2,034,097			$	1,888,245			$	3,922,342
Loans individually evaluated—specific			38,801				43,509				82,310
Total		$	2,072,898			$	1,931,754			$	4,004,652

 

 

 

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Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

The following is a summary of the activity in the allowance for loan losses for the year ended November 30, 2014 (in thousands):

 

 

 

		ORIGINATED				SECONDARY				TOTAL
Balance, November 30, 2013		$	3,755			$	17,873			$	21,628
Provision for loan losses—general			5,038				1,420				6,458
Provision for (recovery of) loan losses—specific			2,261				(740	)			1,521
Transfers to loans held for sale, net			(681	)			(956	)			(1,637	)
Balance, November 30, 2014			10,373				17,597				27,970
Balance, end of period—general		$	8,793			$	14,197			$	22,990
Balance, end of period—specific		$	1,580			$	3,400			$	4,980
Loans receivable:
Loans collectively evaluated—general		$	1,816,276			$	1,532,017			$	3,348,293
Loans individually evaluated—specific			7,820				5,776				13,596
Total		$	1,824,096			$	1,537,793			$	3,361,889

 

 

The reserve balances related to loan losses on unfunded commitments were $5.1 million and $3.6 million as of November 30, 2016 and 2015, respectively. In addition, the Company increased the reserve related to loan losses on unfunded commitments by $1.5 million, $0.1 million and $0.4 million during the years ended November 30, 2016, 2015 and 2014, respectively. The changes in reserve were recognized in General, administrative and other in the Consolidated Statements of Earnings and the reserve was included in Other liabilities on the Consolidated Balance Sheets.

Credit Quality Indicators—As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks credit quality indicators. Management regularly reviews the performance of its loans receivable to evaluate the credit risk.

The Company evaluates each loan using six weighted credit risk grade categories that have both qualitative and quantitative components that differentiate the level of risk. Credit risk categories are assigned weights based on the characteristics of issuers.

For each borrower, the Company evaluates the following credit risk categories:

 

∎

Industry segment

 

∎

Position within the industry

 

∎

Earnings / Operating Cash Flows

 

∎

Asset / Liability values

 

∎

Financial flexibility / debt capacity

 

∎

Management and controls

The Company utilizes a risk grading matrix to assign an internal credit grade (“ICG”) to each of its loans. Loans are individually rated on a tiered scale of one to ten, with each rating further divided into three levels of  .2, .5 and .8.

A description of the general characteristics of the ICGs is as follows:

 

∎

Grade 1—Issuers assigned this grade are characterized as substantially risk free and having an extremely strong capacity to meet all financial obligations.

 

∎

Grade 2—Issuers assigned this grade are characterized as representing minimal risk.

 

∎

Grade 3—Issuers assigned this grade are characterized as representing modest risk.

 

∎

Grade 4—Issuers assigned this grade are characterized as representing better than average risk.

 

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November 30, 2016 and 2015

 

 

 

∎

Grade 5—Issuers assigned this grade are characterized as representing average risk.

 

∎

Grade 6—Issuers assigned this grade are characterized as representing acceptable risk.

 

∎

Grade 7—Issuers assigned this grade are currently vulnerable to adverse business, financial and economic conditions and are characterized by increasing credit risk. They possess potential weakness that may, if not checked or corrected, weaken the asset or result in a likelihood of default at some future date. The increasing risk has or may result in discounted pricing levels or decreased trading liquidity.

 

∎

Grade 8—Issuers assigned this grade are characterized by inadequate repayment capacity and / or recovery of the obligor or of the collateral pledged resulting in potential loss if deficiencies are not corrected.

 

∎

Grade 9—Issuers assigned this grade are in (a) payment default at any level in its debt structure or (b) bankruptcy. In addition, asset weaknesses may make collection or liquidation in full, on the basis of existing facts, highly questionable and improbable.

 

∎

Grade 10—Issuers assigned this grade are charged-off.

The following is a summary of credit risk profile by ICG as of November 30, 2016 (in thousands):

 

 

 

ICG		ORIGINATED				SECONDARY				TOTAL
5.2		$	—			$	14,863			$	14,863
5.5			—				70,043				70,043
5.8			23,007				264,545				287,552
6.2			202,016				579,886				781,902
6.5			896,859				1,022,226				1,919,085
6.8			466,248				400,933				867,181
7.2			119,092				131,383				250,475
7.5			131,136				16,666				147,802
7.8			9,840				12,102				21,942
8.2			89,310				16,288				105,598
8.5			15,694				—				15,694
9.2			4,738				11,793				16,531
Total		$	1,957,940			$	2,540,728			$	4,498,668

 

 

The following is a summary of credit risk profile by ICG as of November 30, 2015 (in thousands):

 

 

 

ICG		ORIGINATED				SECONDARY				TOTAL
5.2		$	—			$	39,209			$	39,209
5.5			—				62,460				62,460
5.8			30,269				166,900				197,169
6.2			243,597				376,283				619,880
6.5			856,837				740,159				1,596,996
6.8			628,437				414,041				1,042,478
7.2			186,133				57,194				243,327
7.5			51,799				24,556				76,355
7.8			72,851				10,026				82,877
8.2			2,975				27,363				30,338
8.5			—				13,563				13,563
Total		$	2,072,898			$	1,931,754			$	4,004,652

 

 

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

Troubled Debt Restructurings (TDRs)—The Company periodically modifies or participates in the modification of the terms of a loan receivable in response to a borrower’s difficulties. Modifications that include a significant financial concession(s) to the borrower that likely reflect a current view that the repayment on the original terms is unlikely are accounted for as TDRs. The Company uses a consistent methodology across all loans to determine if a modification granted to a borrower, determined to be in financial difficulty is a TDR.

The Company’s policies on TDR identification include the following examples of indicators used to determine whether the borrower is in financial difficulty:

 

∎

Payment default of principal and/or interest

 

∎

Bankruptcy declaration

 

∎

Going concern opinion issued by accountants

 

∎

Insufficient cash flow to service debt with low likelihood of turnaround in the short term

 

∎

Securities (public) are de-listed

 

∎

Refinancing sources are unlikely

 

∎

Financial covenants breach is unlikely to be amended

If the borrower is determined to be in financial difficulty, then the Company utilizes the following criteria to determine whether a concession has been granted to the borrower:

 

∎

Modification of interest rate below market rate

 

∎

The borrower does not otherwise have access to funding for debt with similar risk characteristics in the market at the restructured rate and terms

 

∎

Capitalization of interest

 

∎

Delaying principal and/or interest for a period of year or more

 

∎

Forgiveness of some or all of the principal balance

Below is a summary of the Company’s loans which were classified as TDR as of November 30, 2016 (in thousands):

 

 

 

		PRE- MODIFICATION OUTSTANDING RECORDED AMOUNT				POST- MODIFICATION OUTSTANDING RECORDED AMOUNT				INVESTMENT IN TDR SUBSEQUENTLY DEFAULTED
Primary		$	40,613			$	35,889			$	—
Secondary		$	58,340			$	37,660			$	—
Total		$	98,953			$	73,549			$	—

 

 

Below is a summary of the Company’s loans which were classified as TDR as of November 30, 2015 (in thousands):

 

 

 

		PRE- MODIFICATION OUTSTANDING RECORDED AMOUNT				POST- MODIFICATION OUTSTANDING RECORDED AMOUNT				INVESTMENT IN TDR SUBSEQUENTLY DEFAULTED
Secondary		$	8,660			$	4,911			$	—
Total		$	8,660			$	4,911			$	—

 

 

All restructured loans that remain outstanding are on non-accrual status. Because the loans were classified on non-accrual status both before and after restructuring, the modifications did not impact the Company’s determination of the allowance for loan losses. There were no payment defaults on loans restructured in troubled debt restructurings during the years ended November 30, 2016 and 2015.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

Modified loans that are classified as TDRs are individually evaluated and measured for impairment. Modified loans that meet the definition of a TDR are subject to the Company’s standard impaired loan policy, namely that non-accrual loans are individually reviewed for impairment.

Other Liabilities—Included in Other liabilities are amounts payable for loans pending settlement. As of November 30, 2016 and 2015 there were $307.4 million and $140.4 million, respectively, of pending purchases.

5. LOANS HELD FOR SALE, NET

Below is a summary of Loans held for sale, net, as of November 30, 2016 and 2015 (in thousands):

 

 

 

		2016				2015
Loans held for sale		$	966,425			$	266,155
Less:
Original issue discount			(13,124	)			(10,979	)
Valuation allowance			(16,041	)			(7,756	)
Deferred loan fees, net			(6,798	)			433
Loans held for sale, net		$	930,462			$	247,853

 

 

Included in the Loans held for sale were $739.2 million and $174.1 million of loans that funded prior to but completion of the syndication process occurred after November 30, 2016 and 2015, respectively. As of November 30, 2016 and 2015 loans held for sale of  $7.3 million and $65.1 million were pledged as collateral against the Company’s credit facilities and secured notes issued by CLOs, respectively. As of November 30, 2016 and 2015, the Company had one impaired / non-accrual loan in the amount of  $1.2 million and $2.6 million, respectively, in Loans held for sale, net.

Other Assets—Included in Other assets are amounts receivable for sales of loans pending settlement. As of November 30, 2016 and 2015, there were $60.4 million and $42.7 million, respectively, of pending sales.

6. INVESTMENTS

As of November 30, 2016 and 2015, one of the CLOs held $156.8 million and $215.8 million, respectively, of U.S. Treasury securities which have short-term maturities and are restricted under the terms as stated in the CLO indenture. Also, under the fair value option as of November 30, 2016 and 2015, the Company held investments of  $22.4 million and $26.0 million, respectively, in a corporate bond, interest rate swaps, secured and unsecured notes and other investments which were accounted for at fair value.

DERIVATIVE FINANCIAL INSTRUMENTS

As part of certain CLOs’ risk management strategy to protect against the effect of fluctuations in London Interbank Offered Rate (“LIBOR”) rates associated with its loan commitments, interest rate swaps were purchased and currently have a notional value of $1,184.5 million with remaining maturities ranging from one to five years. On August 14, 2014, JFIN entered into a Total Return Swap (“TRS”) with Jefferies Financial Products, LLC (“JFP”), a wholly owned subsidiary of JGL, with the $23.0 million Variable Funding note for one of the CLOs as the underlying asset. The TRS has a remaining maturity of approximately five years.

As of November 30, 2016 and 2015, the interest rate swaps and the TRS had a fair value of  $6.1 million and $9.8 million, respectively and were included within Investments on the Consolidated Balance Sheets. The net loss on the interest rate swaps and TRS was $3.3 million, $10.4 million and $6.2 million for the years ended November 30, 2016, 2015 and 2014 and was included in Other losses, net in the Consolidated Statements of Earnings. As of November 30, 2016 and 2015 the counterparty credit quality with respect to the interest rate swaps was between A+ and BBB.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

The following table sets forth the remaining contractual maturities of the interest rate swaps and total return swap at their notional value as of November 30, 2016 (in thousands):

 

 

 

		1-5 YEARS				GREATER THAN  5 YEARS				TOTAL
Interest rate swaps		$	1,184,472			$	—			$	1,184,472
Total return swap		$	—			$	8,723			$	8,723

 

 

7. FINANCIAL INSTRUMENTS AT FAIR VALUE

The following table presents the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of November 30, 2016 and 2015 by level within the fair value hierarchy (in thousands):

 

 

 

NOVEMBER 30, 2016		LEVEL 1				LEVEL 2				LEVEL 3				TOTAL
Assets, nonrecurring basis:
Loans held for sale, net		$	—			$	930,462			$	—			$	930,462
Assets, recurring basis:
Investments
U.S. treasury securities		$	156,780			$	—			$	—			$	156,780
Bonds			—				4,188				—				4,188
Notes			—				—				2,370				2,370
Interest rate swaps			—				2,741				—				2,741
Corporate equity securities			—				951				8,877				9,828
Total return swap			—				—				3,309				3,309
Total Investments		$	156,780			$	7,880			$	14,556			$	179,216

 

 

 

 

 

NOVEMBER 30, 2015		LEVEL 1				LEVEL 2				LEVEL 3				TOTAL
Assets, nonrecurring basis:
Loans held for sale, net		$	—			$	192,316			$	55,104			$	247,420
Assets, recurring basis:
Investments
U.S. treasury securities		$	215,809			$	—			$	—			$	215,809
Bonds			—				4,450				—				4,450
Interest rate swaps			—				7,300				—				7,300
Corporate equity securities			—				—				11,675				11,675
Total return swap			—				—				2,544				2,544
Total Investments		$	215,809			$	11,750			$	14,219			$	241,778

 

 

For loans held for sale, net, the Company uses observable market data, including pricing on recent trades, third party pricing, or when appropriate, the recovery value of underlying collateral. Included within Loans held for sale, net are loans recorded at lower of cost or fair value, where cost approximates fair value.

For bonds, interest rate swaps and other investments, the Company primarily uses broker quotes for non-exchange traded investments and, based upon the observability of the inputs.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

U.S. Treasury securities are measured based on quoted market prices.

The following table presents the changes in Level 3 assets measured on a recurring and nonrecurring basis as of November 30, 2016 (in thousands):

 

 

 

		BALANCE AT DECEMBER 1, 2015				PURCHASES/ ADDITIONS				SETTLEMENTS, NET				TOTAL GAINS/ LOSSES (REALIZED AND UNREALIZED)				TRANSFERS IN AND OUT OF LEVEL 3				BALANCE AT NOVEMBER 30, 2016				NET CHANGE IN UNREALIZED GAINS/LOSSES RELATING TO INSTRUMENTS STILL HELD AT NOVEMBER 30, 2016
Corporate equity securities		$	11,675			$	524			$	—			$	(3,322	)		$	—			$	8,877			$	(3,322	)
Notes		$	—			$	262,992			$	(220,386	)		$	(23,992	)		$	(16,244	)		$	2,370			$	—
Loans held for sale, net		$	55,103			$	560,035			$	(483,763	)		$	(49,660	)		$	(81,715	)		$	—			$	—
Total return swap		$	2,544			$	—			$	2,280			$	(1,515	)		$	—			$	3,309			$	(1,515	)

 

 

The following table presents the changes in Level 3 assets measured on a recurring and nonrecurring basis as of November 30, 2015 (in thousands):

 

 

 

		BALANCE AT DECEMBER 1, 2014				PURCHASES/ ADDITIONS				SETTLEMENTS, NET				TOTAL GAINS/ LOSSES (REALIZED AND UNREALIZED)				TRANSFERS IN AND OUT OF LEVEL 3				BALANCE AT NOVEMBER 30, 2015				NET CHANGE IN UNREALIZED GAINS/LOSSES RELATING TO INSTRUMENTS STILL HELD AT NOVEMBER 30, 2015
Corporate equity securities		$	—			$	3,891			$	—			$	3,084			$	4,700			$	11,675			$	11,675
Loans held for sale, net		$	—			$	—			$	—			$	—			$	55,103			$	55,103			$	—
Total return swap		$	—			$	—			$	2,544			$	—			$	—			$	2,544			$	2,544

 

 

For the year ended November 30, 2016, $98.0 million was transferred from Level 3 to Level 2 due to increase in the observability of inputs. For the year ended November 30, 2015, $59.8 million was transferred from Level 2 to Level 3 due to the decreased observability of inputs.

The tables below present information on the valuation techniques, significant unobservable inputs and their ranges for the Company’s financial assets and liabilities, subject to threshold levels related to the market value of the positions held, measured at fair value on a recurring basis with a significant Level 3 balance. The range of unobservable inputs could differ significantly across different firms given the range of products across different firms in the financial services sector. The inputs are not representative of the inputs that could have been used in the valuation of any one financial instrument (i.e., the input used for valuing one financial instrument within a particular class of financial instruments may not be appropriate for valuing other financial instruments within that given class). Additionally, the ranges of inputs presented below should not be construed to represent uncertainty regarding the fair values of the Company’s financial instruments; rather the range of inputs is reflective of the differences in the underlying characteristics of the financial instruments in each category.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

 

 

FINANCIAL INSTRUMENTS OWNED		FAIR VALUE (IN THOUSANDS)				VALUATION TECHNIQUE		SIGNIFICANT UNOBSERVABLE INPUT(S)		INPUT RANGE				WEIGHTED AVERAGE
Corporate equity securities
Non-exchange traded securities		$	8,877			Market Approach		EBITDA multiple			5.9x-10.6	x			6.9x
Investments
Notes		$	2,370			Asset Approach		Collateral Liquidation Values			N/A	(1)			N/A	(1)
Derivatives
Total return swap		$	3,309			Discounted Cash		—			—				—
						Flows		Constant prepayment rate			20.0	%			20.0	%
								Constant default rate			2.0	%			2.0	%
								Loss severity			25.0	%			25.0	%
								Yield			16.0	%			16.0	%

 

 

 

(1)	There is no meaningful quantitative information to provide as the methods of valuation are investment specific.

