Investment Banking | Equities | Fixed Income | Wealth Management
To Our Clients:
Today’s Capital Markets
Three months ago, we wrote to you about inflection points, challenges and
opportunities, as well as learning from history. Now that the first calendar quarter
of 2016 has come to a close, it is clear that these past few months have brought
incredible levels of volatility and pain to almost every corner of the investing
world. Equity and leveraged finance markets were all but totally shut down, the
concept of a Brexit raised a potentially new systemic issue, and horrific acts of
terror like the bombings in Brussels seem to be becoming the norm versus
isolated incidents. As is often the case, periods such as this are not about winning,
but about persevering, surviving and regrouping. As many of you may have read,
Jefferies was not immune from these events and challenges, but we too hunkered
down, absorbed the blows that came our way, and have emerged more focused
and driven than ever.
At the moment, the financial world is enjoying a respite and somewhat of an
uplift due to what seems like another round of well-coinciding strategies from the
major central banks around the world. Their efforts to lighten their touch to the
markets, go their separate ways or, to some extent, compete with each other, all
proved too much for the markets to bear, and we have returned to what may be
an even more aligned effort at reflation and encouraging of risk taking. There was
even a rare period of “panic buying” when investors decided they were now
painfully too short on risk. Whatever the facts, the result is clear, at least for now:
the markets have settled back into a comfort zone of moderate risk on, with wary
eyes over all shoulders. Credit is making a comeback and leveraged finance is
getting some appreciation. Our hunch is that a warmer Spring is ahead, but most
likely with a few rainy and windy days. For companies and sponsors, there will be
the opportunity to sell, finance and refinance, but as always at times like this,
please take advantage of the markets as they are and don’t count on or seek a
better day. For investors, value is coming into focus and opportunities do exist,
albeit with the possible need to hedge or otherwise offset the risks one is taking.
At Jefferies, we are open for business, as always. Our tribe of investment bankers,
salespeople, traders, analysts and other professionals are focused 100% on
serving our clients with our best advice and execution.
Jefferies sits in a unique position at a pivotal moment in the evolution of the
capital markets. If regulators, issuers and investors could turn back the clock,
what might they wish for? Separation of banks and securities firms? Limits on the
APRIL 2016
IN THIS ISSUE
Economics and Strategy
• Did the G20 Declare a Truce in the
Currency War?
• From Fear to Greed
• U.S. Outlook – FOMC: More Realistic
Rate Hike Projections, Tri-Mandate,
Falling Behind the Inflation Curve?
• European Outlook – Déjà Vu: ECB
Awaiting the Fed, with the Brexit
Vote Set to Disrupt the Markets and
the Real Economy
Actionable Ideas for Companies and Sponsors
EQUITY CAPITAL MARKETS
• European Monetary Policies Driving
Issuers to the Convertible Market
• Structured Equity Financing from
Private Equity
• Using Primary Forward Equity Offerings
to Fund M&A
DEBT CAPITAL MARKETS
• Recent Reopening of High Yield Bond
Markets Across Both U.S. and Europe
• Repurchasing Deeply Discounted Debt
for Financial and Strategic Purposes
• Debt Portability Provisions Facilitating
M&A Transactions
MERGERS AND ACQUISITIONS
• Go-Private Transactions on the Rise
• Corporations Turning to Private Equity
as White Knights
• Using Asset Swaps as an Alternative to a
Traditional Sale Transaction
RESTRUCTURING AND RECAPITALIZATION
• Rights Offerings as an Effective Financing
Mechanism for Distressed Companies
MUNICIPAL FINANCE
• New Optional Redemption Alternative
for Tax-Exempt Municipal Bonds
Best Research Ideas
AMERICAS
• Jefferies SMID-Cap Perspectives
• PayPal “Pulse” – Survey Says... Pay with
Venmo Could Be a Hit
EMEA
• Vodafone plc – Window of Opportunity;
Upgrade to Buy
• Novartis AG – Entresto Deep Dive;
Getting the Launch into Shape
ASIA
• China Integrated Oil – Cash Dry, But
There’s No Stopping the Supermajor:
Initiate on Sinopec Group
• Japan Banks – Kuroda’s NIRP Shuffles
the Deck: Upgrade SMTH; Downgrade
Mizuho and Resona
APRIL 2016 2
Investment Banking | Equities | Fixed Income | Wealth Management
scale and concentration in banking? Specialists assigned to assure some rational level of liquidity in stocks? More
centralized trading venues whose purpose is to facilitate rather than profit? More than mils or one cent in price
differential between buyers and sellers such that intermediaries can provide some cushion and support? We ask these
questions because the issues of depth of liquidity, volatility and systemic risk remain gating concerns for the markets
and all participants. We expect the world will continue to move forward, and markets, investors, issuers and
intermediaries will continue to adapt their strategies and systems to best cope with the opportunity and
challenges ahead.
