APRIL 2017
To Our Clients:
It Is OK To Be “Unlovable”
Just a short year ago (almost to the day) the financial markets were spiraling out of
control. Oil had plummeted to scary levels, the stock market had suffered a major
correction, hedge funds and long-only investors were bleeding and facing
redemptions, the leveraged loan market had screeched to a halt, and the Fed was
afraid to even utter the words “interest rate increase” for fear the wheels would
completely fall off the cart. What a difference a year makes.
For us, the year-ago period marked the final exclamation point on a relatively
choppy/painful period for Jefferies (and coincidentally a few of the other major
operating businesses within our parent company, Leucadia). Basically, we had
suffered a period of about 18 months (on and off) during which more seemed to
go wrong than right. We all know that when momentum goes the wrong way, it
picks up speed and the fun stops.
As they have done in the past during challenging times, our team was on top of our
issues and we proactively addressed almost all of our problems. While we needed
the time to prove it, we were fairly confident we would once again be well
positioned to add value for our stakeholders. As is the way of nature, that moment
is exactly when an oversimplified and pre-determined article was published in a
major business newspaper declaring that Leucadia (and our largest operating
business Jefferies) was simply "No Longer Lovable.” The article ended with the
words, “there are few reasons to believe the new Leucadia will capture its old glory
anytime soon.” We lived with the story, including all the stock graphs pointing
sharply in the wrong direction, which were side by side with pictures of
management who supposedly was pretty decent for decades, but had been
smacked hard on the head by the stupidity stick.
As one should guess and is often the case, the article marked the bottom of those
challenges and, since the day it was published, Jefferies and virtually all of our other
businesses have performed well and Leucadia’s stock is up over 60%. The point of
this letter is not to declare a victory—we all have much more work to do and things
can change again in an instant. The point is also not to complain about the media
who love a good (i.e., negative) story. Everyone who runs a company or manages
money is a “big boy or girl,” and we all know media coverage goes with the
territory. The point of this note is that we would like to share with each of you our
thoughts on the mood swings of operating in a volatile world because, as we see it,
the only thing for certain is that these sudden and severe swings will remain the
norm and not the exception.
Investment Banking | Equities | Fixed Income | Wealth Management
IN THIS ISSUE
Economics and Strategy
• Secular Stagulation
• A Cyclical Reflation
• U.S. Outlook – Inflation Is Back, Is It Sustainable?
• European Outlook – Can the ECB Successfully
Navigate Tapering? Brexit to Scottish
Independence, What’s the Roadmap?
Actionable Ideas for
Companies and Sponsors
MERGERS AND ACQUISITIONS
• Megatrend in Non-Tech Companies Acquiring
Tech Companies
• Impact of China’s Recent Curbing of Capital
Outflows on Outbound M&A
• Shareholder Activism Driving Tax Free Spins
Using Reverse Morris Trusts
EQUITY CAPITAL MARKETS
• Limited Partners as Direct Investors in Private
Financings
• Block Trades for Primary Issuance Gaining
Significant Traction with Issuers
• ATM Issuance Expands Across More Sectors
and Provides Issuers a Window for Executing
Larger Offerings
DEBT CAPITAL MARKETS
• All-Time Record for High Yield Volume
Speaks to Depth and Flexibility of High Yield
Bond Market
• Dividend Deals for Companies with Limited
Restricted Payment Baskets
• April 1 Change in Investment Grade Index
Eligibility Will Drive Add-Ons, Debt
Refinancings and Debt Private Placements
RESTRUCTURING AND RECAPITALIZATION
• Capturing Debt Discounts Through Public
Debt Tender Offers
MUNICIPAL FINANCE
• Reduce the Cost of Variable Rate Debt by
Converting to Daily Reset Mode
Best Research Ideas
AMERICAS
• U.S. Insights – Remembering the Forgotten:
Worked for Trump, May Work for Your Portfolio
• Equity Strategy – JEF’s Collaborative Research:
Inflation Getting Hot But What Does It All Mean
EMEA
• Europe Insights – 20 for ‘17
• Unilever NV (UNA NA) – A Marmite Stock No
Longer and Still a Positive Spread from Here
ASIA
• Japan Strategy – Minority Shareholders:
Investing Without Representation...