Below is a summary of financial instruments not measured at fair value on a recurring or non-recurring basis as of November 30, 2016 and 2015, but for which fair value is required to be disclosed (in thousands):

 

 

 

		NOVEMBER 30, 2016								NOVEMBER 30, 2015
		Carrying Value				Fair Value				Carrying Value				Fair Value
Financial assets:
Cash		$	656,556			$	656,556			$	1,491,833			$	1,491,833
Restricted cash			975,891				975,891				1,275,900				1,275,900
Loans receivable, net			4,343,661				4,368,982				3,861,303				3,811,651
Total		$	5,976,108			$	6,001,429			$	6,629,036			$	6,579,384
Financial liabilities:
Credit facilities		$	346,862			$	346,862			$	381,956			$	381,956
Secured notes payable, net			3,916,792				3,915,716				4,034,711				3,995,159
Long-term debt			1,660,829				1,613,927				1,662,548				1,593,656
Total		$	5,924,483			$	5,876,505			$	6,079,215			$	5,970,771

 

 

Cash and restricted cash—The carrying value of cash and restricted cash approximates fair value and is considered Level 1 measurement.

Loans receivable, net—A significant portion of the Company’s loans receivable are measured primarily using broker quotations and using pricing service data from external providers. When pricing data is unavailable and there are no observable inputs, valuations are based on models involving projected cash flows of the issuer and market prices for comparable issuers and are considered Level 2 measurements since there is no open exchange for loan assets.

Credit facilities—Due to the adjustable rate nature of the borrowings, the fair value of the credit facilities are estimated to be their carrying values and are considered Level 2 measurements. Rates currently are comparable to those offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders.

Secured notes payable, net—The Company uses broker quotes for non-exchange traded secured notes payable and are considered Level 2 measurements.

Long-term debt—Fair value of long-term debt is based on broker quotations, which are Level 2 inputs. When broker quotes are not available, values are estimated using a discounted cash flow analysis with a discount rate approximating current market interest rates for issuances of similar term debt.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

8. VARIABLE INTEREST ENTITIES

VIEs are entities in which equity investors lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary. The primary beneficiary is the party who has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) 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.

Variable interests in VIEs include debt and equity interests, commitments and management and performance fees. Involvement with VIEs arises from involvement as a portfolio manager of collateralized loan obligations (“CLOs”). The Company also acts as sponsor and funds the underlying loans prior to the close of a CLO and owns notes issued by the CLOs.

The Company determines whether it is the primary beneficiary of a VIE upon initial involvement with the VIE and reassess whether it is the primary beneficiary of a VIE on an ongoing basis. The determination of whether the Company is the primary beneficiary of a VIE is based upon the facts and circumstances for each VIE and requires significant judgment. Considerations in determining the VIE’s most significant activities and whether the Company has the 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.

Variable interests in a VIE are assessed both individually and in aggregate to determine whether the Company has 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 the Company’s variable interest is significant to the VIE requires significant judgment. In determining the significance of the Company’s variable interest, the Company considers the terms, characteristics and size of the variable interests, the design and characteristics of the VIE, the Company’s involvement in the VIE and the Company’s market-making activities related to the variable interests.

The Company is the primary beneficiary of CLOs to which the Company transferred bank loans, securities and participation interests in the form of senior secured loans, second lien loans, unsecured loans, senior secured bonds, senior secured floating notes, unsecured bonds and revolving credit loans to corporate entities. The Company also retained a portion of the secured notes issued by the CLOs. In the creation of the CLOs, the Company was involved in the decisions made during the establishment and design of the entity. The Company acts as the portfolio manager for the CLOs and holds variable interests consisting of the retained notes that could potentially be significant. The assets of the CLOs consist of the loans, bonds and notes to corporate entities, which are available for the benefit of the vehicle’s beneficial interest holders. The creditors of the VIEs do not have recourse to the assets of the Company and the assets of the VIEs are not available to satisfy any other debt.

9. CREDIT FACILITIES

As of November 30, 2016 and 2015, the Company had secured credit facilities totaling $1.6 billion and $1.4 billion, respectively, which were used to fund loans. The interest rates related to the credit facilities are primarily variable interest rates based on LIBOR plus a spread as stated in the respective agreements. The credit facilities are secured by the underlying loans funded with the proceeds of the respective facility.

During the years ended November 30, 2016, 2015 and 2014, the Company entered into revolving credit agreements for $0.5 billion, $0.5 billion and $1.7 billion, respectively. During the years ended November 30, 2016, 2015 and 2014, $0.3 billion, $1.8 billion and $0.7 billion of outstanding commitments matured or terminated and any outstanding amounts were repaid.

 

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Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

Below is a summary of the Credit Facilities and Fronting Lines as of and for the year ended November 30, 2016 (in millions):

 

 

 

		THIRD PARTY FRONTING  LINE				MEMBERS’  FRONTING  LINE				JFIN CLO 2016-II WH				JFIN CLO 2016 WH				JFIN BUSINESS  CREDIT FUND I LLC				JFIN FUND III LLC				TOTAL
Total availability under the facility		$	500.0			$	500.0			$	200.0			$	—			$	100.0			$	300.0			$	1,600.0
Outstanding balance			—				—				124.2				—				33.4				189.3				346.9
Current availability		$	500.0			$	500.0			$	75.8			$	—			$	66.6			$	110.7			$	1,253.1
Principal balance of loans pledged as collateral		$	—			$	—			$	219.4			$	—			$	45.0			$	312.1			$	576.5
Largest outstanding amounts during the periods			218.6				300.0				124.2			$	227.8				50.1				247.3				1,168.0
Interest expense incurred			0.3				0.1				0.3				1.3				0.7				7.1				9.8
Undrawn facility fees incurred			4.5				2.6				—				—				0.2				0.4				7.7
Variable interest rate based on LIBOR			3.88	%			4.19	%			2.88	%			1.95	%			2.39	%			3.22	%			—
Maturity Date			2/25/2017	(1)			3/1/2017	(2)			6/30/2017(3)				Terminated				9/12/2021				2/12/2019				—

 

 

 

(1)	On February 27, 2016, the Third Party Fronting Line was increased to $500.0 million from $481.7 million.

 

(2)	After March 1, 2016, the Members’ Fronting Line contains annual automatic one-year extensions, absent a 60-day termination notice by either party. The commitment on the Members’ Fronting Line was reduced to $500 million on August 21, 2015.

 

(3)	JFIN CLO 2016-II Warehouse facility relates to a consolidated VIE.

Below is a summary of the Credit Facilities and Fronting Lines as of and for the year ended November 30, 2015 (in millions):

 

 

 

		THIRD PARTY FRONTING  LINE				MEMBERS’  FRONTING  LINE				JFIN FUND IV 2014 LLC				CLO 2015-II WH				JFIN BUSINESS CREDIT FUND I LLC				JFIN FUND III LLC				TOTAL
Total availability under the facility		$	481.7			$	500.0			$	—			$	—			$	100.0			$	300.0			$	1,381.7
Outstanding balance			67.2				38.6				—				—				45.1				231.1				382.0
Current availability		$	414.5			$	461.4			$	—			$	—			$	54.9			$	68.9			$	999.7
Principal balance of loans pledged as collateral		$	67.2			$	38.6			$	—			$	—			$	67.2			$	380.5			$	553.5
Largest outstanding amounts during the periods			386.7				530.0				350.2				170.9				47.2				231.1				1,716.1
Interest expense incurred			1.0				1.9				1.8				0.6				0.4				5.7				11.4
Undrawn facility fees incurred			2.0				3.0				—				—				0.3				0.6				5.9
Variable interest rate based on LIBOR			3.38	%			5.36	%			2.26	%			1.85	%			1.83	%			2.66	%			—
Maturity Date			2/27/2016				3/1/2016				Terminated				Terminated				9/12/2018				2/12/2019				—

 

 

 

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Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

Below is a summary of the Credit Facilities and Fronting Lines as of and for the year ended November 30, 2014 (in millions):

 

 

 

		THIRD PARTY FRONTING  LINE				MEMBERS’  FRONTING  LINE				JFIN FUND IV  2014 LLC				JFIN FUND IV LLC				JFIN BUSINESS  CREDIT FUND I LLC				JFIN CAPITAL 2013 LLC				JFIN FUND III LLC				JFIN CAPITAL  2014 LLC				TOTAL
Total availability under the facility		$	750.0			$	1,000.0			$	400.0			$	—			$	100.0			$	—			$	300.0			$	400.0			$	2,950.0
Outstanding balance			—				—				279.2				—				14.1				—				199.9				—				493.2
Current availability		$	750.0			$	1,000.0			$	120.8			$	—			$	85.9			$	—			$	100.1			$	400.0			$	2,456.8
Principal balance of loans pledged as collateral		$	—			$	—			$	385.1			$	—			$	21.7			$	—			$	271.9			$	—			$	678.7
Largest outstanding amounts during the periods			250.0				940.0				279.2				302.0				21.0				320.9				199.9				—				2,313.0
Interest expense incurred			0.1				4.1				1.2				1.0				0.1				4.3				3.6				—				14.4
Undrawn facility fees incurred			0.6				3.2				—				—				0.4				0.4				0.6				0.8				6.0
Variable interest rate based on LIBOR			3.25	%			5.88	%			1.36	%			1.31	%			1.73	%			2.40	%			2.49	%			—				—
Maturity date			6-11-15				3-1-16				1-7-16				Terminated				9-12-18				Terminated				2-12-19				5-20-16				—

 

 

Natixis LC Facility—On August 17, 2011, JFIN entered into a letter of credit and reimbursement agreement with Natixis for a $50.0 million letter of credit commitment (the “LC Facility”). The LC Facility was established for the purpose of issuing letters of credit to borrowers under credit facilities originated by JFIN. In June 2015, the Company extended its availability under the Facility until June 26, 2018. Interest is charged on issued letters of credit at a rate of LIBOR plus a margin of 2.5%. Interest expense for the years ended November 30, 2016, 2015 and 2014 was $1.0 million, $1.1 million and $1.0 million, respectively, and is included in Interest expense in the Consolidated Statements of Earnings.

Wells Fargo LC Facility—On March 10, 2016, the Company’s wholly-owned subsidiary JFIN LC Fund LLC (“LC Fund”), which was formed on February 1, 2016, entered into a Standby Letter of Credit Facility with Wells Fargo Bank, National Association (“Wells Fargo”), as issuing bank, pursuant to which the issuing bank has committed to provide a revolving letter of credit facility in an aggregate principal amount of up to $50.0 million. LC Fund’s obligations under the facility mature on the third anniversary of the closing date, and are secured by a first lien perfected security interest in a specified segregated deposit account held at Wells Fargo into which the Company is required to deposit 102% of the outstanding face amount of issued letters of credit. The Company guarantees the payment obligations of LC Fund under the facility. Interest expense for the year ended November 30, 2016 was $0.2 million and is included in Interest expense in the Consolidated Statements of Earnings.

Deferred Structuring Fees—Deferred structuring fees in aggregate were $4.0 million and $5.4 million at November 30, 2016, and 2015, respectively, and are included in Other assets on the Consolidated Balance Sheets. Amortization of deferred structuring fees expense for the years ended November, 2016, 2015 and 2014 was $4.8 million, $7.6 million and $3.9 million, respectively, and is included in Interest expense in the Consolidated Statements of Earnings.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

Undrawn Facility Fees—Undrawn facility fees in aggregate were $7.8 million, $5.9 million and $5.9 million for the years ended November 30, 2016, 2015 and 2014, respectively, and are included in Interest expense in the Consolidated Statements of Earnings.

10. SECURED NOTES PAYABLE, NET

CLOs consolidated by the Company are funded by the issuance of notes, which are included in Secured notes payable, net on the Consolidated Balance Sheets. Each of the CLOs’ respective assets are pledged as collateral against the secured notes issued by the respective CLO. The cash held by the CLOs is used first to pay interest due to note holders or to be reinvested in loans as prescribed by the indentures. JFIN is entitled to the residual interest of all CLOs after all claims to note holders have been paid.

Following are the remaining maturities of the secured notes payable, net (in thousands):

 

 

 

		NOVEMBER 30,  2016				NOVEMBER 30,  2015
Due in 2017		$	—			$	—
Due in 2018			—				—
Due in 2019			—				—
Due in 2020			100,040				125,749
Due in 2021			315,434				487,374
Thereafter			3,501,318				3,421,588
Total		$	3,916,792			$	4,034,711

 

 

For the years ended November 30, 2016, 2015 and 2014, the Company repaid $454.8 million, $91.3 million and $89.0 million of outstanding secured notes payable.

Interest rates related to the secured notes are variable interest rates based on LIBOR plus a spread as stated in the respective note agreements ranging from 0.240% to 9.000%.

Deferred Structuring Fees—Deferred structuring fees in aggregate were $39.2 million and $44.5 million as of November 30, 2016 and 2015, respectively, and are included in Other assets on the Consolidated Balance Sheets. Deferred structuring fee expense was $9.8 million, $5.9 million and $2.7 million for the years ended November 30, 2016, 2015 and 2014, respectively, and is included in Interest expense in the Consolidated Statements of Earnings.

Original Issue Discount—The unamortized original issue discount of $58.8 million and $61.3 million as of November 30, 2016 and 2015, respectively, was included within Secured notes payable, net on the Consolidated Balance Sheets. The amortization of the original issue discount was $9.2 million, $7.2 million and $4.1 million for the years ended November 30, 2016, 2015 and 2014, respectively, and was included in Interest expense in the Consolidated Statements of Earnings.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

11. LONG-TERM DEBT

Below is a summary of JFIN’s long-term debt as of November 30, 2016 (in millions):

 

 

 

DESCRIPTION

ISSUE DATE

OUTSTANDING  PRINCIPAL AMOUNT

MATURITY

INTEREST  RATE

INTEREST PAYMENT DATES

REDEMPTION FEATURES

2020 Notes (1)

3/26/2013

$

600.0

April 1, 2020

7.375%

April and October 1

35% at 105.531% (prior to April 1, 2017)

2021 Notes (1)

10/14/2014

$

425.0

April 15, 2021

7.500%

April and October 15

35% at 107.500% (prior to October 15, 2017)

2022 Notes (1)

3/31/2014

$

425.0

April 15, 2022

6.875%

April and October 15

35% at 106.875% (prior to April 15, 2017)

Secured Term Loan (2)

5/14/2015

$

212.3

May 15, 2020(3)

Libor +3.5%

Last business  day of each fiscal quarter

N/A

 

 

 

(1)	Collectively, the 2020 Notes, 2021 Notes and the 2022 Notes are referred to as the “Senior Notes”.

 

(2)	Issued with a Libor floor of 1%.

 

(3)	The Secured Term Loan matures on May 15, 2020, or October 1, 2019 if the 2020 Notes are still outstanding on such date.

The Senior Notes are not guaranteed by any of the Company’s subsidiaries; however, its subsidiaries may be required to guarantee the Senior Notes in the future pursuant to certain covenants as defined in the Senior Notes offering memorandum. At any time prior to April 1, 2017, October 15, 2017 and April 15, 2017, the Company may redeem the Senior Notes, respectively, in whole or in part, at their option, at a redemption price equal to 100% of the principal amount of such Senior Notes, respectively, plus the relevant applicable premium as of, and accrued and unpaid interest, if any, to but not including the applicable redemption date.

The table below summarizes the redemption prices and dates for the Senior Notes:

 

 

 

		2020     NOTES				2021     NOTES				2022     NOTES
YEAR		PERCENTAGE
2016			105.531	%			—				—
2017			103.688	%			105.625	%			105.156	%
2018			101.844	%			103.750	%			103.438	%
2019			100.000	%			101.875	%			101.719	%
2020 and thereafter			—				100.000	%			100.000	%

 

 

The Company may redeem the Senior Notes with cash proceeds from any equity offering at a redemption price, plus accrued but unpaid interest, if any, to but not including the applicable redemption date, in an aggregate principal amount for all such redemptions not to exceed 35% of the original aggregate principal amount of the Senior Notes, respectively (including any additional notes); provided that (1) in each case the redemption takes place not later than 180 days after the consummation of the related equity offering; and (2) not less than 65% of the original aggregate principal amount of the Senior Notes, respectively (including any additional notes) issued under the indenture remains outstanding immediately after such redemption (excluding the aggregate principal amount of all Senior Notes, respectively then held by the Issuers or any of their restricted subsidiaries).

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

If a change of control occurs, the holders of the Senior Notes will have the right to require the Company to repurchase their Senior Notes, respectively, in whole or in part, at a purchase price of 101% of the principal amount of the Senior Notes, respectively, plus accrued and unpaid interest, if any, to the date of repurchase. If the Company sells certain assets and the net cash proceeds are not applied as permitted under the indenture governing the Senior Notes, the Company may have to use such proceeds to offer to purchase some of the Senior Notes, respectively at 100% of the principal, plus accrued and unpaid interest, if any, to the date of repurchase.