At Jefferies, our response to our clients’ needs and our own perception of the direction of market structure, as well as
that of our competitors and potential future competitors, is to continue to strengthen and deepen our capabilities.
What you may have understood from our actions over the past year is that we are laser focused on our core
businesses of Equities, Fixed Income and Investment Banking, and are continuing to add exceptional individuals into
key roles around our firm where they can improve or establish our service to you in a particular sector, service or
product. We continue to develop further and strengthen the solutions we offer you to navigate increasingly complex
markets. In Equities, we offer state of the art algorithms and electronic access, and in both Equities and Fixed Income,
we have broadened the range of access to execution alternatives and continued to strengthen the quality and volume
of ideas we share with you each day. As our continued efforts to build and strengthen our business demonstrate, we
are more committed than ever to being a leader in all the Fixed Income products we trade. In the last twelve months,
we have added measurably to the breadth of our Investment Banking capabilities, as well as the depth of our sector
knowledge and coverage. At this time of epic change on Wall Street, the City of London and around the world,
Jefferies will continue to deliver for you, our clients, and to strive to be better every day.
We thank you for your support and look forward to seeing you soon,
Sincerely,
Rich and Brian
RICHARD B. HANDLER
Chairman of the Board and CEO
1.212.284.2555
BRIAN P. FRIEDMAN
Chairman, Executive Committee
1.212.284.1701
APRIL 2016 3
Investment Banking | Equities | Fixed Income | Wealth Management
Economics and Strategy
Did the G20 Declare a Truce in the Currency War?
The decision by the European Central Bank (ECB) at their meeting this month represents a sharp change in the usage
of extraordinary monetary policies during the post crisis era. Mario Draghi delivered aggressively on all easing
measures related to the DOMESTIC credit channel. He upped QE purchases by a larger than expected €20 billion per
month. He introduced the purchase of non-financial investment grade (IG) corporate bonds. And he set up
refinancing facilities which will allow financial institutions to secure long term funding for European securities at rates
as low as -40 basis points. Mario went “full bazooka” on the DIRECT QE led portfolio balance channel. These policies
will DIRECTLY ignite domestic credit formation in the Eurozone. Further, they will DIRECTLY force a portfolio
movement out of risk-free/IG assets into higher risk assets. And of course, this is what we all hope will spark animal
spirits, business investment, job creation, real returns on capital and a real business cycle upswing in the Eurozone.
What was missing in Mario’s new policy directive was the traditional usage of risk free real rates as a driver of further
easing. Of course he did take the depo rate down by -10 basis points, but at the same time he crushed forward
guidance in the press conference. And it was the latter which created all the confusion (i.e., the four-figure rise in
EURUSD). Basically, Mario declared that the ECB was done with using the INDIRECT rate channel as a way to spur
credit formation, investment growth and portfolio balance effects. The question of course is – why did he do that?
Let me say up front that I do not think it has anything to do with the effectiveness of further moves into negative
territory for short-term rates. These moves are highly effective—they lower real rates, spur investment and
consumption, and most importantly weaken the currency. But it is this latter effect which has been so troublesome for
all central bankers. It is what has been at the heart of the “currency war” debate since the Fed started using rates and
forward guidance back in 2008. Using the interest rate channel to drive a credit easing can end up stealing growth
from trading partners via the currency, which in turn can create a lot of negative externalities.
What Mario did was to engineer a credit easing without a currency devaluation, and my suspicion is that this was all part
of a gentlemen’s agreement back at the G20 meeting. Here was what I think happened in Shanghai. The Bank of Japan
(BoJ) and ECB proclaimed that they were both going to ease aggressively in March. The People’s Bank of China (PBOC)
then said, “Well, if you drive the EUR to parity and JPY to 130 with deeper negative rates we will break the USD peg.”