History Rhymes
• China Tech – Preparing for a New Tide of
Artificial Intelligence: Initiate with Positive View
APRIL 2017
Our Observations On Being “Unlovable”
1. If you aren’t constantly trying to improve, evolve, adapt, and grow, you will not make it in business because
every good competitor is stretching to do these things every day. That said, you cannot do all of these important
things without taking calculated risk and even if you are the best risk taker on the planet, sometimes you will get
it wrong and you will find yourself being “unlovable” for a period. This is necessary if you want to win long term.
By the way, if you ask anyone who is truly successful, they will tell you that they have had many “unlovable”
periods throughout their career and if they did not, they never would have built something special.
2. It is always OK to be “unlovable” as long as you don’t get a margin call. Your company’s capital structure must
be secure and conservative. Your overnight funding and liquidity must always be smart (never rely on short term
unsecured lines to finance long term assets). A slightly reduced ROE is a small price to pay for excess liquidity.
Diversification is important and one should never put too many eggs in a single basket. If you are managing
money, it is all about duration of capital and it is always preferable to sacrifice fees for an increased runway to
outlast the times you find yourself “unlovable.”
3. When you find yourself in an “unlovable” period, that is when you find out what your culture and team are all
about. Do they point fingers? Do they abandon ship? Do they whisper, “I told them so?” Or do they roll up their
sleeves, work even harder, and help make the tough decisions and find smart compromises with the goal of
finding the path to be “lovable” once again. Everyone is with you when you are “lovable.” The best operating
and investment companies truly shine when they are actually “unlovable” because that is when their people truly
distinguish themselves.
4. Being “unlovable” is very personal. Whether you are running a company or investing in them, bad results over a
period of time can be very unsettling, embarrassing, and humiliating. We are all human beings and for those of
us in these positions, we know it is not about the money, power, or glory. It is about pride and not letting the
people you care about down. That is why it is so important to have a strong foundation of family and friends that
you can always rely on no matter how much you may “stink” lately at work. To family and true friends,
regardless of your missteps or failures, you are always “lovable.”
5. Then there are those times in the cycle when everything you and your company does is working well and success
and great results are free flowing from every part of your organization. These are the times when you are
exceptionally “lovable” from a business and professional perspective. What the reporters who write silly
headlines really don’t understand is that this is truly the most dangerous time and it is generally when investors
should be on alert and someone should be firing off the warning flares. When you are too “lovable” and
everyone is telling you so, that is the time that arrogance can rear its ugly head and spread around an
organization like a parasite. People stop challenging senior management, people focus on victory laps versus
doubling down on hard work and innovation, and people get relaxed, sloppy, or believe their own press. The
very best leaders and companies realize this slippery slope and while they allow their people to celebrate their
successes, they never dwell on them for too long.
Investment Banking | Equities | Fixed Income | Wealth Management
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APRIL 2017
Thank you for reading our perspective on being “unloved.” Our goal here is to share our experiences in a manner that
hopefully many of you can relate to and reflect upon as you see the eventual ups and downs in your world. It is a very
long race and one of the things that has made Jefferies (and Leucadia) successful over the decades is that even when
we are going through an “unlovable period,” our clients have always stood by us. Our promise to each of you is that
we will always do the same.