On May 14, 2015, JFIN issued a $215.0 million senior secured term loan. The debt under the five-year term loan is secured by a first lien security interest in unrestricted cash and loan receivables not encumbered by other facilities, and is subject to a collateral value coverage ratio test and other negative covenants. As of November 30, 2016, $1.2 billion of loans were pledged as collateral to the term loan.

Interest expense related to Long-term debt was $114.9 million, $110.7 million and $67.9 million for the years ended November 30, 2016, 2015 and 2014, respectively.

Deferred Structuring Fees—Deferred structuring fees in aggregate were $21.4 million and $26.6 million as of November 30, 2016 and 2015, respectively and are included in Other assets on the Consolidated Balance Sheets. Amortization of deferred structuring fee expense was $5.3 million, $4.9 million and $3.0 million for the years ended November 30, 2016, 2015 and 2014, respectively, and is included in Interest expense in the Consolidated Statements of Earnings.

12. FEE INCOME, NET

The Company presents fee income net of origination, syndication and deferred underwriting fees in the Consolidated Statements of Earnings. The following is a summary of the components of Fee income, net for the years ended November 30, 2016, 2015 and 2014 (in thousands):

 

 

 

		2016				2015				2014
Underwriting fees		$	262,933			$	410,611			$	438,574
Administration fees			9,508				8,745				5,307
Other fees			52,104				44,056				31,136
			324,545				463,412				475,017
Less:
Deferred underwriting fees			(72,227	)			(56,026	)			(80,822	)
Jefferies LLC fees, net (1)			(99,013	)			(130,958	)			(198,349	)
Third party fees			(22,949	)			(105,749	)			(23,532	)
Fee income, net		$	130,356			$	170,679			$	172,314

 

 

 

(1)	Jefferies LLC is a wholly owned subsidiary of JGL.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

13. OTHER LOSSES, NET

The following summarizes Other losses, net for the years ended November 30, 2016, 2015 and 2014 (in thousands):

 

 

 

		2016				2015				2014
Realized (loss) gain on sale of loans held for sale		$	(34,545	)		$	(9,610	)		$	5,429
Change in fair value of loans held for sale			(8,267	)			(1,552	)			(8,859	)
Realized loss on investments			(24,597	)			(2,437	)			(114	)
Unrealized loss on investments			(8,139	)			(5,218	)			(6,455	)
Dividends			—				2,177				—
Other losses, net		$	(75,548	)		$	(16,640	)		$	(9,999	)

 

 

14. INCOME TAXES

Under current federal and state income tax laws and regulations, the Company is treated as a partnership for tax reporting purposes and is generally not subject to income taxes. Additionally, no provision has been made for federal, state, or local income taxes on the results of operations generated by partnership activities; as such taxes are the responsibility of its Members. However, the Company is subject to certain state and local entity level income taxes, including New York City Unincorporated Business Tax. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The realization of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized. The Company follows the provisions of accounting for uncertainty in income taxes which prescribes a recognition threshold under which it is determined whether it is more likely than not that a tax position will be sustained on the basis of the technical merits of the position. For those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of the tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the tax authority is recognized. Income tax (benefit) expense for year ended November 30, 2016, 2015 and 2014 consists of the following (in thousands):

 

 

 

		2016				2015				2014
Current—local		$	(1,666	)		$	4,411			$	7,032
Deferred—local			152				(990	)			(1,490	)
Total income tax (benefit) expense		$	(1,514	)		$	3,421			$	5,542

 

 

Deferred income taxes are provided for temporary differences in reporting certain items, principally the allowance for loan losses and deferred loan fees. The Company had a net deferred tax asset of $5.4 million and $5.5 million at November 30, 2016 and 2015, respectively, included in Other assets on the Consolidated Balance Sheets.

For the years ended November 30, 2016 and 2015, the Company concluded, based upon its assessment of positive and negative evidence, that it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. Accordingly, the Company did not record a valuation allowance at November 30, 2016 and 2015.

The Company had taxes payable of $14.6 million and $16.4 million at November 30, 2016 and 2015, respectively, included in Other liabilities on the Consolidated Balance Sheets.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

The Company’s effective tax rate was 4.2%, 4.0% and 3.9% for the years ended November 30, 2016, 2015 and 2014 respectively. The Company’s effective tax rate for the years ended November 30, 2015 and 2014 differed from the New York City statutory rate of 4.0% primarily due to the exclusion of foreign income and losses not subject to tax in the United States.

The Company accounts for uncertainties in income taxes under ASC 740, Income Taxes. ASC 740 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest, penalties, accounting in interim periods, disclosure and transition. The balance of net unrecognized tax benefits at November 30, 2016 and 2015, was approximately $19.1 million and $20.5 million, respectively.

Interest related to income tax liabilities is recognized in income tax expense. Penalties, if any, are recognized in other expenses. The Company has interest accrued of approximately $2.4 million and $1.7 million at November 30, 2016 and 2015, respectively. No material penalties were accrued.

The Company is currently under examination by New York City for the years 2006 to 2009. The Company does not expect that the resolution of this examination will have a material impact on the consolidated financial statements.

15. RELATED PARTY TRANSACTIONS

JGL—Distributions by JFIN to JGL in respect of taxes were $17.1 million and $40.5 million for the years ended November 30, 2016 and 2015, respectively. The undrawn capital commitment available to JFIN from JGL as of November 30, 2016 and 2015 was $106.1 million and $102.6 million, respectively.

JFIN owed JGL $0.4 million and $0.5 million as of November 30, 2016 and 2015, respectively related to interest payable on the Fronting Line, which was recorded in Due to affiliates on the Consolidated Balance Sheets.

JGL provides a guarantee to one of the consolidated CLOs, whereby Jefferies is required to make certain payments to the CLO in the event that JFIN is unable to meet its obligations. As of November 30, 2016 and 2015 there was $2.9 million and $2.1 million, respectively, outstanding of the maximum amount payable under the guarantee of  $21.0 million which matures in January 2021.

Mass Mutual—Distributions by JFIN to Mass Mutual in respect of taxes were $17.1 million and $36.5 million for the years ended November 30, 2016 and 2015, respectively. The undrawn capital commitment available to JFIN from Mass Mutual as of November 30, 2016 and 2015 was $106.1 million and $102.6 million, respectively.

JFIN owed Mass Mutual $0.4 million and $0.5 million as of November 30, 2016 and 2015, respectively, related to interest payable on the Fronting Line, which was recorded in Due to affiliates on the Consolidated Balance Sheets.

Mass Mutual has also provided JFIN’s direct lending subsidiary, JFAM access to capital to invest on their behalf and paid $0.2 million in management fees to JFAM.

BCM—Under the Babson Service Agreement, JFIN is required to reimburse BCM for management fees. Management fees paid to BCM are based on a percentage of the consolidated portfolio, excluding the CLOs. BCM is the sub-advisor to certain CLOs and is entitled to receive management fees underlined in the sub-advisor agreement. All management fees earned by BCM are included in General, administrative and other in the Consolidated Statements of Earnings. The Babson Service Agreement was terminated effective March 1, 2015. Additionally, the Company ended all but one of its CLO sub-advisory and CLO services agreements with BCM effective as of August 31, 2015.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

Below is a summary of management fees earned by BCM for the years ended November 30, 2016, 2015 and 2014 (in thousands):

 

 

 

		2016				2015				2014
Babson Service Agreement management fees		$	—			$	2,527			$	8,050
Collateral management fees			1,488				5,504				6,158
Total management fees charged by BCM		$	1,488			$	8,031			$	14,208

 

 

JFIN owed BCM approximately $0.2 million at both November 30, 2016 and 2015, which is recorded in Due to affiliates on the Consolidated Balance Sheets.

In April of 2015, JFIN made a distribution in respect of taxes to BCM in the amount of  $4.0 million.

Jefferies LLC—Under the Jefferies Service Agreement, Jefferies LLC (“Jefferies”), a wholly owned subsidiary of JGL, is required to provide specifically identified staff for the benefit of the Company. Also, under the agreement, JFIN is required to reimburse Jefferies for administration, rent, taxes and origination fees as well as any other services performed in the support of loan origination activities. During March 2016, the Jefferies Service Agreement was amended in conjunction with the restructuring of personnel. JFIN shifted underwriting staff to Jefferies and modified the cost sharing arrangement in the service agreement. JFIN continues to retain management of the underwriting process for covered financings and the approval of any transaction is subject to JFIN’s credit committee.

Below is a summary of expenses paid by Jefferies on behalf of JFIN for the years ended November 30, 2016, 2015 and 2014 (in thousands):

 

 

 

		2016				2015				2014
Compensation and benefits		$	28,919			$	39,121			$	32,165
Administration expenses			13,935				5,827				4,440
Occupancy expenses			2,999				2,670				2,160
New York City Unincorporated Business Tax			347				3,362				2,637
Expenses charged by Jefferies		$	46,200			$	50,980			$	41,402

 

 

The Company’s operating costs are paid by Jefferies and are included in Compensation and benefits and General, administrative and other in the Consolidated Statements of Earnings. Compensation and benefit costs include salaries, bonuses, retirement and medical insurance plan costs, of which certain amounts are deferred as direct loan origination costs.

All benefit plans that the employees participate in are provided by Jefferies. Therefore, benefit plan expenses are determined based upon participation and are reflected through an allocation from Jefferies to the Company. Administration and occupancy expenses are included in General, administrative and other. The Company reimburses Jefferies for all compensation, administration, occupancy and other amounts paid by Jefferies on behalf of the Company on a monthly basis.

Under the Jefferies Service Agreement, JFIN receives from and pays to Jefferies fees on certain transactions originated by Jefferies. Net origination fees were $99.0 million, $131.0 million and $198.3 million for the years ended November 30, 2016, 2015 and 2014, respectively, and are recorded in Fee income, net, in the Consolidated Statements of Earnings.

In the regular course of business, JFIN enters into agreements, related to specific transactions, with Jefferies and/or JGL to provide certain operational support, subsidies for loans, reimbursement of expenses, or to mitigate potential losses on transactions.

JFIN owed Jefferies $23.0 million and $7.0 million at November 30, 2016 and 2015, respectively, which were recorded in Due to affiliates on the Consolidated Balance Sheets.

 

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JEFFERIES FINANCE LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

November 30, 2016 and 2015

 

 

 

At November 30, 2016 and 2015, JGL held securities issued by CLOs managed by JFIN and provided a guarantee whereby they are required to make certain payments to a CLO in the event that JFIN is unable to meet its obligations to the CLO. Additionally, JFP and Jefferies Funding LLC (JFL) have entered into derivative contracts or participation agreements with JFIN whose underlying value is based on certain securities issued by the CLO. Under these contracts, JFIN paid approximately $3.3 million and $3.8 million to JFP and JFL, respectively. Refer to Note 6, Investments, and Note 7, Financial Instruments at Fair Value.

In connection with the issuance of the Senior Notes, Jefferies acted as underwriter. Jefferies also acted as a placement agent for certain CLOs and holds a portion of certain secured notes.

On July 31, 2015, JFIN CLO 2015-II entered into a $300.0 million pre-CLO warehouse financing with Jefferies Leveraged Credit Products LLC. The warehouse was terminated on October 22, 2015 when the assets were contributed into the CLO. Jefferies also acted as underwriter on the closing of JFIN CLO 2015-II. On January 27, 2016, JFIN CLO 2016 entered into a $250.0 million pre-CLO warehouse financing with Jefferies Leveraged Credit Products LLC. The warehouse was terminated on August 10, 2016 when the assets were contributed into the CLO. On September 21, 2016, JFIN CLO 2016-II entered into a $200.0 million pre-CLO warehouse financing with Jefferies Leveraged Credit Products LLC.

16. LOAN COMMITMENTS

From time to time, the Company makes commitments to extend revolving lines of credit and delayed draw term loans to borrowers. These commitments are not recorded on the Consolidated Balance Sheets. Once drawn, the funded amounts can be pledged as collateral under the Company’s credit facilities. As of November 30, 2016 and 2015, the Company had undrawn commitments of $1.6 billion and $1.7 billion, respectively, related to loans recorded in Loans receivable, net. As of November 30, 2016, the Company, through the CLOs, had the capacity to fund $0.9 billion of revolving commitments. In addition, $202.7 million of revolving commitments were held in a credit facility subject to equity requirements. As of November 30, 2016 and 2015, these commitments had maturity dates through November 2023 and August 2021, respectively. For the years ended November 30, 2016, 2015 and 2014, the Company earned unfunded fees of $11.5 million, $12.0 million and $9.2 million, respectively. These amounts are included in Fee income, net in the Consolidated Statements of Earnings.

In addition, during the normal course of business, the Company extends commitments to underwrite credit facilities. As of November 30, 2016, the Company had $1.2 billion of commitments to these credit facilities, of which $0.2 billion had been syndicated to third parties. As of November 30, 2015, the Company had $2.7 billion of commitments to lend to such underwritings, of which $0.9 billion had been syndicated to third parties.

17. CONCENTRATIONS OF CREDIT RISK

In the normal course of business, the Company engages in commercial lending activities with borrowers primarily throughout the United States. As of November 30, 2016, there was one borrower whose individual outstanding loan balance represented 7% of all loan balances. As of November 30, 2015, there was no borrower whose individual outstanding loan balances represented 5% of all loan balances. As of November 30, 2016, healthcare, retail, automotive and business services were the largest industry concentrations, which made up approximately 20%, 9%, 9% and 7%, respectively, of all loan balances. As of November 30, 2015, healthcare, retail, high tech industries and business services were the largest industry concentrations, which made up approximately 14%, 10%, 9% and 9%, respectively, of all loan balances. Loans balances include Loans receivable, Loans held for sale and Notes included in Investments.

* * * * * *

 

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		Jefferies LoanCore LLC
		Consolidated Statements of Financial Condition as of November 30, 2016 and 2015 and Related Statements of Operations and Comprehensive Income, Changes in Members’ Equity and Cash Flows for the Years Ended November 30, 2016, 2015 and 2014

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Jefferies LoanCore LLC

Index

 

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Report of Independent Auditors

To the Management of Jefferies LoanCore LLC

We have audited the accompanying consolidated financial statements of Jefferies LoanCore LLC and its subsidiaries (the “Company”), which comprise the consolidated statements of financial condition as of November 30, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, of changes in members’ equity, and of cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferies LoanCore LLC and its subsidiaries as of November 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

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Other Matter

The accompanying consolidated statements of operations and comprehensive income, of changes in members’ equity, and of cash flows of Jefferies LoanCore LLC and its subsidiaries for the year ended November 30, 2014, are presented for purposes of complying with Rule 3-09 of SEC Regulation S-X; however, Rule 3-09 does not require the financial statements as of and for the year ended November 30, 2014 to be audited and they are, therefore, not covered by this report.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

January 23, 2017

 

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Jefferies LoanCore LLC

Consolidated Statements of Financial Condition

November 30, 2016 and November 30, 2015

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Jefferies LoanCore LLC

Consolidated Statements of Operations and Comprehensive Income

Fiscal Years Ended November 30, 2016, 2015 and 2014

 

 

(in thousands of dollars)		2016				2015				2014
										(unaudited)
Net interest income
Interest income		$	94,422			$	117,501			$	61,080
Interest expense			(51,534)				(58,032)				(31,982)
Net interest income			42,888				59,469				29,098
Other income and gains (losses)
Income from other investments			-				4,695				1,040
Other income			11,404				22,938				6,644
Change in net assets related to consolidated VIEs			(124)				-				-
Realized gain (loss) on sales of loans and other investments			(792)				30,780				34,572
Realized and unrealized gain (loss) on derivative instruments			9,404				19,452				(13,991)
Realized and unrealized gain (loss) on foreign currency, net			9,368				7				(134)
Unrealized gain (loss) on loans held for sale and other investments			18,790				(15,662)				8,789
Unrealized gain on loan participations sold			-				-				307
Unrealized gain on real estate debt securities			744				-				-
Total other income and gains (losses)			48,794				62,210				37,227
Costs and expenses
Compensation and benefits			(19,074)				(30,655)				(20,680)
Administrative expenses			(8,407)				(11,123)				(6,840)
Net income before income taxes			64,201				79,901				38,805
Income taxes			(501)				(934)				(129)
Net income from continued operations		$	63,700			$	78,967			$	38,676
Discontinued operations
Income from operations of discontinued real estate properties			1,835				-				-
Bargain purchase gain upon consolidation			1,914				-				-
Realized gain on real estate			4,355				-				-
Net income from discontinued operations			8,104				-				-
Net income		$	71,804			$	78,967			$	38,676
Other comprehensive loss
Foreign currency translation adjustments, net			(28,875)				(3,986)				(515)
Total comprehensive income		$	42,929			$	74,981			$	38,161

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Jefferies LoanCore LLC

Consolidated Statements of Changes in Members’ Equity

Fiscal Years Ended November 30, 2016, 2015 and 2014

 