And that’s when everyone said, “Ooohhh, not so fast.” It was surely well understood by all participants that the August
and January CNY moves had destroyed all the hard reflationary work the ECB and BoJ had done since Q4 2014. A full
break in the CNY peg would bring a further nasty and unwieldy tightening in global financial conditions (i.e., our 1998
argument). No one wanted that! Also, it was no doubt widely understood by all those involved that the Chinese (with
the peg in place) could not take a significant strengthening in the USD Index (DXY) given their domestic debt and
growth situation. So the players in this very complex currency war game all sat down and came up with a simple
agreement. The ECB and BoJ would focus purely on the DOMESTIC credit easing channel. They would not use these
highly powerful negative rates (and forward guidance) to lower risk free real rates and in turn weaken their currencies.
Further, the Fed likely gave assurances that it would not remove accommodation too quickly via rate rises. That would
also keep the DXY in check and give the Chinese time to use fiscal policy and structural reforms to manage the unwind
of their debt bubble. All that said, I can imagine the Fed is thinking long and hard about ways to focus less on rate rises
and more on a domestic credit tightening if conditions warrant further accommodation removal. The exchange rate
externalities which arise from using rates may simply be too problematic given the delicate bilateral “detente” structure
between the PBOC and FOMC. That is certainly some food for further thought.
APRIL 2016 4
Investment Banking | Equities | Fixed Income | Wealth Management
In any case, the easiest way to confirm this G20 currency peace agreement theory will be to watch the actions of other
central banks over the coming months. If they ramp ETF purchases and look to set up funding structures which
DIRECTLY support portfolio balance moves into riskier assets, while at the same time playing down the future use of
negative rates, then “it’s a bingo” as Christoph Waltz would say! If there truly is a currency peace agreement in place,
all market correlation patterns between currencies, rates and equities will need to change. This could create some
very “spiky” flows in the coming weeks as many systematic algorithms begin to break.
— David Zervos, Chief Market Strategist
From Fear to Greed
Global equities experienced a torrid start to the year as investor concerns over China’s currency, a possible U.S.
recession, falling commodity prices and worries about central bank credibility led to a broad-based sell-off. Anxieties
over further Fed tightening, widening credit spreads and deflation fears pushed investors to the sidelines as fund
managers worried over possible redemptions. However, better U.S. economic data, a surprise cut in China’s Reserve
Ratio and a rebound in oil prices quickly reversed sentiment with fund flows picking-up into quarter end. Global
equity prices almost repaired back to where they started from, led by emerging markets (EM). Investor positioning in
EM remains close to 15 year lows.
Looking forward, we believe the equity story for 2Q will be about rotation as investors broaden their country
allocation towards EM as a lot of bad news has already been discounted, while at the same time widening their sector
composition given the value-on offer in financials, mining, materials and energy in the developed markets.
— Sean Darby, Global Head of Equity Strategy
U.S. Outlook – FOMC: More Realistic Rate Hike Projections, Tri-Mandate, Falling Behind the Inflation Curve?
The March 16-17 FOMC meeting was noteworthy for a few reasons.
First, the Dot Plot of year-end fed funds rate projections in the Summary of Economic Projections (SEP) reflected a 50
basis point decline in the median year-end fed funds rate for both 2016 and 2017. FOMC policymakers continued to
signal an intention of implementing a gradual pace of rate normalization but reduced the number of projected rate
hikes in 2016 from the four embodied in the December 2015 Dot Plot to two rate hikes this year. The updated 2017
SEP fed funds rate projections still embody four rate hikes.
Second, the FOMC increased the weight given to “global economic and financial developments” in policy
deliberations. In effect, policymakers elevated overseas considerations to dual mandate status during the current
phase of the rate normalization process that features a significant divergence in central bank policies globally.
In her recent speech before the Economic Club of New York on March 29, Janet Yellen made it quite clear that the
FOMC will “proceed cautiously in adjusting policy” and attempted to justify the lower FOMC SEP fed funds rate
projections by focusing on a variety of downside risks to the Fed’s baseline projections.