With Appreciation (and love),
Rich and Brian
RICHARD B. HANDLER
Chairman of the Board and CEO
1.212.284.2555
[email protected]
@handlerrich Twitter | Instagram
BRIAN P. FRIEDMAN
Chairman, Executive Committee
1.212.284.1701
[email protected]
Investment Banking | Equities | Fixed Income | Wealth Management
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APRIL 2017
Economics and Strategy
Secular Stagulation
Since 2013, the concept of “secular stagnation” has become a key focus for both markets and policy makers. For those
who need a quick refresher, the proponents of this idea argue that a combination of weak investment and strong
savings causes a drop in both the equilibrium level of U.S. GDP growth and the risk-free real interest rate. Below is a
non-exhaustive list of the standard proposed causes for this phenomenon:
1. Aging demographics
2. Increased income inequality
3. Strong foreign demand for safe assets
4. Labor market hysteresis
5. Low levels of inflation at the ZLB (Zero Lower Bound)
6. Financial sector deleveraging
Now, to be sure, since the financial crisis, annual U.S. GDP growth has averaged between 1.5-2% – a far cry from our
post-war level of 3-3.5%. So there is no doubt that we have a little stagnation on our hands. And after almost nine years
in this situation, it is certainly starting to feel a bit secular. Further, highly aggressive and unconventional monetary
stimulus has failed to boost investment (or deter savings) enough to push us towards a more traditional growth
outcome. As a consequence, the “stagnationists” continually argue that the cure for this problem rests upon a standard
Cambridge/Berkeley/CUNY-style Keynesian fiscal stimulus program. If we just issue a bunch of debt and then use the
proceeds to repair/build roads, bridges, trains, and airports, the glory days of 3-3.5% growth will quickly be upon us.
Of course, this conclusion should surprise no one. Economists trained in a traditional saltwater Keynesian style nearly
always come up with the same policy solution for any problem: more big government deficit-financed spending
programs. They particularly like the ones where they get to choose the winners and losers. But there is an alternative
way to look at this stagnation issue, one that focuses on the supply side rather than the demand side.
With that in mind, I want to propose today that the largest driver of weak investment, low GDP growth, and low
equilibrium real rates is actually REGULATION. In the post-crisis era (and even before the crisis) businesses in many
sectors faced an ever-accelerating (and confusing) level of government red tape. And this has not just occurred in the
obvious case of the financial sector – the healthcare, energy, and transportation sectors have also seen significant
increases in their regulatory burden. The real story is NOT some sort of Hobson- or Hansen-style theory rooted in
insufficient aggregate demand, it’s simply a supply-side-driven story associated with excess regulation.
In order to give you a little feel for the potential size of this burden, I provide the following link to a pie chart from a
presentation by the Competitive Research Institute: jefferies.com/CRI (page 10). I try not to use charts in these
commentaries in an attempt to keep things simple, but when I saw this one I nearly fell out of my chair. It suggests
that nearly 10% of U.S. GDP is associated with the cost of federal regulation and intervention. It’s no wonder we can’t
generate productivity growth: Economic activity requires an ever-increasing spend on “nonproductive” regulation!
Now I’m sure I will get plenty of pushback on this idea. In particular, the advocates of secular stagnation are wont to say,
“If the regulatory burden is so extreme, why are corporate profits at record highs?” Well, there is a very easy answer to
that. This excessive regulatory burden has reduced competition. We currently stand at multi-decade lows in terms of
small business formation. And the high levels of fixed-cost regulation create significant barriers to entry, thereby allowing
oligopoly or even monopoly rents to accrue to the existing larger businesses. In fact, some folks with a more
Investment Banking | Equities | Fixed Income | Wealth Management
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APRIL 2017
Machiavellian view may even believe that the largest business conglomerates go to Swiss ski resorts every January to
meet with global policy makers in order to keep resetting the regulatory barriers just high enough to stymy the
competition and maximize their profits. But I digress!
The bottom line is that slow output growth, low equilibrium real rates, weak investment, high corporate profits, low
productivity growth, and tepid new business formation are all consistent with the view that increased regulation is
behind our stagnation. In addition, the market reaction to Trump’s victory, as well as the post-election surge is business
optimism from survey data such as the NFIB (National Federation of Independent Business), suggests that Trump’s
deregulation theme is registering positively with the business community.
I would therefore like to coin an alternative concept: “secular stagulation,” where the word stagulation is derived by
combining the words stagnation and regulation. And whether or not you believe in this storyline, I hope I have at least
got you thinking that the cure for our post-crisis economic weakness may not rest on some sort of
Japanese/Keynesian/Cambridge/Berkeley/CUNY-style deficit-financed government spending increase. Rather, if we focus
on the supply side and pursue a wholesale repudiation of excess regulation, the “new normal” concept will quickly
revert back to just plain old “normal.”