 

* Not covered by the Independent Auditor’s Report included herein.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Jefferies LoanCore LLC

Consolidated Statements of Cash Flows

Fiscal Years Ended November 30, 2016, 2015 and 2014

 

 

(in thousands of dollars)		November 30, 2016				November 30, 2015				November 30, 2014
										(unaudited)
Cash flows from operating activities
Net income		$	71,804			$	78,967			$	38,676
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Realized (gain) loss on sales of loans and other investments			792				(30,780)				(34,572)
Realized (gain) loss on derivative instruments			(8,615)				(4,132)				11,503
Unrealized (gain) loss on loans held for sale and other investments			(18,790)				15,662				(8,789)
Unrealized gain on foreign currency, net			(9,980)				-				-
Unrealized gain on loan participations sold			-				-				(307)
Unrealized (gain) loss on derivative instruments			(789)				(15,320)				2,488
Unrealized gain on real estate debt securities			(744)				-				-
Change in net assets related to consolidated VIEs			377				-				-
Payment-in-kind interest			-				(893)				(521)
Amortization of deferred financing fees			7,248				7,958				3,864
Accretion of discount on real estate securities			(380)				-				-
Net income from discontinued operations			(8,104)				-				-
Origination discount related to loans and other investments paid down			(4,710)				(3,445)				(3,371)
Purchases and funding of loans held for sale			(1,159,275)				(2,650,528)				(1,770,701)
Purchases of real estate debt securities			(12,638)				-				-
Principal repayments received on loans held for sale			291,488				419,375				162,328
Proceeds from sales of loans			1,019,396				1,683,724				1,129,684
Proceeds from loan participations sold			84,370				329,075				41,500
Payments received on derivative instruments			23,712				17,067				13,676
Payments on settlement of derivative instruments			(12,639)				(13,006)				(25,677)
Changes in operating assets and liabilities
Accrued interest receivable			3,552				(2,965)				(2,185)
Prepaid expenses and other assets			(2,983)				(3,353)				(2,716)
Accounts payable and accrued expenses			(14,533)				12,486				(5,448)
Net cash provided by (used in) operating activities			248,559				(160,108)				(450,568)
Cash flows from investing activities
Principal repayments on loans held for sale			-				-				32,000
Purchase of real estate			(143)				-				-
Proceeds from sale of real estate asset			46,953				-				-
Purchase of loans by consolidated VIEs			(202,259)				-				-
Distributions of cash from consolidated VIEs			354				-				-
Increase in restricted cash			(3,000)				(6,387)				(729)
Contributions to other investments			-				(9,736)				(53,140)
Net decrease in restricted cash at real estate subsidiary			655				-				-
Paydowns received on other investments			618				24,661				3,670
Proceeds from sales of other investments			-				14,925				-
Net cash provided by (used in) investing activities			(156,822)				23,463				(18,199)
Cash flows from financing activities
Upfront fees received on derivative instruments			9,816				6,545				-
Payments on settlement of derivative instruments			(13,267)				(6,457)				-
Proceeds from credit facilities			542,536				586,000				724,812
Paydowns on credit facilities			(481,547)				(641,000)				(568,280)
Proceeds from repurchase agreements			606,456				1,872,443				1,174,666
Paydowns on repurchase agreements			(1,223,427)				(1,656,017)				(893,691)
Payment of deferred financing fees			(5,247)				(8,324)				(3,107)
Issuance of debt of consolidated VIEs			864,927				-				-
Repayment of debt of consolidated VIEs			(354)				-				-
Contributions from members			676,576				1,954,905				1,253,468
Distributions to members			(994,805)				(1,964,250)				(1,221,413)
Net cash provided by (used in) financing activities			(18,336)				143,845				466,455
Effect of exchange-rate changes on cash and cash equivalents			(1,227)				552				(60)
Net increase in cash and cash equivalents			72,174				7,752				(2,372)
Cash and cash equivalents
Beginning of period			16,954				9,202				11,574
End of period		$	89,128			$	16,954			$	9,202
Supplemental cash flow information
Cash paid for interest		$	51,562			$	49,479			$	27,167
Cash paid for income taxes			261				40				148
Change in distributions payable to members			1,835				4,594				617
Non-cash distributions applied to contributions from members			20,924				56,158				38,767
Non-cash reversal of loan participations sold			322,430				-				17,688

The accompanying notes are an integral part of these consolidated financial statements.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

1.

Organization

Jefferies LoanCore LLC (the “Company”), a Delaware limited liability company, was formed on February 23, 2011 (“Inception”) and its members are Jefferies JLC Holdings LLC (“Jefferies”), FINEII LLC (“FINEII”), LoanCore JLC Holdings LLC (“LoanCore”) and certain other individuals (“LoanCore Investors”). The Company was formed for the purpose of acquiring, originating, syndicating and securitizing real estate related debt. The Company shall remain in existence unless dissolved in accordance with the terms of the Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”). All initially capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the LLC Agreement of the Company dated February 23, 2011 and as subsequently amended.

A board of managers (“Manager”) appointed by Jefferies, FINEII and LoanCore, shall have the sole and exclusive right and authority to manage and control the business and affairs of the Company. A three person credit committee (“Credit Committee”), equally represented by Jefferies, FINEII and LoanCore, has been established to review and approve all new investments, material amendments to existing investments, and the securitization or other sales of investments. Any action of the Credit Committee shall be authorized by a majority of the members of the Credit Committee.

Capital commitments had been made to the Company totaling $600,000. On May 31, 2016, the capital commitments made to the Company were reduced to $400,000. Jefferies and FINEII each have a 48.5% membership interest in the Company, LoanCore with a 0.333% interest and LoanCore Investors with a combined 2.667% interest. The interest held by the Members is represented by Units in the form of Preferred Units, Class A Common Units and Class B Common Units. Capital calls may be made at the discretion of the Manager to fund investments and cover expenses, costs, and liabilities incurred in the conduct of Company business as further specified in the LLC Agreement. Subject to certain limitations, capital returned to the members may be recalled.

To increase its funding capacity, the Company has formed various wholly owned subsidiaries that have separately entered into master repurchase agreements with different financial institutions as described in Note 5. The Company also formed JLC Finance Corporation, a wholly owned subsidiary, to co-issue with the Company $300,000 of unsecured senior notes on May 31, 2013 as described in Note 7. To facilitate European loan origination operations, the Company has various wholly owned subsidiaries in foreign countries.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying financial statements are presented on a consolidated basis and include all wholly owned subsidiaries of the Company. All intercompany accounts and transactions have been eliminated in consolidation.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions. The Company’s most significant estimates include the fair value of financial instruments, including loans held for sale, derivatives, other investments, debt securities, loan participations sold, and VIE assets and liabilities that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. The actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers highly liquid short-term investments denominated in US Dollars (“USD”), British Pound Sterling (“GBP”) or Euros (“EUR”) with original maturities of less than ninety days from the date of purchase to be cash equivalents. Cash and cash equivalents are comprised of deposits and money market accounts with commercial banks that each may be in excess of depository insurance limits. The Company believes it adequately mitigates this risk by only investing in or through major financial institutions.

Restricted Cash

Restricted cash represents amounts required to be held with the Company’s counterparties as collateral under certain requirements of the Company’s repurchase agreements, credit facilities and derivative transactions.

Consolidated Statements of Cash Flows

During the year ended November 30, 2012, the Company achieved key strategic objectives and the Commercial Mortgage Backed Securities (“CMBS”) secondary markets experienced favorable economic conditions that increased the demand for commercial real estate loans. As a result, the Company began classifying cash flows related to loans that were originated subsequent to November 30, 2011 as operating activities. During the years ended November 30, 2016, 2015 and 2014, $0, $0 and $32,000, respectively, related to the principal repayment of loans originated or acquired in the year ended November 30, 2011 have been classified as investing activities.

The Company classifies cash flows from its economic hedges in the same category as the cash flows from the items subject to the economic hedging relationships. Accordingly, cash flows related to derivative instruments are classified as operating activities. Cash flows related to certain derivative instruments that are used to hedge general credit risk are classified as financing activities as they have a financing element attributed to them at inception.

Loans Held for Sale

The Company originates and purchases its loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of first and mezzanine mortgage loans that are collateralized by commercial, mixed use and multifamily residential real estate throughout the United States and Europe. Loans held for sale are initially recorded at cost, which approximates fair value and are net of purchase or origination discounts and premiums. Subsequent changes in the estimated fair value of loans are recorded as unrealized gains or losses in the accompanying consolidated statements of operations and comprehensive income as the Company has elected the fair value option under ASC 825 for all of its loans. Certain of the Company’s loans may include embedded derivatives that are not bifurcated from the related loans, but rather accounted for as one instrument under the fair value option in accordance with ASC 815. Any change to the fair value of the embedded derivatives is recorded in the unrealized gain (loss) on loans held for

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

sale in the Company’s accompanying consolidated statements of operations and comprehensive income. The estimated fair value of loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities and credit quality. Of the loans held for sale, $232,442 and $1,015,142 are pledged as collateral under the Company’s master repurchase agreements as of November 30, 2016 and November 30, 2015, respectively.

The performance of the underlying collateral is considered a key factor in the valuation process. As of November 30, 2016 and November 30, 2015, all loans were performing. The Company considers a loan to be non-performing if it is delinquent on debt service or maturity, or if the loan to value ratio falls below a certain threshold at which the Company does not believe it will recover its investment.

The Company evaluates the collectability of both interest and principal of each loan on an ongoing basis, at least quarterly, to determine whether they are impaired. A loan is impaired when it is probable that the Company will not be able to collect all amounts due pursuant to the contractual terms of the loan. Because the Company’s loans are collateralized either by real property or by equity interests in the borrower, impairment is usually measured by comparing the estimated fair value of the underlying collateral to the Company’s investment in the respective loan. The valuation of the underlying collateral requires significant judgment. When a loan is impaired, the amount of the loss accrual is calculated and recorded accordingly in realized gain (loss) on sales of loans and other investments on the consolidated statements of operations and comprehensive income.

The Company has also evaluated, where appropriate, its loans held for sale which may have an element of a lending arrangement collateralized by real estate for accounting treatment as loans or investments as required by sections of ASC 310 governing the accounting for acquisition, development and construction type loans (“ADC loans”). Except as described in Note 12, the Company has concluded that it has no decision making authority or power to direct activity, except normal lender rights as further discussed in Note 9 and that the Company’s loans evaluated as ADC loans under ASC 310 should be accounted for as loans rather than investments.

The Company relies substantially on the secondary mortgage market as all of the loans originated are intended to be sold into this market. The secondary mortgage market relies primarily on the CMBS market, into which loans are sold and securitized into CMBS bonds. The CMBS bond market can be very volatile along with other fixed income securities’ markets. Fluctuations in values of CMBS bonds will most likely lead to similar fluctuations in the estimated fair value of loans held for sale and could limit the Company’s ability to securitize loans.

Real Estate Debt Securities

Investments in real estate debt securities are recorded in accordance with ASC 320 and ASC 325-40. The Company has chosen to elect the fair value option pursuant to ASC 825 for its real estate debt securities. Real estate debt securities are recorded at fair market value on the consolidated statements of financial condition and the periodic change in fair market value is recorded in current period earnings on the consolidated statements of operations and comprehensive income as a component of unrealized gain (loss) on real estate debt securities.

These investments meet the requirements to be classified as available for sale under ASC 320-10-25, which requires the securities to be carried at fair value on the consolidated statements of financial condition with changes in fair value recorded in other comprehensive income, a component of Members’ Equity. Electing the fair value option allows the Company to record changes in fair value in the consolidated statements of operations and comprehensive income,

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

which more appropriately reflects the results of operations for a particular reporting period as all of the Company’s investments including loans held for sale are recorded in a similar manner.

The Company accounts for its securities under ASC 320 and ASC 325 and evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. When the estimated fair value of an available-for-sale security is less than the amortized cost, the Company will consider whether there is an other-than-temporary impairment in the value of the security. When a real estate security is impaired, the amount of the loss accrual is calculated and recorded accordingly in realized gain (loss) on real estate debt securities on the consolidated statements of operations and comprehensive income. The Company uses third-party valuations to determine the fair market value of the securities.

The determination as to whether an OTTI exists is subjective, given that such determination is based on information available at the time of assessment as well as the Company’s estimate of future performance and cash flow projections for the individual security. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

Increases in interest income may be recognized on a security on which the Company previously recorded an OTTI charge if the performance of such security subsequently improves and the Company updates estimated yields to calculate interest income accordingly.

Real Estate Held for Sale

Real estate held for sale is carried at the lower of cost or fair value less costs to sell as the Company’s real estate meets the requirements to classify as held for sale under ASC 360-10, including a plan to dispose of the real estate within one year. Once a property is determined to be held for sale, depreciation is no longer recorded.

Ordinary repairs and maintenance are expensed as incurred, and major replacements and betterments, which improve or extend the life of the asset, are capitalized over their useful lives or over the extension of the useful life for the existing asset.

The Company follows the purchase method for an acquisition of real estate, where the purchase price is allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles, such as goodwill. The Company’s real estate properties, which have met the criteria to be classified as held for sale, are separately presented on the consolidated statements of financial condition and the results from the Company’s real estate properties held for sale are reflected in income from discontinued operations.

Transfer of Financial Assets

For a transfer of financial assets to be considered a sale, the transfer must meet the sale criteria of ASC 860 under which the Company must surrender control over the transferred assets which must qualify as recognized financial assets at the time of transfer. The assets must be isolated from the Company, even in bankruptcy or other receivership; the purchaser must have the right to pledge or sell the assets transferred and the Company may not have an option or obligation to reacquire the assets. If the sale criteria are not met, the transfer is considered to be a secured borrowing, the assets remain on the Company’s consolidated statements of financial condition and the sale proceeds are recognized as loan participations sold, a liability.

Loan Participations Sold

Loan participations sold represent senior interests in certain loans that were sold, however, the Company presents such loan participations sold as liabilities because these arrangements do not

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

qualify as sales under ASC 860. These participations are non-recourse and remain on the Company’s consolidated statements of financial condition until the loan is repaid. The gross presentation of loan participations sold does not impact member’s equity or net income.

Other Investments

At times, the Company may invest in special purpose vehicles structured as limited liability companies for the purpose of investing in commercial real estate debt and preferred equity positions. Some of these entities in which the Company may invest in may qualify as Variable Interest Entities (“VIEs”) as discussed in Note 12. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its related party affiliates and agents, has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be potentially significant to the VIE. The Company considers the facts and circumstances pertinent to each VIE borrowing under the loan or through the Company’s investment, including the relative amount of financing the common equity holders of the VIE are contributing to the overall project cost, decision making rights or control held by the common equity holders, guarantees provided by third parties, and rights to expected residual gains or obligations to absorb expected residual losses that could be significant from the project. If the Company is deemed to be the primary beneficiary of a VIE, consolidation treatment would be required. The Company’s exposure to each investment is limited to the fair market value reflected on the consolidated statements of financial condition.

The Company has also evaluated, where appropriate, its loan investments which may have an element of a lending arrangement collateralized by real estate for accounting treatment as investments rather than loans as required by ASC 310. The Company has concluded that it has no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the senior loans on the projects. For each investment described in Note 12, the characteristics, facts and circumstances indicate that investment accounting under the equity method treatment is appropriate.

The Company has elected to account for its other investments at estimated fair value. The fair value option provides an election that allows a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. Under the fair value option, investments are initially recorded at cost which approximates estimated fair value. The estimated fair value of other investments is determined based upon completed or pending transactions involving the underlying investment. In the absence of such evidence, estimated fair value is determined using multiple methodologies, including the market and income approaches.

Income from limited liability companies in which the Company invests is reflected in the accompanying consolidated financial statements as income from other investments and changes in estimated fair value of the investments are reflected as a component of unrealized gain (loss) on loans held for sale and other investments.

Presentation of Variable Interest Entities

The Company acquires unrated, investment grade and non-investment grade rated CMBS. These securities represent interests in securitization structures (commonly referred to as special purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. These SPEs typically qualify as VIEs.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

As the holder of the controlling class of the trust the Company has the right to name and remove the special servicer for the trust, which typically can direct the significant actions of the trust and requires consolidation of these structures pursuant to ASC 810. This results in a presentation on the consolidated statements of financial condition of the gross assets and liabilities of the VIEs. The assets and other instruments held by these VIEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the VIEs do not have any recourse to the general credit of any other consolidated entities, nor to the consolidator of these VIEs.

The Company separately presents the assets and liabilities of consolidated securitization VIEs as individual line items on the consolidated statements of financial condition. The liabilities of consolidated securitization VIEs consist principally of obligations to the bondholders of the related CMBS trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of consolidated securitization VIEs consist principally of loans. These assets in the aggregate are likewise presented as a single line item entitled “VIE assets.”