Yellen sent a clear message that the FOMC will continue to implement an asymmetric pro-growth policy. In so doing,
Yellen argued that the options of traditional policy logistics are currently asymmetric to the upside because the Fed
can significantly raise rates but cannot cut rates much. Consequently, the FOMC will attempt to offset this logistical
asymmetry by creating a risk to actual policy implementation that is asymmetric in the opposite direction by raising
rates less than would be appropriate if the Fed had the ability to cut rates more aggressively.
This is a prescription for inflation.
APRIL 2016 5
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The Fed is very frustrated with the inability of QE to generate inflation as intended, so Yellen is willing to take
significant policy risk in order to foster an environment that is conducive to inflation. When inflation finally rises above
target, which will likely happen later this year, the Fed response will be very tolerant for a longer period of time than
would normally be anticipated based on Fed history. This increases the risk that the Fed will be perceived as falling
behind the inflation curve later in 2016 and early 2017.
Coming into the year, the Jefferies Economics base case scenario was for a cautious approach to policy with two rate
hikes, the most probable dates for rate hikes being June and December. In this scenario, we expect the FOMC to hold
steady at the April 26-27 FOMC meeting but also lay out the conditions that must be met to pave the way for a June
15 rate hike at that time.
In the aftermath of the March FOMC meeting and Janet Yellen’s more recent comments, this is still Jefferies’ base case
because we expect there to be sufficient progress toward the dual mandate for the Fed to be able to implement the
second rate hike in June.
Finally, given the recently elevated status of “global economic and financial developments” in policy decisions, the UK
Brexit referendum in June is also a highly visible wild card. Depending on the pre-referendum polls and the global
market reaction, the Brexit vote could complicate FOMC policy decisions and interfere with the timing of the next Fed
rate hike despite continued progress toward the dual mandate objectives. If Brexit jitters are roiling the markets in
mid-June, the Fed will be reluctant to throw fuel onto a volatile market environment at that time.
— Ward McCarthy, Chief Financial Economist
European Outlook – Déjà Vu: ECB Awaiting the Fed, with the Brexit Vote Set to Disrupt the Markets
and the Real Economy
As the March meeting demonstrated, the ECB still has the power to surprise. Although Draghi could have done a
better job in communicating the details of the new measures, the decision to start purchasing non-bank corporate
bonds marks an important shift in the ECB’s approach to balance sheet risk.
Importantly, the ECB also left the door open to further interest rate cuts. The fact that both the new Targeted Longer-
Term Refinancing Operation (TLTRO) and the corporate bond purchase program take place in June means that the
ECB, most likely, will do nothing on rates until September – but this particular lever of monetary policy remains very
much at the ECB’s disposal. Meanwhile, the Euro area continues to recover.
In the near term, one issue is likely to dominate all others: the Brexit vote on June 23. The damage to global
confidence from the upcoming vote is hard to estimate, but the increased market volatility leading into the event
could make it very difficult for the U.S. Fed to raise rates at its June 14-15 meeting.
And what happens if the UK does vote to leave? On a two-year view the UK economy would almost certainly be worse
off, as confidence and activity are disrupted by protracted negotiations over the terms of exit. The Bank of England may
well move to cut rates in Q3 and would probably welcome a weaker sterling. In fact, with no precedent, the complexity
of the situation is such that the final negotiations could go on for years after the referendum. Longer term, however, the
benefits/costs of the UK staying in the EU are debatable – which is why the vote is likely to be close either way.
What’s more, in case of an exit vote, the EU might ultimately fare no better than the UK, if the inevitable disruptions to
trade and investment were compounded by fears over the long-term survival of the EU as a political project. With
the new Spanish General Elections scheduled for June 26, and the French and German elections due in 2017, it
might not be long before political uncertainty resurfaces with the ECB responding to a probable widening out in
core/periphery spreads. FULL REPORT
— David Owen, Chief European Financial Economist
— Marchel Alexandrovich, European Financial Economist
APRIL 2016 6
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Actionable Ideas for Companies and Sponsors
EQUITY CAPITAL MARKETS
European Monetary Policies Driving Issuers to the Convertible Market
With the ECB extending its quantitative easing program, combined with a continued lack of convertible supply and
strong investor fund flows, there have been more zero and negative-yield convertible bonds issued in Europe in the last
12 months than in the previous 10 years. Despite the impact of higher volatility, the European convertible market
remains resilient, and we expect quality issuers will continue to come to market to take advantage of these historically
attractive terms. Recently a number of larger issuers have come to market and received unprecedented terms, including
Telefonica (Spain), LVMH (France), Safran (France), Vodafone (UK), Airbus (France), British Land (UK), among others.