— David Zervos, Chief Market Strategist
A Cyclical Reflation
Pushing worries over French and Dutch elections aside, global equities benefited from ongoing inventory restocking,
higher producer prices and a broadening recovery in emerging markets. The fact that all major stock exchanges have
shown at least single digit gains is testament to a broad reflation of the global economy. For the first time since mid2011, global earnings revisions (upward minus downward) have inflected positively. At least for equity investors,
analysts and company CEOs are now feeling confident enough to raise earnings estimates over the past month. In this
regard, the risk that reality might not match sentiment indicators is beginning to fade.
A glance at fund flows since the Trump election suggest that while there has been no great jump from one asset class
to another or for the much hope for bond to equity switch, there is a much more subtle shift occurring. In equities,
the U.S. has certainly seen solid inflows but the breadth of equity buying has widened with Europe experiencing solid
cash injections as well as Japan.
Investors argue that the ‘reflation’ trade is solely due to a rebound in energy prices. This is not true, in our view. The
price increases have been broad based from silicon wafers to paper, from steel to copper, and have reflected both
bottlenecks, capacity constraints and an underestimation of demand. It has been international. Equally, the Producer
Price Index numbers are turning better in Europe and also in Japan, while export data has firmed in Germany and Korea.
In contrast to the past five years in which bond proxies or ‘reach for yield’ stocks outperformed, a more traditional
cyclical rally is evolving with steel, chemical, mining and energy stocks rallying accompanied by financials.
The bottom line is that we believe global equities are in a sweet spot with rising asset turnover and pricing power
helping the shares of the real economy while higher bond yields and firming input costs will weigh heavily on the
‘bond proxies’ in 2017.
— Sean Darby, Global Head of Equity Strategy
Investment Banking | Equities | Fixed Income | Wealth Management
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APRIL 2017
U.S. Outlook – Inflation Is Back, Is It Sustainable?
While U.S. inflation remains moderate, the acceleration has been relatively sharp. In a relatively short period of time, the
U.S. inflation picture has migrated from a state of dormancy to a state of semi-perkiness. For example, the 12-month
change in the Consumer Price Index (CPI) accelerated from no change in September 2015 to 2.5% in early 2017.
In the months immediately ahead, the Fed will attain its 2% target for the 12-month change in the Personal
Consumption Expenditure (PCE) Deflator for the first time since April 2012.
The inflation picture in the U.S. mirrors the U.S. economy.
The U.S. economy is a heavily service-driven economy, and the service sector has gradually improved to-date this
cycle. Service-related inflation has responded accordingly. Prices of services have been gradually accelerating since
early 2010 from a 12-month change of as low as 0.5% to 3.1% in early 2017.
The behavior of goods prices has been far more erratic and the primary source of volatility in headline inflation readings.
For example, the commodity-based price component of the CPI has been up as much as 6.6% and down as much as
4.3% year-over-year to-date this cycle. This deceleration in commodity-based goods prices was the driving force
behind the deceleration in the headline CPI inflation from 3.9% in September 2011 to a decline of 0.2% in April 2015.
Since 2015, however, deflationary pressures on the goods side of the equation gradually eased and have finally again
begun to contribute to headline inflation as of late 2016 and early 2017.
The dynamics that underlie the prices of goods in the U.S. tend to be dictated less by the domestic U.S. economy and
more by global economic conditions because of the structure of the U.S. economy.
The change in the structure of the U.S. economy away from good-producing activities toward service-providing
activities has been ongoing for decades, and was a key issue in the presidential campaign.
The focus of the campaign was the social implications of the loss of jobs in the manufacturing sector. However,
another implication of the change in the structure of the U.S. economy and decline in manufacturing activity has been
a sharp increase in imports of manufactured goods from overseas. In 2016, for example, the U.S. ran a $750 billion
goods trade deficit and imported $2.2 trillion in goods from overseas.
Because the U.S. imports so much, the behavior of import prices is a very important determinant of headline inflation
in the U.S. Furthermore, there is a strong correlation between the commodity prices and U.S. import prices. When
commodity prices were falling, the U.S. imported deflation. Once commodity prices bottomed, deflationary pressures
on import prices first began to abate. As commodity prices have firmed, import prices have also risen. A continuation
of a rise in commodity prices will translate into a continued rise in U.S. import prices and also headline inflation.