The Company elects the fair value option for initial and subsequent recognition of the assets and liabilities of the consolidated securitization VIEs. The VIEs are recorded by following the guidance of ASU 2014-13 which values the assets and liabilities utilizing the more observable input. All of the underlying assets, liabilities and equity of the securitization VIE’s are recorded on the Company’s financial statements, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Interest income and interest expense associated with these VIEs are no longer relevant on a standalone basis because these amounts are already reflected in the fair value changes. The Company has elected to present these items in a single line its consolidated statements of operations and comprehensive income. All net residual amounts from consolidation are recorded in the “Change in net assets related to consolidated VIEs” which represents the Company’s income from its retained beneficial interest in the VIEs.

Other Income

The Company recognizes other income related to origination discounts, termination fees and miscellaneous other fees when loans are paid off per terms of the related loan agreement.

Deferred Financing Fees, Net

Fees and expenses incurred in connection with the Company’s repurchase agreements and credit facilities are capitalized and amortized to interest expense over the financing term under the straight-line method. Fees and expenses incurred in connection with Company’s bond payable are capitalized and amortized to interest expense over the financing term under the effective interest method.

Derivative Instruments

In the normal course of business, the Company is exposed to the effect of interest rate changes and may undertake a strategy to limit these risks through the use of derivatives. To address exposure to interest rates, the Company uses derivatives primarily to hedge the fair value variability of fixed rate assets caused by interest rate fluctuations. The Company may use a variety of derivative instruments, including interest rate swaps, indices, caps, collars and floors, to manage interest rate and credit risk.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

To determine the fair value of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each statement of financial condition date. Standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost, and termination cost may be used to determine fair value. All such methods of measuring fair value for derivative instruments result in an estimate of fair value, and such value may never actually be realized.

The Company recognizes all derivatives on the consolidated statements of financial condition at estimated fair value. The Company does not designate derivatives as hedges to qualify for hedge accounting. Any net payments under open or terminated derivatives are included in realized gain (loss) on derivative instruments, and fluctuations in the fair value of derivatives held are recognized in unrealized gain (loss) on derivative instruments in the accompanying consolidated statements of operations and comprehensive income.

Initial payments made or received on open derivatives at November 30, 2016 and November 30, 2015 are included in derivative liabilities and derivative assets, at fair value, on the accompanying consolidated statements of financial condition.

As a part of the risk management strategy of the Company, it may enter into Interest Rate Lock Commitments (“IRLCs”) in connection with its loan origination activities. The Company accounts for IRLCs as derivative instruments and records them at fair value with changes in fair value recorded in unrealized gains and losses on the consolidated statements of operations and comprehensive income. In estimating the fair value of an IRLC, the Company assigns a probability to the loan commitment based on an expectation that it will be exercised and the loan will be funded. The fair value of the commitments is derived from the fair value of related loans which is based on observable market data and includes the expected net future cash flows of the loans. Changes to the fair value of IRLCs are recognized based on interest rate fluctuations, changes in the probability that the commitment will be exercised and the passage of time. Outstanding IRLCs expose the Company to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To protect against this risk, the Company utilizes other derivative instruments, including interest rate swaps and options to economically hedge the risk of potential changes in the value of the loans that would result from the commitments. The changes in the fair value of these IRLCs are recorded in realized gain (loss) on sales of loans and other investments and unrealized gain (loss) on loans held for sale and other investments on the consolidated statements of operations and comprehensive income. At the time the related loan is funded, any remaining fair value is transferred to the basis of that loan as a discount or premium, as applicable.

The Company enters into foreign currency forward contracts with counterparties primarily as hedges against portfolio positions with each instrument’s primary risk exposure being foreign exchange risk. Forward currency contracts are over-the-counter contracts for delayed delivery of currency in which the buyer agrees to buy and the seller agrees to deliver a specified currency at a specified price on a specified date. The Company did not incur an upfront cost to acquire the contracts and all commitments are marked-to-market on each valuation date at the applicable forward exchange rate and adjusted for nonperformance risk of counterparties, as appropriate. Any resulting unrealized appreciation or depreciation is recorded on such date in derivative assets, at fair value or derivative liabilities, at fair value on the Company’s consolidated statements of financial condition and reflected as unrealized gain (loss) on the Company’s consolidated statements of operations and comprehensive income as the Company does not designate its

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

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forward currency contracts as hedges to qualify for hedge accounting, but rather as economic hedges to manage the Company’s foreign currency risk related to its European operations. The Company realizes gains and losses at the time forward contracts are extinguished or closed upon entering into an offsetting contract or delivering the foreign currency.

The Company has also entered into other derivatives, including share warrants, related to loans or other investments it has originated in the UK. The Company did not incur an upfront cost to acquire the other derivatives and all other derivatives are marked-to-market on each valuation date. Any resulting unrealized appreciation or depreciation is recorded on such date in derivative assets, at fair value or derivative liabilities, at fair value on the Company’s consolidated statements of financial condition and reflected as unrealized gain (loss) on the Company’s consolidated statements of operations and comprehensive income. The Company realizes gains and losses at the time the other derivative is either exercised or terminated.

Repurchase Agreements

Loans sold under repurchase agreements are treated as collateralized financing transactions unless they meet sales treatment. Loans financed through a repurchase agreement remain on the Company’s consolidated statements of financial condition as an asset and cash received from the purchaser is recorded on the Company’s consolidated statements of financial condition as a liability. Interest incurred in accordance with repurchase agreements is recorded in interest expense.

Bond Payable

Bond payable is accounted for on an amortized cost basis. Interest incurred in accordance with the indenture agreement is recorded in interest expense and calculated using the effective interest method.

Credit Facilities

Borrowings under the credit facilities are stated at their outstanding principal amount. Interest incurred in accordance with the credit facilities agreements is recorded in interest expense and accrued interest is included in accounts payable and accrued expenses.

Fair Value Measurement

In accordance with the authoritative guidance on estimated fair value measurements and disclosures under GAAP (Financial Accounting Standards Board - Accounting Standards Codification Topic 820), the methodologies used for valuing such instruments have been categorized into three broad levels as follows:

Level 1 - Quoted prices in active markets for identical instruments.

Level 2 - Valuations based principally on other observable market parameters, including

 

•

Quoted prices in active markets for similar instruments,

•

Quoted prices in less active or inactive markets for identical or similar instruments,

•

Other observable inputs (such as interest rates, yield curves, volatilities, prepayment spreads, loss severities, credit risks and default rates), and

•

Market corroborated inputs (derived principally from or corroborated by observable market data).

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

Level 3 - Valuations based significantly on unobservable inputs.

 

•

Valuations based on third party indications (broker quotes, counterparty quotes or pricing services) which are, in turn, based significantly on unobservable inputs or are otherwise not supportable as Level 2 valuations.

•

Valuations based on internal models with significant unobservable inputs.

Pursuant to the authoritative guidance, these levels form a hierarchy. The determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy is performed at the end of each reporting period. The Company considers all available information, including observable market data, indications of market liquidity and orderliness, and its understanding of the valuation techniques and significant inputs. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the Level 3 inputs into the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions.

Financial instruments are considered Level 3 when pricing models are used, including discounted cash flow methodologies and at least one significant model assumption or input is unobservable or has significant variability between sources. The tables in Note 14 present a reconciliation for all assets and liabilities that are measured and recognized at fair value on a recurring basis using significant unobservable inputs. When assets and liabilities are transferred between levels, the Company recognizes the transfer as of the end of the period. There were no transfers between levels for the years ended November 30, 2016 and November 30, 2015.

Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, estimated fair values are not necessarily indicative of the amounts the Company could realize upon disposition of the financial instruments. Financial instruments with readily available active quoted prices, or for which an estimated fair value can be measured from actively quoted prices, generally have a higher degree of pricing observability, and therefore, require a lesser degree of judgment to be utilized in measuring estimated fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and require a higher degree of judgment in measuring estimated fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and the overall market conditions. The use of different market assumptions and/or pricing methodologies may have a material effect on estimated fair value amounts.

Electing the fair value option for loans held for sale, real estate debt securities, consolidated securitization VIEs, other investments, and liabilities related to loan participations sold reflects the manner in which the business is managed and often allows for an offset of the changes in the estimated fair value of these instruments and the interest rate derivatives used to hedge against market interest fluctuations. For a further discussion regarding the measurement of financial instruments, see Note 14.

Revenue Recognition

Interest on loans held for sale is recognized as earned under the contractual terms of the loans and included in interest income in the accompanying consolidated statements of operations and comprehensive income. Interest is only accrued if deemed collectible. Interest is generally

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

deemed uncollectible when a loan becomes three months or more delinquent. Delinquency is calculated based on the contractual interest due date of the loan. For the years ended November 30, 2016 and November 30, 2015 the Company had no loans deemed delinquent, respectively.

Upon sale of a loan, the Company will reverse previously recorded unrealized gains and losses and recognize realized gains or losses on the loan sold. Any difference between the initial recorded value of the loan, including any discount, and the sales price is recorded as realized gain or loss. For loans that were originated at a discount that are subsequently paid down by the borrower, the origination discount is recognized in other income.

Interest income on the Company’s real estate debt securities is accrued based on the actual coupon rate and the outstanding principal balance of such securities. The Company has elected to record interest in accordance with ASC 835-30-35-2 using the effective interest method for all securities accounted for under the fair value option (ASC 825). As such, premiums and discounts are amortized or accreted into interest income over the lives of the securities in accordance with ASC 310-20, ASC 320-10 or ASC 325-40, as applicable. Total interest income from real estate debt securities is recorded in the interest income line item on the consolidated statements of operations and comprehensive income.

The Company reassesses the cash flows on at least a quarterly basis for securities accounted for under ASC 325-40. In estimating these cash flows, there are a number of assumptions that will be subject to uncertainties and contingencies. These include the rate and timing of principal and interest receipts (including assumptions of prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans have to be judgmentally estimated. Differences between previously estimated cash flows and current actual and anticipated cash flows are recognized prospectively through an adjustment of the yield over the remaining life of the security based on the current amortized cost of the investment as adjusted for credit impairment, if any.

Operating lease income is recognized in income from operations of discontinued real estate properties on a straight-line basis over the respective lease terms. The Company commences recognition of operating lease income at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property. Tenant recoveries related to reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, and other operating expenses are recognized as revenue in the period during which the applicable expenses are incurred in income from operations of discontinued real estate properties.

Certain Risks and Concentrations

Due to the nature of the mortgage lending industry, changes in interest rates and spreads on CMBS may significantly impact the estimated fair value of the Company’s investments, revenue from originating mortgages and subsequent sales of loans, which is one of the primary sources of income for the Company.

The Company uses third parties to provide loan servicing on its portfolio of investments. There is a credit risk associated with using these third parties. The Company believes it mitigates this risk by using nationally recognized third parties to service loans and other investments. Management also monitors each loan or other investment independently.

 

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Concentration of Credit Risk

The Company invests its cash primarily in demand deposits and money market accounts with commercial banks. At times, cash balances at a limited number of banks and financial institutions may exceed federally insured amounts. The Company believes it mitigates credit risk by depositing cash in or investing through major financial institutions having capital ratios that exceed the regulatory standards defined for a well-capitalized financial institution. To date, there have been no losses from these investments.

In the normal course of its activities, the Company may utilize derivative financial instruments. These derivatives are predominantly used for managing risk associated with the Company’s portfolio of investments. Credit risk includes the possibility that a loss may occur from the failure of counterparties or issuers to make payments according to the term of the contract. The Company’s exposure to credit risk at any point in time is generally limited to amounts recorded as derivative assets on the consolidated statements of financial condition.

Concentrations of credit risks arise when a number of properties related to the Company’s loans and other investments are located in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company monitors various segments of its investments to assess potential concentrations of credit risks. Management believes the current investments are reasonably well diversified and do not contain any significant concentration of credit risks. Collateral for all of the Company’s loans and other investments is located in Europe at 30.6% and the United States at 69.4%, with New York 10.7%, representing the only state with a concentration greater than 10.0% of the total as of November 30, 2016. As of November 30, 2015, the collateral for all of the Company’s loans and other investments is located in Europe at 13.1% and the United States at 86.9%, with the only states with collateral concentration greater than 10.0% of the total being New York 24.2% and California 12.7%.

Income Taxes

No provision has been made in the accompanying consolidated financial statements for federal income taxes as the Company has elected to be treated as a partnership for federal income tax purposes. Each member is responsible for its allocable share of income taxes generated by the activities of the Company.

The Company files various foreign, state and local income tax returns. For the years ended November 30, 2016, 2015 and 2014, tax expenses of $501, $934 and $129 were recorded and included in income taxes, respectively. State withholding payments made on behalf of the Company’s members that remain due to the Company as of November 30, 2016 and November 30, 2015 were $106 and $209, respectively.

The Company recognizes tax positions in the consolidated financial statements only when it is more-likely-than-not, based on the technical merits, that the position would be sustained upon examination by the relevant taxing authority. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of tax benefit that is greater than fifty percent likely of being realized upon settlement. As of November 30, 2016 and November 30, 2015, unrecognized tax benefits were $1,061 and $974, respectively.

Interest related to unrecognized tax benefits is recognized in income tax expense. Penalties, if any, are recognized in other expenses. At November 30, 2016 and November 30, 2015, the Company has accrued interest expense of approximately $215 and $424, respectively. No penalties have been accrued for the years ended November 30, 2016, 2015 and 2014.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The Company is not under examination by any taxing authorities. The earliest tax year which remains subject to examination by major taxing authorities is 2012.

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is GBP. In the normal course of business, the Company enters into transactions not denominated in US dollars in connection with its European loan originations. Foreign exchange gains and losses arising on such transactions are recorded as a gain or loss in the Company’s consolidated statements of operations and comprehensive income. As of November 30, 2016 and November 30, 2015, the Company and its wholly owned subsidiaries held 1,023 GBP and 1,323 EUR and 3,898 GBP and 517 EUR in cash and cash equivalents, respectively. In addition, the Company consolidates wholly owned subsidiaries which have non-US dollar functional currency. Non-US dollar denominated assets and liabilities are translated to US dollars at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses at the average rate of exchange prevailing during the period recognized. Cumulative translation adjustments arising from translation of GBP denominated subsidiaries are recorded in other comprehensive income. Certain intercompany transactions between the Company’s foreign subsidiaries and the US domiciled parent also create unrealized and realized gains and losses on foreign currency due to those transactions not qualifying as long term advances under ASC 830, Foreign Currency Matters. The Company has recorded $28,875, $3,986 and $515 of other comprehensive loss on foreign currency translation adjustments, respectively, as of November 30, 2016, 2015 and 2014. The Company has entered into various foreign currency forward contracts, as discussed in Note 2, to reduce risk and exposure to foreign currency movements. Substantially all of the Company’s foreign currency exposure is hedged.

Indemnifications

The Company enters into contracts that contain a variety of indemnifications under certain representations and warranties, which primarily relate to sales of loans as part of securitization transactions. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not had claims or losses pursuant to these contracts and expects the risk of loss to be remote.

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new ASU disclosure requirement explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date by considering relevant conditions that are known (and reasonably knowable) at the issuance date. If significant doubt exists, management will need to assess if its plans will or will not alleviate substantial doubt in order to determine the specific disclosures. The ASU is effective for annual periods beginning after December 15, 2016. Earlier application is permitted. The Company is currently evaluating the impact of ASU 2014-15 on the consolidated financial statements.

In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity,

 

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which establishes a measurement alternative allowing qualifying entities to measure both the collateralized financing entity’s, or CFE’s, financial assets and financial liabilities based on the fair value of the financial assets or financial liabilities, whichever is more observable. The measurement alternative is available upon initial consolidation of the CFE or adoption of this ASU and can be applied on a CFE-by-CFE basis. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2015. Early application is permitted. The Company early adopted the standard as of November 30, 2016 which was the initial consolidation of a CFE as discussed in Note 10.

In April 2015, FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amended guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this ASU is permitted for financial statements that have not been previously issued. Entities must apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. For the Company’s fiscal year starting December 1, 2016 the unamortized debt issuance costs related to its Bond Payable will be reclassified from Deferred financing fees to a direct deduction to the Bond Payable balance. All prior comparative periods will also be reclassified in accordance with adoption on the retrospective basis. The unamortized amount of Deferred financing fees related to the Bond Payable at November 30, 2016 is $4,944. 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall. The amendment provides guidance to improve certain aspects of classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The Company is required to adopt the new guidance in the first quarter of 2018. Early adoption is permitted. The Company is currently evaluating the potential impact of the new guidance on its consolidated financial statements, as well as available transition methods.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model for lessee accounting which results in the recognition of most leased assets and lease liabilities on the balance sheet of the lessee. Lessor accounting was not significantly changed. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2019 by applying a modified retrospective approach. Early application is permitted. The Company is currently evaluating the potential impacts of the new guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, an amendment to the guidance on reporting credit losses for assets measured at amortized cost and available-for-sale securities. The Company is required to adopt the new guidance in the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the potential impacts of the new guidance on its consolidated financial statements, as well as available transition methods.