Structured Equity Financing from Private Equity
Given the challenging capital markets backdrop, public companies are increasingly receptive to privately-placed
structured investments because they provide companies with execution certainty, the ability to raise large amounts of
capital and the signaling benefits of partnering with respected investors. The investor base for these types of securities
has grown over the years to include not only traditional private equity firms, but also pension funds, endowments
and large family offices. Use of proceeds has also expanded to include share repurchases, repayment of debt and
strategic investments.
Some common structural features of these investments include: 1) the investment size is typically limited to 20% of
the company to allow closing without shareholder approval; 2) the securities are typically convertible into common
stock or warrants to provide investors with upside participation; and 3) investors typically require one or more Board
seats and other corporate governance features depending on the size and purpose of the investment.
Using Primary Forward Equity Offerings to Fund M&A
Primary forward transactions are particularly applicable in volatile markets to fund a pending or potential M&A
transaction where equity financing is required but there is uncertainty around the closing of the acquisition due to
regulatory review or if a specific acquisition has not yet been identified. A primary forward allows an issuer to lock in
its current stock price for potential future equity needs. The issuer can choose to draw down on the proceeds and
incur the dilution whenever necessary until maturity of the contract, typically one year, or to let it expire and make a
catch-up payment depending on stock price movement.
DEBT CAPITAL MARKETS
Recent Reopening of High Yield Bond Markets Across Both U.S. and Europe
The high yield market is currently in the midst of a strong rally, finally breaking a downturn that began in the summer
of 2015. Further, the rally has gained momentum almost on a daily basis. In the U.S. this has resulted in the high yield
broad market index declining 171 basis points over the last 33 trading days through March 31, with the index now
yielding 8.39% after hitting a high of 10.1% on February 11th. In addition, for five of the past six weeks, net inflows
have totaled $12.8 billion, including a record weekly inflow of $5 billion four weeks ago. In Europe, iTraxx has rallied
from a high of 486 basis points on February 11th to 310 basis points today, a 36% improvement, and Europe has seen
a similar trend of positive fund flows into European high yield the past four weeks totaling €3 billion.
As a result of these trends, the recovery now is underway in high yield bond primary issuance, and this is the best new
issue window that we have seen in quite some time. There has been a return of opportunistic deals to refinance
existing debt and for general corporate purposes. New issue premiums have reverted to more normal levels, most
deals are pricing in line or below the initial guidance and many deals are upsizing.
APRIL 2016 7
Investment Banking | Equities | Fixed Income | Wealth Management
Repurchasing Deeply Discounted Debt for Financial and Strategic Purposes
Currently 450 companies in the high yield market are classified as distressed—i.e., trading at a 1000 or more basis
point spread over the comparable Treasury rate—the highest level since September 2009. With the debt of many
issuers trading at such deep discounts to par value and, outside of specific sectors such as Energy, most companies
believing that these levels will rebound over the course of 2016, repurchasing deeply discounted debt now is a very
timely financial strategy. In addition, for financial sponsors and cash rich corporates, this also provides a compelling
environment to purchase the debt of businesses they would like to own in the long term, with the aim of converting
the debt to equity down the road or merging it into a portfolio company.
Debt Portability Provisions Facilitating M&A Transactions
The recent volatility in the leveraged credit market has made debt “portability” provisions extremely valuable, as it is
now driving the ability to complete a large number of M&A transactions that otherwise would not occur. Over the
last two years, an increasing number of portability clauses were put into covenant-lite institutional term loan and high
yield bond documentation, both in the U.S. and Europe, with the effect of these clauses being to give companies the
option to keep a substantial portion of a target company’s existing capital structure in place, and as a result, avoid
having to refinance such debt upon a change of control. Portability provisions provide support to a seller’s M&A
process as: 1) refinancing fees or make-whole payments are reduced or possibly avoided; 2) the cost of debt is likely
to be more favorable; 3) by removing or limiting financing contingencies, transaction risk is substantially lower; and
4) execution timetables are shorter.