The gradual upward trend in service prices is likely to continue going forward, but commodity-based goods prices are
more likely to continue to be the primary driving force behind the movement in headline inflation.
While there has been a clear upturn in the U.S. inflation picture, there are still upside and downside risks. For example,
China is the single largest consumer of commodities in the world, so any type of downturn in China significantly
affects global commodity markets and prices. Given the importance of import prices to the U.S. inflation environment,
and the importance of the behavior of global commodity markets to import prices, China always poses a risk in the
short term. In recent years, there have been episodic issues in China that have roiled the global currency, financial and
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APRIL 2017
commodity markets. Events like the ones that occurred in August 2015 and January 2016 are not predictable and can
change the underlying U.S. inflation dynamics at least temporarily.
In the longer-term, inflation tends to be sustainable when wage growth has been faster than it is now. However, we are
headed in the right direction, and wage growth will continue to accelerate as the labor market continues to tighten.
Consequently, the accelerating inflation trend is likely to be sustainable.
— Ward McCarthy, Chief Financial Economist
European Outlook – Can the ECB Successfully Navigate Tapering? Brexit to Scottish Independence,
What’s the Roadmap?
The European political calendar is in full swing: the elections in the Netherlands passed without a major surprise; but
the French elections will keep the markets on edge in the coming months (23 April and 7 May for the two Presidential
rounds; 11/18 June for the National Assembly elections); the German elections will follow on 22 September; and the
Italian elections, while at the moment are likely to take place in 2018, could be called sooner.
Whichever leadership emerges, however, the political challenges from Brexit, to Greece, to the development of multispeed Europe will need to be addressed. Ultimately, and perhaps especially after Brexit, the choice for the euro area
countries is whether to move toward closer fiscal integration, or to continue to muddle through.
Against this background, the euro area continues to grow, and the ECB is particularly encouraged by what it sees as a
receding threat of outright deflation. However, headline inflation is close to the peak and set to head lower, while core
inflation remains stuck below 1%. And as the example of other large economies shows, the ECB may be too optimistic
in expecting a fairly swift recovery in wages and core inflation.
Nonetheless, the ECB is gradually preparing the ground for eventual QE exit. For now it is a delicate balancing act of
continuing to expand the balance sheet on the one hand (the ECB is slowing down the pace of QE from April, while
the final TLTRO take-up on 23 March could provide a large boost of extra liquidity), but also starting to deliberate
when and how to bring the process to an end. The debate over whether the ECB could perhaps raise the depo rate
before QE even ends (we expect asset purchases to carry on through at least the first half 2018) will run in parallel;
but it’s not a decision the ECB will be in position to take for a long time and perhaps only in December.
Theresa May’s government will trigger Article 50 on 29 March, giving the EU and the UK two years to negotiate the
terms of divorce. Negotiating the new trade agreements, however, will take significantly longer, and realistically, the
UK will rely on some form of transitional arrangements afterwards. The end result from the EU’s perspective is that the
UK cannot be seen to do better outside the club than being part of it, so the economic considerations will be
overruled by political interests, and the UK economy will pay a price.
The Bank of England will remain on standby to manage the risks to the economy which means a neutral policy
stance. Domestically, the government will face multiple threats: one from its own rebel backbench MPs opposed to a
‘Hard Brexit’ and the other from the SNP pushing for Scottish independence. The next General Election in the UK is
due in 2020, but the fallout from the Brexit process could certainly make this a reality much sooner. FULL REPORT
— David Owen, Chief European Financial Economist
— Marchel Alexandrovich, European Financial Economist
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APRIL 2017
Actionable Ideas for Companies and Sponsors
MERGERS AND ACQUISITIONS
Megatrend in Non-Tech Companies Acquiring Tech Companies
While technology companies have been disrupting traditional markets for many years, the pace of this disruption has
increased in recent years. No industry has been immune to the wave of innovation emanating from the technology
sector. Management teams and Boards have begun to react aggressively to this trend, through acquiring the very
technology companies that have been encroaching on their markets to help them maintain their leadership position
through this evolution of their industry. In fact, for the first time ever, over 50% of technology companies acquired in
2016 were purchased by acquirers outside of the technology industry. Five years ago, a then-record-breaking $20 billion
of technology companies were acquired by non-tech companies. Last year, that number was more than $125 billion.