 

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In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective in the first quarter of fiscal 2019 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the consolidated statements of cash flows.

 

3.

Members’ Equity

As described in Note 1, interests held by the Members are represented by Units in the form of Preferred Units, Class A Common Units and Class B Common Units. Issued at inception and outstanding as of August 31, 2016 were 600 Preferred Units, 10,000 Class A Common Units and 2,195 Class B Common Units, of which 11.5 Preferred Units, 191.668 Class A Common Units and 1,770 Class B Common Units were held by employees.

Class B Common Units were granted at inception to FINEII and one key employee (“Key Employee”). All such Class B Common Units shall become vested units immediately before the consummation of a Company sale that results in an annualized rate of return, realized entirely in cash, on the Preferred Units and Class A Common Units, of at least 15%, an IPO that results in gross proceeds of at least $150,000 and an annualized rate of return, realized entirely in cash, on the Preferred Units and Class A Common Units, of at least 15%, a liquidity event or a transfer, as defined. To the extent the return is not entirely realized in cash in the case of a qualifying IPO, 50% of the Class B Common Units shall become vested and the remainder will vest contingent upon the performance of the Company’s stock price over the two years immediately following the IPO. Upon vesting, each Class B Common Unit will convert into one Class A Common Unit. Prior to vesting, Class B Common Units have no voting rights.

In the event that the Company terminates the Key Employee for Cause or he resigns without Good Reason, as defined, all unvested Class B Common Units owned by either party will be forfeited. In the event that the Company terminates the Key Employee without Cause, he resigns for Good Reason, or his employment with the Company ends due to death or disability, the employee and FINEII may retain 20% of the unvested Class B Common Units for each full year the Key Employee was employed by the Company. As of the date of grant, February 23, 2011, the Company has determined the fair value of the Class B Common Units held by the Key Employee to be $3,145, in aggregate. The fair value was determined utilizing a Black-Scholes model, discounted to account for the inherent lack of marketability of the Units. Significant inputs and assumptions utilized in determining the fair value of the Units include the term, expected volatility, dividend yield and risk-free rate.

With respect to Preferred Units and Class A Common Units held by employees, upon termination of employment without Cause or for Good Reason, as defined, the Company shall redeem promptly all Preferred Units and, at the option of such employee, all Class A Common Units held by such employee at Book Value, as defined.

Under the LLC Agreement, as amended, a 7% capital charge (“Capital Charge”) accrues as a preference to the Preferred Units on unreturned Capital Contributions and Retained Earnings.

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

On an accumulated basis through November 30, 2016 and November 30, 2015, respectively, the Company called $8,162,281 and $7,464,781 of capital from its members to fund new investment originations, acquisitions and working capital. Cumulatively through November 30, 2016 and November 30, 2015, respectively, the Company distributed $8,162,799 and $7,145,234, of which $145,067 and $108,022 is considered payments of the Capital Charge and Retained Earnings. Of the distributions declared, $7,046 and $5,211 were due and payable to LoanCore and LoanCore Investors at November 30, 2016 and November 30, 2015, respectively, and are included in accounts payable and accrued expenses on the consolidated statements of financial condition.

The total capital commitments of the Company were $400,000 and $600,000 as of November 30, 2016 and November 30, 2015, respectively, as further described in Note 1. Certain amounts of capital previously returned to Members are considered recallable, resulting in net callable, unfunded commitments of $255,452 and $172,431 at November 30, 2016 and November 30, 2015, respectively.

Pursuant to the LLC Agreement, an affiliate of FINEII has the first right to purchase subordinate loans and investments based on market terms. For the years ended November 30, 2016 and November 30, 2015, no loans or investments were sold to FINEII.

Allocation of Net Income and Net Losses

Net income and net losses are allocated to the members in a manner consistent with the LLC Agreement, as amended, which provides for a hypothetical liquidation at net book value of the Company’s assets and liabilities as of the date of presentation and as recorded on the accompanying consolidated statement of changes in members’ equity.

Distributions

Non-liquidating Distributions

No less often than semi-monthly (or more frequently as requested by FINEII or Jefferies), the Company shall distribute the Company’s Available Cash, as defined in the LLC Agreement, as follows:

 

1)

First, to the extent available, to the holders of the Preferred Units,

 

a.

pro rata in accordance with their respective Preferred Percentage Interests until each holder of Preferred Units shall have received an amount equal to, but not in excess of, the unpaid accrued 7% Capital Charge attributable to the Preferred Units; and then

 

b.

pro rata in accordance with their respective Preferred Percentage Interests an amount equal to, but not in excess of, the unpaid accrued 7% Retained Earnings Capital Charge;

 

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2)

Second, to the extent available, to the holders of the Preferred Units, pro rata in accordance with their respective Preferred Percentage Interests until each holder of Preferred Units shall have received an amount equal to, but not in excess of, their Unreturned Capital Contribution; and

 

3)

Third, to the extent available, to the holders of the Class A Common Units, pro rata in accordance with their respective Common Percentage Interests (calculated by excluding from the numerator and the denominator the number of Class B Common Units issued and outstanding).

Liquidating Distributions

Upon a Liquidity Event, the proceeds of such sale, disposition or liquidation and any other available cash shall be applied and distributed as follows:

 

1)

First, to the extent available, proceeds shall be applied to the payment of liabilities of the Company (including all expenses of the Company incident to the Liquidity Event and all other liabilities that the Company owes to the Members or any Affiliates of a Member in accordance with the terms hereof);

 

2)

Second, to the extent available, proceeds shall be applied to the setting up of any reserves which are reasonably necessary for contingent, un-matured or unforeseen liabilities or obligations of the Company;

 

3)

Third, to the extent available, to the holders of the Preferred Units,

 

a.

pro rata in accordance with their respective Preferred Percentage Interests until each holder of Preferred Units shall have received an amount equal to, but not in excess of, their unpaid accrued 7% Capital Charge attributable to the Preferred Units; and then

 

b.

pro rata in accordance with their respective Preferred Percentage Interests until each holder of the Preferred Units shall have received an amount equal to, but not in excess of, their unpaid accrued 7% Retained Earnings Capital Charge;

 

4)

Fourth, to the extent available, to the holders of the Preferred Units, pro rata in accordance with their respective Preferred Percentage Interests until each holder of Preferred Units shall have received an amount equal to, but not in excess of, their Unreturned Capital Contribution; and

 

5)

Fifth, to the extent available, to the holders of the Common Units, pro rata in accordance with their respective Common Percentage Interests.

Per the May 13, 2016 Amendment to the LLC Agreement, to the extent that the sum of the Company’s Retained Earnings and the Maximum Contribution Amounts for all Members exceeds $560,000 as of the end of any fiscal quarter, the Company will promptly (and in any event no later than 45 days after the end of such quarter) make a distribution of Available Cash that is treated as a reduction to Retained Earnings.

 

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Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) reflected in the Company’s members’ equity is comprised of the following:

 

Balance at November 30, 2014		$	(515)
Unrealized loss on translation adjustment			(3,986)
Balance at November 30, 2015			(4,501)
Unrealized loss on translation adjustment			(28,875)
Balance at November 30, 2016		$	(33,376)

 

4.

Transfers of Financial Assets

During the years ended November 30, 2016, 2015 and 2014, the Company sold loans to unaffiliated third parties, as part of securitization transactions. The Company received only cash proceeds from these transactions. As discussed in Note 10, in certain transactions the Company purchased CMBS from the same securitization transactions. Some of the purchased CMBS did not preclude sales accounting treatment for the loans sold under ASC 860. The purchased investment securities, for which the company is the holder of the controlling class, are consolidated as discussed on Note 10.

Transfers of loans as part of securitization transactions that qualified as sales, were derecognized from the consolidated statements of financial condition, resulting in the recognition of aggregate realized gains (losses) of $(2,210), $34,811 and $28,417 for the years ended November 30, 2016, 2015 and 2014, respectively.

During the year ended November 30, 2016, twenty-five loans with an aggregate outstanding principal balance of $616,044 were sold to LoanCore Capital Credit REIT LLC (“LCC REIT”), a related party. LCC REIT is a separate investment vehicle managed by LoanCore Capital, LLC that has certain different investors than the Company. The sale of these loans resulted in a net realized gain of $6,711, which is included in realized gain on sales of loans and other investments in the accompanying consolidated statements of operations and comprehensive income. One of the loans sold to LCC REIT, with an aggregate principal balance of $19,370, as of the date of sale, remains on the Company’s consolidated statements of financial condition with a corresponding liability for proceeds received as the sale did not qualify as a sale for accounting purposes because the Company retained the B Note related to the same underlying collateral and the B Note does not receive cash flows on a pari-passu basis with the sold notes.

During the year ended November 30, 2016, five loan participations, with a face value of $211,575 that had previously not qualified for a sale for accounting purposes have been derecognized because the junior loan interests were included in the sale to LCC REIT and the Company no longer has interests in the whole loans. Also, in March 2016, as a result of a junior participation loan payoff, the related senior participation with a face value of $39,000 was derecognized as a loan participation sold as it qualified to be treated as a sale under ASC 860. This resulted in a net realized gain of $224, which is included in realized gains on sales of loans and other investments in the accompanying consolidated statements of operations and comprehensive income.

 

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Additionally, during the year ended November 30, 2016, one A-1 Note and one whole loan were sold for $48,500 to the DivCore CLO 2013-1, Ltd. (the “CLO”), a related party. The sale of the whole loan to the CLO resulted in a realized gain of $130, which is included in realized gain on sales of loans and other investments in the accompanying consolidated statements of operations and comprehensive income. As of the date of the sale, the A-1 Note sold to the CLO remained on the Company’s consolidated statements of financial condition with a corresponding liability for proceeds received as the sale did not qualify as a sale for accounting purposes because the Company retained a B Note related to the same underlying collateral and the B Note did not receive cash flows on a pari-passu basis with the sold A-1 Note. In November 2016, as a result of the B Note payoff, the related A-1 Note and A-2 Note with a combined face value of $65,000 were derecognized as loan participations sold as they qualified to be treated as a sale under ASC 860. This resulted in a net realized gain of $103, which is included in realized gains on sales of loans and other investments in the accompanying consolidated statements of operations and comprehensive income.

During the year ended November 30, 2015, two whole loans, one A-note and six senior participations were sold for an aggregate of $384,375 to the CLO. The sale of the two whole loans to the CLO resulted in a realized gain of $503, which is included in realized gain on sales of loans and other investments in the accompanying consolidated statements of operations and comprehensive income. The A-note and the six senior participations sold to the CLO remain on the Company’s statements of financial condition with corresponding liabilities for proceeds received as they did not qualify as a sale for accounting purposes because the Company retained either a subordinate participating note or junior participation related to the same underlying collateral and the subordinate participating note or junior participation does not receive cash flows on a pari-passu basis with the sold note or participation.

Additionally, for the year ended November 30, 2015, one whole loan was sold to an unaffiliated third party for $7,177 resulting in a realized gain of $351, one other investment was sold to an unaffiliated third party for $14,925, resulting in a realized gain of $75 and one mezzanine loan was sold to an unaffiliated third party for $5,481, resulting in a realized gain of $451. All realized gains are included in realized gain on sales of loans and other investments in the accompanying consolidated statements of operations and comprehensive income.

During the year ended November 30, 2014, fourteen whole loans and one senior participation were sold for an aggregate of $474,087 to the CLO. Additionally, two loans were sold for $13,492 to unaffiliated third parties. The sale of these loans resulted in a net realized gain of $4,706, which is included in realized gain on sales of loans and other investments in the accompanying consolidated statements of operations and comprehensive income. The senior participation sold to the CLO remains on the Company’s statement of financial condition with a corresponding liability for proceeds received as the sale did not qualify as a sale for accounting purposes because the Company retained a junior participation related to the same underlying collateral and the junior participation does not receive cash flows on a pari-passu basis with the sold participation.

In June 2012, one loan, although legally transferred in connection with its securitization, did not qualify as a sale for accounting purposes because the Company retained a junior participation in the whole loan, and accordingly remained on the Company’s consolidated statements of financial condition with a corresponding liability recorded as loan participations sold. In July 2014, as a result of the junior participation loan payoff, the senior participation of the whole loan was qualified and treated as a sale by the Company under ASC 860. This transaction resulted in the Company

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

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recognizing a $1,450 realized gain on loans for the year ended November 30, 2014. Consequently, the Company also reversed a $2,071 unrealized gain on fixed rate loans and a $621 unrealized loss on loan participations sold during the year ended November 30, 2014.

At November 30, 2016 and 2015, three loans sold and one A-note and seven senior participations, respectively with an aggregate fair value of $132,515 and $370,575 remain on the Company’s consolidated statements of financial condition with a corresponding liability for the proceeds received recorded as loan participations sold, at fair value. The Company has elected to measure these liabilities at fair value, with subsequent changes in fair value reflected as unrealized gain (loss) on loan participations sold in the accompanying consolidated statements of operations and comprehensive income. The estimated fair value of these liabilities is determined using current secondary market prices for loans with similar coupons, maturities, and credit quality, which approximates the estimated fair value of the liability related to the financial asset retained.

 

5.

Repurchase Facilities

The Company has entered into multiple committed master repurchase agreements in order to finance its lending activities. As of November 30, 2016, the Company has six committed master repurchase agreements, as outlined in the table below, with multiple counterparties totaling $980,000 of credit capacity. Assets pledged as collateral under these facilities include whole mortgage loans, participation interests in mortgage loans collateralized by first liens on commercial properties and subordinate loans. The Company’s repurchase facilities include covenants covering net worth requirements, minimum liquidity levels, and maximum leverage ratios including a ratio of total indebtedness to total assets of .83 to 1. The Company believes it is in compliance with all covenants as of November 30, 2016 and November 30, 2015.

The Company’s wholly-owned subsidiary, JLC Warehouse II LLC (“JLC WH II”) entered into a $300,000 Master Repurchase Agreement on August 25, 2011. This facility was scheduled to terminate on August 25, 2014 with the option to extend for an additional year, subject to certain conditions. On February 14, 2014, this master repurchase agreement was amended. The facility amount was increased to $350,000 and the termination date was extended to February 14, 2017 with an option to extend for up to two one-year extensions, subject to certain conditions.

The Company’s wholly-owned subsidiary, JLC Warehouse IV LLC (“JLC WH IV”) entered into a $200,000 Master Repurchase Agreement on December 16, 2013. The facility originally terminated on December 16, 2016. On November 18, 2016, this master repurchase agreement was amended. The facility termination date was extended to December 16, 2017, with an option to extend for two additional one-year periods.

The Company’s wholly-owned subsidiary, JLC Warehouse V LLC (“JLC WH V”) entered into a $350,000 Master Repurchase Agreement on August 25, 2014. On December 20, 2014, the facility amount was increased to $500,000. On June 3, 2016, the facility amount was decreased to $150,000. The facility terminates on August 25, 2017 and has rolling one-year extension options, subject to certain conditions.

The Company’s wholly-owned subsidiaries, JLC Warehouse VI LLC and JLC Mezz VI LLC (collectively “JLC WH VI”) entered into a $220,000 Master Repurchase Agreement on January 20, 2015 with Jefferies Funding LLC, a related party. On January 19, 2016, this master repurchase agreement was amended. The facility amount was decreased to $200,000 and the termination

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

date was extended to July 18, 2016, with an option to extend for an additional six months, subject to certain conditions. On June 15, 2016, this master repurchase agreement was amended. The facility amount was decreased to $130,000 and the termination date was extended to January 18, 2017.

The Company’s wholly-owned subsidiary, JLC Warehouse VII LLC (“JLC WH VII”) entered into a $200,000 Master Repurchase Agreement on July 8, 2015. The facility terminates on July 6, 2016 and has two one-year extension options, subject to certain conditions. On July 12, 2016, this master repurchase agreement was amended. The facility amount was decreased to $150,000 and the termination date was extended to January 12, 2017, with six additional one-month extension options, subject to certain conditions. As of November 30, 2016, the Company has exercised four extension options, which extended the termination date to May 12, 2017.

On August 7, 2013, the Company entered into a Master Repurchase Agreement with Jefferies Funding LLC, a related party. The terms of the agreement are negotiable and determinable on a transaction-by-transaction basis. A transaction is an agreement between JLC (“Seller”) and Jefferies Funding LLC (“Buyer”) in which the Seller agrees to transfer to the Buyer securities or other assets (“Securities”) against the transfer of funds by buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a specified date or on demand, against the transfer of funds by Seller. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any transactions then outstanding.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

A summary of the Company’s repurchase facilities as of November 30, 2016 and November 30, 2015 were as follows:

 

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The repurchase agreements require principal repayments on the financings as principal payments are received on loans held for sale or upon sale or transfer of the loans. All principal and interest payments from borrowers on the Company’s loans held for sale are collected by the Company’s third-party servicers. Under the terms of the Company’s repurchase agreements, all such loan payments are applied toward interest and principal due on the repurchase agreements first with any excess remitted to the Company.