MERGERS AND ACQUISITIONS
Go-Private Transactions on the Rise
The decline in equity markets has provided more rational valuations upon which to initiate go-private transactions,
and the high level of CEO and Board frustration with current valuations is driving a record increase in go-private
transactions. Year-to-date, 21 go-privates have been announced, representing an increase of 75% in the number of
go-privates relative to 2015.
Despite lower leverage levels prevailing in today’s markets, IRRs and return-on-cash metrics remain compelling to
investors, as lower leverage has largely been offset by lower valuation. In addition, alternative providers of leverage
are eager to put money to work in the junior levels of the capital structure, providing an important piece of the go-
private financing. Go-privates are of great interest to sponsors who have plenty of dry powder, are eager to put
money to work, and are facing a dearth of sell-sides in which to deploy capital.
Corporations Turning to Private Equity as White Knights
While traditionally white knights have been strategics seeking a friendly negotiated transaction, more companies are
looking to private equity as a solution to avert the demands of activists. The spectrum of private equity involvement
has ranged from minority investments to acquisitions of subsidiaries or assets or a combination of both.
In addition, the larger size of many activist targets provides private equity an opportunity to deploy significant equity
without the requirement of acquiring the company, where often it is challenging to be competitive with strategics. In
return, the companies gain a new investor with significant ownership who, in the near term, is aligned with the
current strategy of management.
APRIL 2016 8
Investment Banking | Equities | Fixed Income | Wealth Management
Using Asset Swaps as an Alternative to a Traditional Sale Transaction
Asset swaps are an attractive alternative to traditional cash or stock deals and are increasingly being used in this
volatile capital markets environment. In an asset swap, two companies exchange assets, businesses or divisions, often
with a balancing payment to equalize the valuation. There are many benefits to an asset swap, including: 1) asset
swaps can bridge disagreements about valuation and soften concerns about cyclically high or low multiples; 2) asset swap
transactions can remove concerns about use of sale proceeds; 3) whereas divestitures can sometimes be viewed as a
sign of weakness, an asset swap can be positioned as strengthening and optimizing the corporate portfolio; and 4)
asset swaps are typically more tax efficient than straight cash divestitures.
RESTRUCTURING AND RECAPITALIZATION
Rights Offerings as an Effective Financing Mechanism for Distressed Companies
The use of rights offerings has become an increasingly popular means of acquiring a company in distressed situations,
including in Chapter 11 bankruptcies. A rights offering provides a debtor and participants with many benefits,
including: 1) providing access to capital; 2) resolving valuation disputes; 3) allocating control; and 4) a potential
exemption from registering the new securities with the SEC. Rights offerings also have proven to be an effective tool
for junior creditors or equity holders to bolster their position.
In bankruptcy, a rights offering allows a company to offer creditors or equity security holders the right to purchase equity in
the post-emergence company, usually at a discount to the value of the reorganized enterprise. Because the new equity is
typically sold at a discount to plan value, parties often have a strong incentive to participate in the offering and to avoid
dilution. Because the rights offering capital being raised is necessary to fund the reorganization plan, rights offerings are
almost always backstopped by an existing stakeholder or a third party, ensuring the requisite capital is secured.
MUNICIPAL FINANCE
New Optional Redemption Alternative for Tax-Exempt Municipal Bonds
Municipal issuers can now incorporate a new “make whole” optional redemption provision to economically redeem
non-advance refundable tax-exempt bonds before the bonds standard 10 year par call date. Previously, issuers would
have to use taxable refunding bonds or another more expensive and/or complicated refinancing strategy. The new
make whole provision allows issuers to redeem bonds immediately using tax-exempt bond proceeds and differs from
a conventional make whole calculation because it discounts cash flows only through the call date, recognizing that
most callable tax-exempt muni bonds are priced to their call date. The new make whole method redemption price is
calculated using the greater of: 1) 102% of the amortized value of the bond, or 2) the present value of the cash flows
using a discount rate of AAA MMD assuming the bond is called on the par call date instead of remaining outstanding
until maturity. This new optional redemption provision was used on three new issues recently, including the State of
Wisconsin’s $120 million Clean Water Revenue Refunding Bonds senior-managed by Jefferies.
