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

rhandler@jefferies.com

BRIAN P. FRIEDMAN

Chairman, Executive Committee

1.212.284.1701

bfriedman@jefferies.com

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.

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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

Investment Banking | Equities | Fixed Income | Wealth Management

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

Investment Banking | Equities | Fixed Income | Wealth Management

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,

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JEFFERIES KEY FACTS

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APRIL 2016 12

Investment Banking | Equities | Fixed Income | Wealth Management

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