Amortization of deferred financing fees for all repurchase facilities is included as interest expense in the accompanying consolidated statements of operations and comprehensive income and was $4,496, $6,009 and $2,465 for the years ended November 30, 2016, 2015 and 2014, respectively.

 

6.

Credit Facilities

On March 19, 2014, the Company entered into two committed subscription credit agreements, collateralized by the Company’s available commitments, in the aggregate principal amount of $60,000. The Credit Facilities are available on a revolving basis to finance the Company’s working capital needs and for general corporate purposes. On March 19, 2015, the Company amended the two committed subscription agreements by extending the initial term to April 19, 2016. On April 18, 2016, the Company amended the two committed subscription agreements by extending the stated maturity date to April 18, 2017. The terms of the facilities are for one year through April 18, 2017, with two one-year extension options, subject to an extension fee. The subscription credit facilities have an upfront fee, an unused fee and a stated interest rate based on a spread to LIBOR or a spread to prime. The Company had $0 and $0 of borrowings outstanding under these facilities at November 30, 2016 and November 30, 2015, respectively. The Company incurred interest expense of $486, $488 and $475 respectively, for the years ended November 30, 2016, 2015 and 2014, including the unused fee.

As of November 30, 2016 and for the year ended November 30, 2016, the Company believes it was in compliance with all covenants, which include maintaining leverage policies detailed in the LLC Agreement and maintaining a sufficient borrowing base consisting of uncalled capital commitments of members to collateralize the credit facilities borrowings.

On May 26, 2015, the Company’s wholly-owned subsidiary, Jefferies LoanCore (Europe) 2015-1 DAC, entered into a 51,500 GBP credit facility agreement. The facility terminates on January 9, 2017 and has two six-month extension options. The facility was initially collateralized by a 74,541 GBP whole loan that was originated by Jefferies LoanCore (Europe) 2015-1 DAC. At November 30, 2016, the whole loan current balance was 56,389 GBP. The term of the facility is six months longer than the initial term of the whole loan and required an upfront fee to be paid at closing. The Company had 29,570 GBP outstanding under this facility at November 30, 2016. The interest rate on the facility is three-month LIBOR plus 4.50% as of November 30, 2016. The Company incurred interest expense of $2,370 and $1,807, respectively, for the years ended November 30, 2016 and November 30, 2015. Costs incurred related to the facility that were capitalized to deferred financing fees are amortized over the life of the whole loan as that is the expected term of the facility.

On December 16, 2015, the Company’s wholly-owned subsidiary, Jefferies LoanCore (Europe) 2015-2 DAC, entered into a 75,475 GBP credit facility agreement. The facility’s termination date is bifurcated and is six months after the maturity dates for each of the underlying loans. The facility was initially collateralized by three whole loans with an aggregate original principal balance of

 

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(in thousands – except unit data)

 

 

 

107,821 GBP. At November 30, 2016, the current balance of the whole loans collateralizing the facility was 88,280 GBP. The Company had 53,601 GBP outstanding under this facility at November 30, 2016. The interest rate on the facility is three-month LIBOR plus 4.0% as of November 30, 2016. The Company incurred interest expense of $4,107 for the year ended November 30, 2016. Costs incurred related to the facility that were capitalized to deferred financing fees are amortized over the life of the underlying loans, which is the expected term of the facility.

Amortization of deferred financing fees for the credit facilities is included as interest expense in the accompanying consolidated statements of operations and comprehensive income and was $1,556, $837 and $365, respectively, for the years ended November 30, 2016, 2015 and 2014.

 

7.

Bond Payable

On May 31, 2013, the Company issued $300,000 of unregistered senior unsecured notes maturing on June 1, 2020 and bearing interest at 6.875%.

The Company may redeem the notes in whole or in part on and after June 1, 2016 at a redemption price equal to the respective percentage of the principal amount of any Notes being redeemed set forth below during the twelve-month period beginning on June 1 of the year indicated below, plus accrued but unpaid interest, thereon, to, but not including, the applicable date of redemption as described in Section 3.07 of the indenture agreement.

Year:  Percentage

2016: 105.156%

2017: 103.438%

2018: 101.719%

2019 and thereafter: 100.000%

The Company is subject to various financial and operating covenants, including maintaining a non-funding debt to equity ratio of less than 1.75x and a $300,000 minimum GAAP equity requirement, which may be reduced down by subsequent GAAP losses. The Company believes it was in compliance with all of the debt covenants as of November 30, 2016 and November 30, 2015.

Amortization of bond deferred financing fees included as interest expense in the accompanying consolidated statements of operations and comprehensive income for the years ended November 30, 2016, 2015 and 2014 was $1,196, $1,112 and $1,034, respectively.

 

8.

Related Party Transactions

LoanCore provides management services to the Company and the Company reimburses LoanCore for its costs allocable to such activities. For the years ended November 30, 2016, 2015 and 2014, compensation, benefits and administrative costs allocable to the Company and reimbursable to LoanCore were $18,098, $29,273 and $19,891, respectively. As of November 30, 2016 and 2015, amounts owed to LoanCore, net of any LoanCore expenses paid by the Company, were $15,024 and $25,351, respectively, and are included in accounts payable and accrued expenses in the accompanying consolidated statements of financial condition.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

As provided for in the LLC Agreement, the Company engages affiliated entities to provide financial advisory, underwriting, investment banking, loan servicing, insurance, real estate, due diligence, accounting or other services.

The Company has an agreement in place with Divco West Services, LLC (“DWS”), an affiliate, related to the provision of administration, accounting, advisory and financial reporting, which is subject to approval by the Manager. Amounts incurred for services provided by DWS were $240, $240 and $240 for the years ended November 30, 2016, 2015 and 2014, respectively. As of November 30, 2016 and 2015 there were $0 and $0 payable to DWS for these services, respectively.

The Company reimburses DWS for amounts paid on the Company’s behalf for certain administrative, IT and payroll-related expenses. The total reimbursements paid to DWS were $959, $707 and $361, for the years ended November 30, 2016, 2015 and 2014, respectively. LoanCore reimburses the Company for its allocable share of the total amount owed to DWS. As of November 30, 2016 and 2015, the amount payable to DWS by the Company, net of any DWS expenses paid by the Company, were $34 and $59, respectively, which are recorded in accounts payable and accrued expenses in the consolidated statements of financial condition.

On October 28, 2011, the Company entered into a service agreement with Jefferies & Company, Inc. (“Jefferies & Co”), as amended, an affiliate of Jefferies, to obtain services for facilities operations, legal and compliance, technology and other services (“Jefferies Services”). Amounts incurred for Jefferies Services for the years ended November 30, 2016, 2015 and 2014 were $145, $184 and $129, respectively. As of November 30, 2016 and 2015, amounts owed to Jefferies & Co net of any LoanCore expenses paid by the Company, totaled $9 and $15, respectively, which were recorded in accounts payable and accrued expenses in the consolidated statements of financial condition.

As discussed in Note 4, during the years ended November 30, 2016, 2015 and 2014, the Company sold multiple loans to LCC REIT and the CLO.

During the years ended November 30, 2016, 2015 and 2014, the Company incurred $1,050, $1,162 and $1,225, respectively, in underwriting fees to Jefferies & Co. related to the securitization of loans. As of November 30, 2016, and November 30, 2015, $0 and $300, respectively, were payable to Jefferies & Co., which is recorded in accounts payable and accrued expenses in the consolidated statements of financial condition.

As discussed in Note 5, on August 7, 2013, the Company entered into a master repurchase agreement with Jefferies Funding LLC. For the years ended November 30, 2016, 2015 and 2014, the Company incurred $0, $569 and $1,243 of interest expense related to this master repurchase agreement, respectively. At November 30, 2016 and 2015, there was no balance outstanding on this master repurchase agreement.

As discussed in Note 5, on January 20, 2015, the Company entered into a master repurchase agreement with Jefferies Funding LLC. For the years ended November 30, 2016, and November 30, 2015, the Company incurred $8,364 and $10,156 of interest expense and fees related to this master repurchase agreement, respectively. At November 30, 2016 and November 30, 2015, there was $68,095 and $175,063 outstanding on this master repurchase agreement, respectively.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

9.

Loans Held for Sale

The Company has originated and purchased loans mainly consisting of first mortgage and mezzanine positions. The loans are collateralized by various asset types such as office, multi-family, hospitality, industrial, and retail properties. A summary of the Company’s loans held for sale at November 30, 2016 and November 30, 2015, respectively, is as follows:

 

At November 30, 2016 and November 30, 2015, the aggregate fair value of loans in non performing status amounted to $0 and $0, respectively.

During the year ended November 30, 2016, the Company realized $1,000 of impairment on a certain loan with an unpaid principal balance of $9,500 and a fair value of $8,675, which is included

 

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in realized gain (loss) on sale of loans and other investments on the consolidated statements of operations and comprehensive income. The Company recorded the $1,000 of impairment due to an adverse change in the expected cash flows, including an amendment to the loan agreement to write-down the loan principal by $1,000. The fair value of the loan’s collateral was less than the Company’s cost basis of the respective loan and the loan was collateral dependent, meaning the repayment of the loan is expected to be provided solely by the underlying collateral.

On October 30, 2015, the Company originated a floating rate loan in the UK in the original principal amount of 51,370 EUR. The borrower’s project is considered to be a VIE because the equity at risk is not sufficient to finance the activities without additional subordinated financial support. The Company is not considered to be the primary beneficiary of the VIE and the Company also determined its floating rate loan should be accounted for as a loan rather than an investment under ASC 310 given that the Company has no decision making authority or power to direct activity, except normal lender protective rights. The Company elected to account for its loan under the fair value option.

 

10.

Real Estate Debt Securities

Commercial mortgage-backed securities are reported at fair value, given the Company has elected the fair value option, with changes in fair value recorded in unrealized gain on real estate debt securities on the consolidated statements of operations and comprehensive income. The following is a summary of the Company’s real estate debt securities at November 30, 2016. The Company did not hold any real estate debt securities in the annual periods prior to the year ended November 30, 2016.

 

As discussed in Note 2, the Company evaluates all of its investments and other interests in entities for consolidation, including the Company’s investments in CMBS and the Company’s retained interests in securitization transactions, all of which are generally considered to be variable interests in VIEs.

Securitization VIEs consolidated in accordance with ASC 810 are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The Company’s exposure to the obligations of consolidated securitization VIEs is generally limited to the Company’s investment in these entities. The Company is not obligated to provide, nor has the Company provided, any financial support for any of these consolidated structures. The consolidation of the assets and liabilities of securitization VIEs in which the Company is deemed the primary beneficiary has no economic effect on the Company except for the direct beneficial interest securities the Company owns represented by the net interest in securitization VIE disclosed below. The Company consolidated one securitization VIE during October 2016 upon the purchase of the controlling classes of securities in the trust.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The following is a summary of the Company’s consolidated securitization VIEs as of November 30, 2016.

 

Loans transferred to securitization VIE		$	688,423
Loans purchased by securitization VIE			202,518
MTM adjustment			4,517
Principal pay downs			(354)
Interest receivable			246
VIE assets, at fair value			895,350
VIE liabilities, at fair value			(869,972)
Net interest in the securitization VIE		$	25,378

 

11.

Unfunded Lending Commitments

The Company enters into commitments to extend variable credit that are legally binding conditional agreements having fixed expirations or termination dates and purposes. These commitments generally require customers to maintain certain credit standards. Collateral requirements and loan-to-value ratios are the same as those for funded transactions and are established based on management’s credit assessment of the customer. These commitments may expire without being drawn upon. Therefore, the total commitment amount does not necessarily represent future funding requirements. The outstanding unfunded floating rate commitments to extend credit were approximately $0 and $27,832 as of November 30, 2016 and November 30, 2015, respectively.

 

12.

Other Investments

On September 11, 2014, the Company originated a loan in the UK in the original principal amount of 13,158 GBP, including future funding commitments, to a third-party borrower. The borrower was considered to be a VIE because it is thinly capitalized; however, the Company is not considered to be the primary beneficiary. Accordingly, the investment is not consolidated. At the time of origination, the Company elected to account for its interest therein under the fair value option. On August 11, 2015, the Company refinanced the original loan with a new 12,500 GBP floating rate loan. The borrower was not considered a VIE and qualified for accounting treatment as a loan which the Company elected to account for under the fair value option.

On October 10, 2014, the Company, through its wholly owned subsidiary, JLC AP PE LLC, originated a $28,500 Preferred Equity Investment (“AP PE”) by entering into the operating agreement, along with a subsidiary of Atlas Residential (“Atlas”), of P2 Portfolio Investor Holdings, LLC (“P2 LLC”). AP PE was considered to be a VIE; however, initially, the Company was not considered to be the primary beneficiary. Accordingly, the investment was not consolidated. At the time of investment, the Company elected to account for its interest therein under the fair value option. The Company also originated a $20,000 mezzanine loan in conjunction with the origination of AP PE.

P2 LLC was formed for the purpose of originating and holding equity interests in two multi-family properties located in Orlando, Florida. Under the terms of the P2 LLC operating agreement, JLC AP PE LLC is entitled to a 16.0% preferred return per annum based on its unreturned preferred capital amount balance. Pursuant to the P2 LLC operating agreement, the expected repayment date was November 25, 2014. AP PE was not fully repaid on November 25, 2014, triggering a breach in the operating agreement and an increase in the preferred return rate to 36.0%.

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

From May 12, 2015 through December 31, 2015, the Company entered into a series of settlement agreements with the Atlas borrower that resulted in Atlas posting $9,250 in payments, which were applied to AP PE capital, accrued yield on AP PE and fees. In return, the Atlas borrower was given extension options and economic incentives to repay AP PE, including a waiver of exit fees, spread maintenance on the mezzanine loan and breach interest on the AP PE. During this time, the Atlas borrower controlled the rights to sell or refinance P2 LLC, along with the property management function of the properties, therefore the Company concluded it was not the primary beneficiary of P2 LLC, since it did not have the power to direct the activities of the VIE that most significantly impacted the VIE’s economic performance.

On February 24, 2016 (the “consolidation date”), JLC AP PE LLC controlled the rights to sell or refinance P2 LLC and the Company replaced the in-place property manager with a property manager selected by the Company. This gave the Company control of the day-to-day operations at the properties, which is viewed as a key consideration to “control,” in addition to the right to sell the underlying properties. As of February 24, 2016, JLC AP PE LLC was deemed to have control and to have more than a potentially insignificant economic interest in the residual return of P2 LLC, therefore, JLC AP PE was determined to be the primary beneficiary, which triggered consolidation treatment under the Company’s VIE assessment under Topic 810. On September 12, 2016, the Company sold its interests in P2 LLC. See Note 13 for further details. As of November 30, 2015, the fair value of AP PE was $19,524.

On October 30, 2014, the Company, through its wholly owned subsidiary, JLC HS PE LLC, originated a $15,000 Preferred Equity Investment (“HS PE”) by entering into the operating agreements of Student Housing JV Preferred 1201, LLC, Student Housing JV Preferred A-B, LLC and Student Housing JV Preferred P-V, LLC (collectively, the “HS Housing JVs”). The HS Housing JVs were formed for the purpose of originating and holding preferred equity interests in five student housing properties located in various locations within the United States. HS PE is not considered to be a VIE. At the time of investment, the Company elected to account for its interest therein under the fair value option. On February 27, 2015, HS PE was sold to an unaffiliated third party for $14,925 and the Company recognized a realized gain of $75.

The Company recognized a realized loss of $138 on the write-off of one other investment during the year ended November 30, 2015. The write-off was a result of the senior mortgage holder foreclosing on the property and taking title to the collateral on March 3, 2015.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The following summarizes the activity in other investments for the period from December 1, 2015 to November 30, 2016:

Balance at December 1, 2015, at fair value		$	19,524
Contributions to other investments			-
Proceeds from sale of other investments			-
Pay downs of other investments			(618)
Consolidated other investments			(18,912)
Income from other investments			-
Distributions from other investments			-
Origination discount related to other investments paid down			6
Effect of exchange-rate changes			-
Sales and transfers of investment interests			-
Realized loss included in statement of operations			-
Unrealized loss on other investments			-
Balance at November 30, 2016, at fair value		$	-

 

 

 

13.

Real Estate Held for Sale

P2 LLC

During the period ended February 29, 2016, the Company became primary beneficiary related to P2 LLC, the Company’s previously sole equity method investment and a VIE as discussed in Note 12. The underlying properties were currently held for sale by the Company and met the held for sale guidance upon consolidation.