The key drivers of this megatrend include:
1. Survival: Boards and management teams have seen the destruction created by companies such as Amazon, and
don’t want to risk becoming irrelevant. Furthermore, leading companies in every industry have come to a realization
that building new technologies and business models in-house is a painstaking process prone to many mistakes
2. Pervasiveness: Technology has permeated the daily lives of almost every consumer, bringing awareness as well as
confidence to traditional companies evolving to technology-first approaches
3. Change: Technology has allowed for the creation of new business models (customer acquisition, pricing,
distribution), which non-technology companies are not able to capitalize on. Furthermore, many technology
companies have built a culture around not just innovation, but the rapid ideation and testing that leads to
quicker product evolution and time to market
4. Growth: Traditional companies have become more comfortable with growth-based valuation models and
understand the need to pay acquisition multiples which are meaningfully higher than their own multiple
Jefferies has been at the forefront of this trend, and also has developed valuation analysis tools to help traditional
acquirors better understand how to value high growth-based acquisitions as well as the pro forma impact of such
acquisitions on a company’s overall valuation.
Impact of China’s Recent Curbing of Capital Outflows on Outbound M&A
Chinese bidders have become a major factor in recent M&A processes with outbound acquisitions of over $200 billion
in 2016, a 114% increase year-on-year. Recent downward currency pressures on the RMB, in part as a result of
significant outbound M&A (with limited inbound M&A to counterbalance), have led to the Chinese government
seeking to restrict capital outflows by 1) curbing outbound mega-deals (US$10 billion+); and (2) significantly
scrutinizing acquisitions with a value over US$1 billion which are outside the Chinese bidder’s core business areas.
These new restrictions have resulted in a number of announced Chinese cross-border acquisitions significantly
delaying their closing, and heightened concerns among many U.S. and European sellers regarding Chinese buyers.
However, overseas acquisitions remain an important strategic priority for China to continue to expand influence
globally and to bring outside technology into China. So it is possible that these regulations may be relaxed or that “in
sector” deals will be less constrained. Furthermore, in order to help sellers mitigate these concerns and shift risk onto
Chinese buyers, sellers should seek a sizeable reverse break-up fee, secured in a bank outside of China, if the required
government approvals are not obtained.
Investment Banking | Equities | Fixed Income | Wealth Management
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APRIL 2017
Shareholder Activism Driving Tax Free Spins Using Reverse Morris Trusts
The trend of shareholder activists pushing companies to unlock the value of their pure play businesses when
companies have disparate business lines has led to a recent uptick in the use of Reverse Morris Trusts (RMTs) to effect
tax free spin/merge combinations that create pure play businesses.
In an RMT, the shareholders of the parent company affecting the spin-off must own greater than 50% of the newly
combined entity. Recent examples of this trend include: 1) CBS pursuing the spinoff of its CBS Radio business thru an
RMT combination with Entercom, where CBS shareholders hold 72% of the newly combined entity, 2) HewlettPackard Enterprises spinning off its non-core software assets in an $8.8 billion combination with Micro Focus
International PLC, with HPE shareholders holding 50.1% of the newly combined entity, and 3) Citrix Systems spinning
off its GoTo business in a $1.5 billion combination with LogMeIn Inc., with Citrix shareholders holding 50.1% of the
newly combined entity.
EQUITY CAPITAL MARKETS
Limited Partners as Direct Investors in Private Financings
While Limited Partners co-investing alongside their general partners has been on the rise for years, we have seen a
dramatic increase in Limited Partners investing “directly”. Many Limited Partners have added significantly to their staff in
order to analyze, execute and lead direct investment transactions, and LP direct investing is no longer limited to the
largest sovereign wealth funds and pension funds, but now includes endowments, family offices/foundations and
insurance companies. The sizes of these transactions average between $500 million to $1 billion.