APRIL 2016 9
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Best Research Ideas
AMERICAS
Jefferies SMID-Cap Perspectives
Jefferies initiated coverage of a SMID cap strategy with a 7% return objective over the next 12 months and a target of 1175
for the Russell 2000. Short term, the firm believes the index is somewhat overbought, and over the near- to mid-term points
out that absolute valuations place small caps in Quintile 4 (second most expensive), which has meant returns over the next
year of +7%. Small caps are expected to lag large caps, with other headwinds including an expectation for a rising VIX.
Jefferies also expects little difference in performance between growth and value over the next 12 months. FULL REPORT
— Jefferies Equity Strategy Team
PayPal “Pulse” – Survey Says... Pay with Venmo Could Be a Hit
Jefferies continues to believe at current valuation shares of PayPal Holdings Inc. (PYPL, BUY, PT $44) are not getting
any material credit for the potential of Pay with Venmo, which is being rolled out during 2016. Based on the firm’s
recent proprietary survey of 1,000 Venmo users, the updated scenario analysis suggests significant interest in
adopting Pay with Venmo, which could add 2.1-5.5% to 2017 EPS and drive multiple expansion. PYPL remains a
Jefferies Franchise Pick. FULL REPORT
— Jason Kupferberg, Equity Research Analyst, Business & Computer Services & IT Consulting
EMEA
Vodafone plc – Window of Opportunity; Upgrade to Buy
EU mobile is benefitting from supportive macro/pricing; VOD’s performance gap is also narrowing. VOD margins
benefit from easier comps post-Spring but also operating leverage prospects in Italy/Germany. Reassurance on capex
discipline reinforces the attraction of a covered March 17 dividend yielding 5.4%. The acquisition of Liberty Global is
still needed to secure long term prospects, but a credible (value-accretive) deal structure is now within reach. This is
VOD’s window of opportunity. FULL REPORT
— Jerry Dellis, Equity Research Analyst, Europe/UK Telecoms
Novartis AG – Entresto Deep Dive; Getting the Launch into Shape
Novartis is Jefferies’ top pharma pick in Europe (2nd globally). The firm’s U.S. cardiologist survey gets behind the root
causes of the slower than expected launch and confirms very strong uptake once the key issues have been rectified.
Jefferies continues to forecast CORE EPS 5-8% above consensus in the mid-term and sees a strong catalyst for a re-
rating during 2016. FULL REPORT
— Jeff Holford, Equity Research Analyst, Global Pharma
ASIA
China Integrated Oil – Cash Dry, But There’s No Stopping the Supermajor: Initiate on Sinopec Group
Sinopec Group is largely responsible for increasing crude imports into China and has been tasked to acquire assets
overseas. Jefferies initiated on Sinopec Kantons (Buy) and Sinopec Engineering (Hold) with an expectation for the
following related themes from China’s 13th Five Year Plan (2016-2020): 1) China would be better off increasing crude
imports and allowing oil majors to cut back on uneconomical production; and 2) Sinopec Group needs to deleverage
for supply-side reform and to bring its gearing level closer to that of the global supermajors. The refining and chemical
segment is the most actionable space as low crude prices will hurt E&P and oilfield services. Jefferies recommends
buying Sinopec Kantons, which owns half of China’s crude terminals and is still growing. FULL REPORT
— Elaine Lai, Equity Research Analyst, Hong Kong / China Oil Services
APRIL 2016 10
Investment Banking | Equities | Fixed Income | Wealth Management
Japan Banks – Kuroda’s NIRP Shuffles the Deck: Upgrade SMTH; Downgrade Mizuho and Resona
The immediate impact of Japan’s current NIRP (negative interest rate policy) will be minimal for the banks. The market
is pricing in the impact on the Tokyo Interbank Offered Rate (TIBOR) and thus a decrease in loan-deposit spreads from
this and further potential action. To simulate this Jefferies applied a 10% reduction in spreads from FY3/16E to
FY3/19E, and imputed 25 basis points of credit costs at the megabanks (vs. 15 basis points elsewhere), a 20%
reduction in total trading gains, and a rise in cost of equity assumption from 7% to 9%. As a result, Jefferies upgraded
SMTH to BUY (business is more diversified than other similar sized banks), and downgraded Resona to HOLD (focus
on domestic loans and variable mortgages) and Mizuho (the least capitalized of the megas), assuming buyback
scenarios for MUFG and SMTH within the base case. FULL REPORT
— Makarim Salman, Equity Research Analyst, Head of Japan Financials
APRIL 2016 11
Investment Banking | Equities | Fixed Income | Wealth Management
NOTABLE RECENT TRANSACTIONS
Restructuring Financial Advisor to the Company
January 2016
$249,000,000
Energy
RestructuringSole Financial Advisor
February 2016Metals &Mining
$218,000,000
Sale to Suzhou Dongshan Precision
Manufacturing Co., Ltd.Sole Financial Advisor
February 2016Pending
Technology
$610,000,000
January 2016Real Estate
$280,000,000Common Stock Offering
Joint Bookrunner
Common Stock OfferingSole Bookrunner
Real Estate
£200,000,000
February 2016
Tritax Big Box REIT plc
Senior Secured Notes OfferingJoint Bookrunner
February 2016Maritime
€300,000,000
Onorato Armatori S.p.A.