At the consolidation date, the Company recorded the real estate at fair value minus costs to sell and recorded all other related operating assets and liabilities of P2 LLC, including a third party senior mortgage loan. The Company eliminated the mezzanine loan and preferred equity interest previously recorded at a fair value of $19,564 and $18,912, respectively. The following table summarizes the consolidation of P2 LLC and the related effects on the Company’s consolidated financial statements upon consolidation date:

 

Real estate, held for sale		$	143,950
P2 LLC operating assets			5,684
Senior mortgage loan			105,000
P2 LLC operating liabilities			3,296
Net real estate assets acquired, held for sale			41,338
Elimination of Company interests:
Mezzanine loan, at fair value			19,564
Preferred equity investment, at fair value			18,912
Reversal of unrealized loss upon consolidation of real estate			948
Bargain purchase gain upon consolidation		$	1,914

For the year ended November 30, 2016, the Company recorded $525 of income, relating to the Company’s interests in P2 LLC before the consolidation date and $1,835 of income from operations of discontinued real estate properties relating to the consolidated results of P2 LLC for year ended November 30, 2016, for the post consolidation date. On September 12, 2016, the Company sold its interests in P2 LLC. This resulted in a net realized gain of $4,455, which is included in realized gain on real estate in the accompanying consolidated statements of operations and comprehensive income.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

JLC Hunters LLC

On August 5, 2016, the Company took ownership of a real estate asset that had previously collateralized a $12,500 first mortgage loan the Company had originated. The underlying property is currently held for sale by the Company and met the held for sale guidance upon purchase.

During the year ended November 30, 2016 and before the purchase of the real estate asset, the Company recognized $1,375 of unrealized loss on loans held for sale, reversed $3,500 of accumulated unrealized loss and recognized $3,500 of impairment on the first mortgage loan with an unpaid principal balance of $12,500, which is included in realized gain (loss) on sale of loans and other investments on the consolidated statements of operations and comprehensive income. The Company previously realized $3,825 of impairment on the first mortgage loan as of November 30, 2015. The Company recorded the impairment due to an adverse change in the expected cash flows, as the fair value of the loan’s collateral is less than the Company’s cost basis of the respective loan and the loan is collateral dependent, meaning the repayment of the loan is expected to be provided solely by the underlying collateral. Since the purchase of the real estate asset, the Company has recognized $100 of impairment on the real estate, which is included in realized gain on real estate in the accompanying consolidated statements of operations and comprehensive income.

At the date of purchase, the Company recorded the real estate at fair value minus costs to sell and recorded all other related operating assets and liabilities of JLC Hunters LLC. The Company eliminated the first mortgage loan and B-note interest previously recorded at a fair value of $7,000. The following table summarizes the consolidation of JLC Hunters LLC and the related effects on the Company’s consolidated financial statements:

 

Real estate, held for sale		$	6,993
Hunters operating assets			150
Net real estate assets acquired, held for sale			7,143
Elimination of Company interests:
Adjustable rate loan, at fair value		$	7,000

The following table presents additional details related to JLC Hunters LLC’s real estate held for sale, related assets and liabilities at November 30, 2016:

 

Buildings		$	6,131
Land			762
Cash			100
Accounts receivable and other assets			50
Real estate and related assets, held for sale		$	7,043

Future scheduled minimum rents on the JLC Hunters LLC property, exclusive of any renewals, include $51 for the year ended November 30, 2017 and $2 for the year ended November 30, 2018.

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The consolidated assets of JLC Hunters LLC are included on the consolidated statements of financial condition as real estate and related assets, held for sale. The assets of JLC Hunters LLC are restricted for use for the operations of JLC Hunters LLC and cannot be used to settle unrelated JLC Hunters LLC liabilities of the Company. Also, the creditors of JLC Hunters LLC have no recourse to the Company’s general credit.

 

14.

Fair Value

The following table presents the financial instruments carried on the consolidated statements of financial condition by level within the valuation hierarchy as of November 30, 2016:

 

The following table presents the financial instruments carried on the consolidated statements of financial condition by level within the valuation hierarchy as of November 30, 2015:

 

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

Level 3 Fair Value Asset and Liability Input Sensitivity

Changes in unobservable inputs may have a significant impact on fair value. Certain of the unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value may move in the opposite direction for a given change in another input. In general, an increase in the discount rate and credit spreads, in isolation, would result in a decrease in the fair value measurement and a decrease in these same inputs would result in an increase in the fair value measurement.

The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair value measurements at November 30, 2016 and November 30, 2015:

 

 

(1)

Fixed rate loans held for sale are measured at fair value using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing.

(2)

Represents profit margin range on hypothetical securitization scenario on fixed rate loans.

(3)

The Company believes fair value approximates the estimated future cash flows the Company will receive from each other investment.

(4)

The Company has excluded three A-notes with an aggregate face amount of $132,515 from the calculation of Yield and Remaining Maturity as they were legally transferred in connection with sales, but did not qualify as sales for accounting purposes as described in Note 4, and therefore, still remain on the Company’s consolidated statements of financial condition.

(5)

The Company has excluded one A-note and seven senior participations, with an aggregate face amount of $370,575 from the calculation of Yield and Remaining Maturity as they were legally transferred in connection with sales, but did not qualify as sales for accounting purposes as described in Note 4, and therefore, still remain on the Company’s consolidated statements of financial condition.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The following is a reconciliation of the beginning and ending balances for loans held for sale and other investments, as well as loan participations sold measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended November 30, 2016 and November 30, 2015:

 

 

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Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The following table presents the Company’s investments and loan participations sold carried at estimated fair value on a recurring basis in the consolidated statements of financial condition as of November 30, 2016 and November 30, 2015:

 

The following table summarizes the effect of the Company’s investments on the consolidated statements of operations and comprehensive income for the years ended November 30, 2016, 2015 and 2014:

 

 

(1)

Realized gain on sales of loans and other investments for the year ended November, 30, 2015 includes $404 of realized loss on interest rate locks.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

Loans held for sale are measured at estimated fair value based upon a hypothetical securitization model utilizing data from recent securitization spreads and pricing, the application of discount rates to estimated future cash flows using market yields or other valuation methodologies. These valuations are adjusted to consider loan pricing adjustments specific to each loan. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, estimated fair values are not necessarily indicative of the amount the Company could realize on disposition of the loans. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts.

The Company has not elected the fair value option related to its bond payable, repurchase facilities and credit facilities. The amortized cost basis of the repurchase facilities and credit facilities presented on the face of the consolidated statements of financial condition at November 30, 2016 and November 30, 2015 approximates fair value, given the short-term nature and interest rate resets of each facility. The estimated fair value of the liability related to bond payable at November 30, 2016 is based on the “ask” price at the last trading day of the period presented. The “ask” price at November 30, 2016 was 95.75, resulting in a fair value of the bond payable of $287,250. The “ask” price at November 30, 2015 was 98.25, resulting in a fair value of the bond payable of $294,750.

The carrying value of other financial instruments, including cash and cash equivalents, restricted cash, accrued interest receivable and accounts payable, approximate the fair values of the instruments due to their short-term nature.

As discussed above, the Company measures the assets and liabilities of consolidated securitization VIEs at fair value pursuant to the Company’s election of the fair value option. The securitization VIEs in which the Company invests are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the securitization VIE, the Company maximizes the use of observable inputs over unobservable inputs. The principal market for selling CMBS assets is the securitization market where the market participant is considered to be a CMBS trust. This methodology results in the fair value of the assets of a static CMBS trust being equal to the fair value of its liabilities.

 

15.

Derivative Instruments

The Company uses derivatives and interest rate lock commitments primarily to manage the estimated fair value variability of fixed rate loans held for sale caused by market interest rate fluctuations. At times, interest rate swaps are pledged as collateral in the Company’s master repurchase agreements. The Company uses foreign currency forwards primarily to manage foreign currency fluctuations.

Goldman Sachs International, Jefferies Derivative Products, LLC, a related party, Jefferies Financial Services, Inc., a related party, Credit Suisse Securities (USA) LLC and Wells Fargo Securities LLC were the counterparties on all of the Company’s interest rate swaps, foreign currency forwards and corporate credit index positions as of November 30, 2016 and November 30, 2015 and during the years then ended.

In valuing its derivatives, the Company considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement, from the perspective of both the Company and its counterparties. All of the Company’s interest rate swaps,

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

corporate credit index hedges and foreign currency forward contracts are either subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”). For its derivatives subject to bilateral collateral arrangements, the Company has netting arrangements in place with all derivative counterparties pursuant to the standard documentation developed by the International Swap and Derivatives Association (“ISDA”). For the swaps and credit derivatives cleared under the Dodd Frank Act, a Central Clearing Party (“CCP”) stands between the Company and its over-the-counter derivative counterparties. In order to access clearing, the Company has entered into clearing agreements with Future Commission Merchants (“FCMs”). The Company is permitted to net all exposure with a common CCP and FCM under enforceable netting agreements, where a legal right of offset exists. Consequently, no credit valuation adjustment was made in determining the fair value of the Company’s derivatives.

On September 11, 2014, the Company originated a loan in the UK in the original principal amount of 13,158 GBP, including future funding commitments, to a third-party borrower. This loan was refinanced by the Company on August 11, 2015. The new floating rate loan had an original principal amount of 12,500 GBP, including future funding commitments. As part of the underlying loan agreement, the Company was given a share warrant instrument, which enables the Company to subscribe for shares representing 33.3% of the borrower’s ordinary issued share capital. This share warrant instrument is freely transferable and is accounted for as a bifurcated derivative, rather than an embedded derivative, given the terms of the agreement. The share warrants have a fair value of $1,519 and $1,700 as of November 30, 2016 and November 30, 2015, respectively. This valuation is based on the Company’s internal analysis, which was primarily driven by the net asset value of the share capital at November 30, 2016, assuming a hypothetical liquidation of all assets and liabilities and considering control and liquidity restraints of the instrument.

On January 21, 2015, the Company originated a B-note loan in the UK in the original principal amount of 39,967 GBP, to a third-party borrower. The Company upsized the loan by 13,251 GBP on September 4, 2015, increasing the loan balance to 53,218 GBP. This loan was refinanced by the Company on December 16, 2015. The two new floating rate loans had a combined original principal amount of 96,675 GBP. As part of the original underlying loan agreement, the Company was given a share warrant instrument, which enables the Company to subscribe for shares representing 25.0% of the borrower’s ordinary issued share capital. This share warrant instrument is freely transferable and is accounted for as a bifurcated derivative, rather than an embedded derivative, given the terms of the agreement. The share warrants have a fair value of $1,985 and $4,202 as of November 30, 2016 and November 30, 2015, respectively. This valuation is based on the Company’s internal analysis, which was primarily driven by the net asset value of the share capital at November 30, 2016, assuming a hypothetical liquidation of all assets and liabilities and considering control and liquidity restraints of the instrument.

On May 26, 2015, the Company originated a floating rate loan in the UK in the original principal amount of 74,542 GBP, to a third-party borrower. As part of the underlying loan agreement, the Company was given a share warrant instrument, which enables the Company to subscribe for shares representing 25.0% of the borrower’s ordinary issued share capital. This share warrant instrument is freely transferable and is accounted for as a bifurcated derivative, rather than an embedded derivative, given the terms of the agreement. The share warrants have a fair value of $2,303 and $2,117 as of November 30, 2016 and November 30, 2015, respectively. This valuation is based on the Company’s internal analysis, which was primarily driven by the net asset value of the share capital at November 30, 2016, assuming a hypothetical liquidation of all assets and liabilities and considering control and liquidity restraints of the instrument.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The following table is a summary of notional amounts and estimated fair values of derivative instruments as of November 30, 2016 and November 30, 2015:

 

Note:

 

1)

Interest rate swaps are included in derivative assets and derivative liabilities on the consolidated statements of financial condition as of November 30, 2016 and November 30, 2015.

2)

Corporate credit index is included in derivative liabilities on the consolidated statements of financial condition as of November 30, 2016 and November 30, 2015.

3)

FX forward contracts are included in derivative assets and liabilities on the consolidated statements of financial condition as of November 30, 2016 and November 30, 2015, respectively.

4)

Other derivatives are included in derivative assets on the consolidated statements of financial condition as of November 30, 2016 and November 30, 2015.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

The effect of the Company’s derivative instruments on the consolidated statements of operations and comprehensive income for the years ended November 30, 2016, 2015 and 2014 was as follows:

 

(1)

Realized loss on interest rate locks of $404 is reflected in realized gain on sales of loans and other investments in the consolidated statements of operations and comprehensive income.

 

16.

Offsetting Assets and Liabilities

Credit Risk-Related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision whereby if the Company defaults on certain of its indebtedness, the Company could also be declared in default on its derivatives, resulting in an acceleration of payment under the derivatives. As of November 30, 2016 and November 30, 2015, the Company was in compliance with these requirements and not in default on its indebtedness. As of November 30, 2016 and November 30, 2015, there was $13,222 and $13,922 of cash collateral held by the derivative counterparties for these derivatives, respectively. No additional cash is required to be posted if the acceleration of payment under the derivatives was triggered.

The following tables present both gross and net information about derivatives and other instruments eligible for offset in the consolidated statements of financial condition as of November 30, 2016 and November 30, 2015. The Company’s accounting policy is to record derivative asset and liability positions on a gross basis, therefore the following table presents the gross derivative asset and liability positions recorded on the consolidated statements of financial condition while also disclosing the eligible amounts of financial instruments and cash collateral to the extent those

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

amounts could offset the gross amount of derivative asset and liability positions. The actual amounts of collateral posted by or received from counterparties may be in excess of the amounts disclosed in the following table as the following only discloses amounts eligible to be offset to the extent of the recorded gross derivative positions.

 

 

(1)

Included in restricted cash on consolidated statements of financial condition.

(2)

The cash collateral not offset in the consolidated statements of financial condition may exceed any gross derivative liability position balance. In that case, the total amount that is reported as cash collateral not offset in the balance sheet is limited to the gross derivative liability position balance. In the case of a gross derivative asset position balance, no collateral posted by the Company will be shown in the above table.

Master netting agreements that the Company has entered into with its derivative and repurchase agreement counterparties allow for netting of the same transaction, in the same currency, on the same date. Assets, liabilities, and collateral subject to master netting agreements as of November 30, 2016 and November 30, 2015 are disclosed in the tables above. The Company presents its derivative and repurchase agreements gross on the consolidated statements of financial condition.

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

17.

Commitments

Incentive Compensation

Employees of the Company may be eligible for incentive compensation based upon the performance of the Company per individual employment agreements. The amount of the incentive compensation pool in any fiscal year is based upon a fixed percentage of net income adjusted for certain operating expenses and excess compensation paid in prior periods, subject to Available Cash, as defined. Under these agreements, the Members may approve an increase in the amount of the incentive compensation pool earned in any fiscal year. The amounts of accrued incentive compensation included in compensation and benefits expense for the years ended November 30, 2016, 2015 and 2014 were $9,875, $18,857 and $8,789, respectively.

After allocation of the incentive compensation pool under these arrangements, certain officers are subject to a deferral of 20% of any annual incentive compensation allocated to them in a fiscal year, which vests over a three-year period following the fiscal year that the incentive compensation was earned, subject to additional tenure related provisions that may reduce that three-year deferral period. As of November 30, 2016 all deferred compensation is fully vested due to the aforementioned additional tenure related provisions. Deferred balances accrue a 7% rate of interest during the deferral period. For the years ended November 30, 2016, 2015 and 2014, $321, $413 and $386 of interest was accrued and recognized in interest expense, respectively. Incentive compensation that was deferred for the years ended November 30, 2016, 2015 and 2014 was $415, $1,217 and $0, respectively. For the years ended November 30, 2016, 2015 and 2014, $905, $1,773 and $2,776 were recognized as deferred compensation expense, respectively. The deferred amount of the incentive compensation is recognized in compensation and benefits expense on a straight-line basis over the vesting period. As of November 30, 2016 and 2015, there was $0 and $490 of unamortized deferred compensation expense, respectively.

Obligations under Lease Agreements

The Company is the lessee of office spaces located in Greenwich, Connecticut, Los Angeles, California, Irvine, California, Atlanta, Georgia, Chicago, Illinois and the UK. The following table presents minimum future rental payments under these contractual lease obligations as of November 30, 2016:

 

Years Ending November 30:
2017		$	663
2018			660
2019			643
2020			529
2021			505
Thereafter			1,388
Total minimum lease payments		$	4,388

 

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Jefferies LoanCore LLC

Notes to Consolidated Financial Statements - 2014 is not covered by the Independent Auditor’s Report included herein

(in thousands – except unit data)

 

 

 

18.

Subsequent Events

On January 10, 2016, the Company’s wholly-owned subsidiary, JLC WH VII extended the termination date of its master repurchase agreement to July 5, 2017. On January 18, 2017, the Company’s wholly-owned subsidiaries, JLC Warehouse VI terminated its master repurchase agreement in accordance with the terms of the agreement.

The Company has performed an evaluation of events that have occurred subsequent to November 30, 2016 and through January 23, 2017, the date these financial statements were available for release, and has determined that there were no further material subsequent events that occurred during such period requiring recognition and/or disclosure in these financial statements.

 

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