One of the more common transactions in which LPs have been directly participating is investing capital in proven
management teams typically in a blind pool format, where the management team leading the NewCo will pursue the
purchase of assets with the capital that has been raised. The larger LP investors will typically occupy Board seats, and
in most cases, the management team retains governance and receives a carried interest, typically 20% with
performance ratchets. Jefferies has executed the majority of these transactions in the Energy sector, but we have also
been executing customized LP direct investments in the industrials, consumer, and media sectors.
Block Trades for Primary Issuance Gaining Significant Traction with Issuers
Primary blocks are rapidly becoming the principal execution form of raising new capital in the follow-on new issue
market. While the block market has historically been more active with secondary shares, we have seen a dramatic
increase in activity in the primary share block market. Over the last 12 months, 44% of block trades have been primary
share offerings, as companies see the benefits of guaranteed execution. The most active sectors for primary blocks
have been energy, real estate, financials, industrials and most recently biotechnology.
ATM Issuance Expands Across More Sectors and Provides Issuers a Window for Executing Larger Offerings
While historically At-The-Market-Programs (ATMs) have been used primarily by REITs and MLPs, recently ATMs have
been implemented by a broader range of sectors including healthcare ($4.5 billion filed since 2016) and FIG ($3.0
billion filed since 2016). In addition, ATMs often provide critical insights to issuers regarding specific institutional
investor demand for their stock, and often lead issuers to execute larger future public financing mandates based on
those investor insights.
As a reminder, ATM programs allow companies to sell stock (usually 5% - 15% of daily volume) discretely during normal
trading hours at prices predetermined by the issuer. The company has complete discretion regarding timing and
execution, and may stop or start issuance at any time, including intraday. Jefferies has established itself as a significant
underwriter of ATMs, having filed 102 ATMs with a notional $37 billion of filed proceeds in the last five years.
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APRIL 2017
DEBT CAPITAL MARKETS
All-Time Record for High Yield Volume Speaks to Depth and Flexibility of High Yield Bond Market
During the week of March 6th, the high yield market recorded its largest weekly volume ever, with a total of 26 deals
pricing for over $17 billion. By way of comparison, over the previous 12 months, issuance has averaged around 8
deals per week for $5 billion. The lessons learned from this record issuance week were that the high yield market
remains deep and resilient, exhibiting the ability to digest a massive amount of supply. Furthermore it confirmed that
the market is open to all types of deals, from double B to triple C, and for deals of virtually all sizes ranging from $200
million to $3 billion, and that high yield investors are willing to go out on the risk curve to enhance returns. With the
broad market index yielding 5.98% with a spread of 397 basis points, conditions remain extremely attractive for
issuers to lock in long-term, fixed rate capital at low rates.
Dividend Deals for Companies with Limited Restricted Payment Baskets
Today’s strong loan market has made it possible for companies that have Restricted Payment capacities that limit
dividends and acquisitions, but have the ability to borrow incremental debt, to issue loans that exceed those limits and
leave the extra proceeds on their balance sheet until they meet the credit metrics to deploy them. In a recent dividend
deal done by Prime Security, the Company successfully issued an $800 million fungible, incremental first-lien term loan,
with the majority of the proceeds from the incremental debt used to fund a dividend. Because the Company’s current
Restricted Payments capacity only allowed for a $600 million distribution, the company placed the additional $200
million of proceeds on the balance sheet until the Restricted Payment grower basket permits additional restricted
payments. This approach did not require any amendments to the loan given the Company’s preexisting debt capacity.
April 1 Change in Investment Grade Index Eligibility Will Drive Add-Ons, Debt Refinancings and Debt
Private Placements
The Barclays Investment Grade Index is the benchmark index for investment grade debt. Effective April 1 the
eligibility rules for the Index will change---with the minimum tranche size for Index inclusion increasing from $250
to $300 million. As a result of this change, over 650 corporate bonds ($166 billion) will drop from the Index with
no grandfathering.
We expect this change will have several impacts, including: 1) reopening of outstanding sub-$300 million public
issues will become more frequent, as issuers can grow a tranche to keep it in the Index; 2) issuers being more willing
to retire sub-$300 million issues—the concern previously was that issuers didn’t want to trip the Index and take a
bond lower than $250 million outstanding; and 3) less frequent issuers pursuing the private debt private placement
market given its size and flexibility.
