Jefferies, Cantor Rated 'Negative' with Some Words of Warning

Standard & Poor’s cut its outlook Friday on three institutional brokers, warning they could be in for an extended period of pain, while at the same time acknowledging a reduction in risk and leverage at all three.

The ratings agency loweredits outlooks for Jefferies Group and Cantor Fitzgerald to “negative” from “stable” and also, put its BBB- rating on GFI Group on Creditwatch negative.

It should come as no surprise to anyone tracking the markets that investment banking—and bankers—have been suffering.

Layoffs and shrinking bonuses are two of the more obvious indicators of an industry in flux. What might be different is the wary tone of the ratings agency's language.

The following is an excerpt from Standard & Poor's release:

We believe that brokers with institutional sales and trading and investment banking businesses are likely to face a prolonged period of low profitability and possibly other financial pressures because of ongoing weakness in the financial markets.

Borrowing language from the Fed, Standard & Poor’s is putting the industry on alert that this slump in trading volume could be here for a long time.

But, that’s not all. S&P analysts highlight concerns about financial issues in Europe and its impact on the banking system, the securities market and more specifically, those that rely on leveraging funds that come from places other than core deposits.

We also believe that these conditions could further increase the already high confidence sensitivity of leveraged wholesale funded institutions like Jefferies and Cantor.

Jefferies Group had cut its leveraged bets and exposure to European debt last year after concerns were raised following the collapse of MF Global. While the majority of analysts tracked on CNBC.com rate Jefferies a “hold” its shares have lost 39 percent over the past year. GFI Group is down 13.2 percent over the same time frame and is also largely rated “hold,” with two analysts rating it a “strong buy.”

The full S&P release can be found here.

Follow me on twitter @LoriSpechler and read more of my posts on http://marketinsider.cnbc.com

Disclaimer