February 2016Healthcare
$702,000,000Common Stock Offering
Joint Bookrunner
$955,000,000Credit Facility to Finance Acquisition
Joint Lead Arranger
$390,000,000Senior Unsecured Notes Offering
Joint Bookrunner
Sale of Shares in Align Technology, Inc. Common Stock OfferingSole Placement Agent
March 2016
$267,000,000
Healthcare
Sale toInsight Venture PartnersSole Financial Advisor
February 2016Pending
Technology
$624,000,000
February 2016Fund Placement
$1,100,000,000Fund Placement
Sole Placement Agent
FIMI Opportunity 6, L.P.
Merger withWL Ross Holding Corp.Sole Financial Advisor
March 2016Pending
Industrials
$1,575,000,000
A portfolio company of TPG Capital
March 2016February 2016
Technology
$1,730,000,000Senior Unsecured Notes Offering
Joint Bookrunner
$2,500,000,000Credit Facilities to Finance Acquisition
by Vista Equity Partners, Koch Equity Development, and
Broad Street Principal InvestmentsJoint Lead Arranger
General Obligation Refunding BondsSole Bookrunner
February 2016Municipals
$801,000,000
City of New York
Sale to an affiliate ofJ.F. Lehman & CompanySole Financial Advisor
February 2016Pending
Aerospace /Defense
$304,000,000
Sale of Kevitsa Mine to Boliden AB
Sole Financial Advisor
March 2016Pending
Metals & Mining
$712,000,000
February 2016Pending
Healthcare
$1,280,000,000Sale to
Stryker CorporationJoint Financial Advisor
February 2016Pending
Industrials
$635,000,000Sale to
LKQ CorporationLead Financial Advisor
Acquisition of Western Anadarko Basin assets from Chesapeake Energy Corp.
Sole Financial Advisor
February 2016Pending
Energy
$385,000,000Acquisition of Priory Group
Sole Financial Advisor
January 2016Healthcare
$2,225,000,000
Sale to Humanwell Healthcare Group and PuraCap Pharmaceutical LLC
Sole Financial Advisor
March 2016Pending
Healthcare
$550,000,000
Jefferies, the global investment banking firm, has served companies and investors for
over 50 years. Headquartered in New York, with offices in over 30 cities around the
world, Jefferies provides clients with capital markets and financial advisory services,
institutional brokerage and securities research, as well as wealth management. The
firm offers research and execution services in equity, fixed income and foreign
exchange markets, and a full range of investment banking services including
underwriting, merger and acquisition, restructuring and recapitalization and other
advisory services, with all businesses operating in the Americas, Europe and Asia.
Jefferies Group LLC is a wholly owned subsidiary of Leucadia National Corporation
(NYSE: LUK), a diversified holding company.
JEFFERIES KEY FACTS
& STATISTICS
(as of 2/29/2016)
Founded: 1962
Total Capital: $10.6 billion
Total Assets: $35.2 billion
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Companies under Global Equity
Research Coverage: 2,000+
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Jefferies.com
APRIL 2016 12
Investment Banking | Equities | Fixed Income | Wealth Management
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