RESTRUCTURING AND RECAPITALIZATION
Capturing Debt Discounts Through Public Debt Tender Offers
For distressed companies that have found open market debt purchases difficult to achieve in scale and privately
negotiated tenders time consuming and expensive, a public tender can offer maximum flexibility and access to the
entire market. Public tender offers are subject to minimal disclosure standards for investors and issuers, with no SEC
filings required for the tendering of non-equity securities. Once documentation is prepared (typically one week or
less), the offer is announced and remains open to all security holders for a minimum of 20 business days.
Public debt tenders bring significant flexibility to the issuer: 1) Price: fixed at market or slightly above, or variable in response
to investor participation (i.e., Dutch Auction); 2) Priority: maximize the repurchase of nearest term maturities or highest
coupon securities; 3) Incentives: discourage holdouts through early pricing premiums and deadlines, or amendments; 4)
Participation: minimum and maximum thresholds on total amounts tendered; and 5) Flexibility: terminate without having
to purchase tendered securities if parameters are not met and flexibility to alter terms after announcement.
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APRIL 2017
MUNICIPAL FINANCE
Reduce the Cost of Variable Rate Debt by Converting to Daily Reset Mode
Under current market conditions, issuers can minimize the cost of their variable rate debt, in particular their variable
rate demand obligations (VRDOs) by converting to daily reset mode. Municipal Issuers use variable rate debt for a
number of reasons including: 1) to achieve interest rate savings by moving down the yield curve, 2) achieve no cost
optional redemption flexibility since the debt can be retired at any time, and 3) realize an improved asset liability
profile since the variable rate debt provides a natural hedge against the Issuer’s variable rate assets.
Market conditions for variable rate debt have recently been and are likely to continue to be volatile given changes in the
money market fund rules, the likelihood of further interest rates increases, and the change in leadership in Washington.
As a result, investor demand has shifted to VRDOs in daily reset mode that give investors the greatest liquidity and
flexibility for repositioning their investments, since the investor can convert their investment to cash with a single day’s
notice. While investor demand for daily reset mode VRDBOs has increased, the supply of these VRDOs has not.
Right now with the SIFMA Municipal Swap Index (SIFMA) at 0.71% (SIFMA is an index that represents a basket of
VRDOs in weekly reset mode), we estimate that the interest rate for VRDOs in daily reset mode will be 5-10 basis
points less than VRDOs with similar characteristics in weekly reset mode. Therefore, we recommend Issuers seek to
convert their variable rate debt, in particular their existing VRDOs where permitted under the specific terms of their
remarketing agreements and bank letter of credit agreements, from weekly to daily reset mode to capture these
interest cost savings.
Best Research Ideas
AMERICAS
U.S. Insights – Remembering the Forgotten: Worked for Trump, May Work for Your Portfolio
Jefferies released a collaborative report that ranked the U.S. states by five economic factors to identify the lagging
states that may not have benefited under recent policy, but could benefit from President Trump’s proposed policies.
The five factors used were: median household income, ‘08-’15 household income growth, unemployment rate,
manufacturing as a percentage of total employment and the percentage of the population with bachelor’s degrees.
Not surprisingly, Trump won each of the 15 underperforming states, while Clinton won the states with the top
metrics. Jefferies conducted an analysis to see which companies had the most overlap in these 15 states and found 93
companies with 30% or more of their locations in the underperforming states. Jefferies analysts highlighted 10 of
these stocks, where they believe an improved local macro environment could drive stock upside: AAN, BC, BOJA,
FHN, IP, MUSA, ORLY, PKG, SCVL and URI. FULL REPORT
— Jefferies U.S. Equity Research
Equity Strategy – JEF’s Collaborative Research: Inflation Getting Hot But What Does It All Mean
Jefferies analyzed the impact that rising inflation may have across the different sectors. Currently, the firm projects CPI
to peak at 3.2% in the third quarter and hover around 3% thereafter. With that as a backdrop, Jefferies’ analysts
indicated that the best positioned sectors could include Machinery, Steel, Chemicals and Hardline Retail, while the
most negatively exposed are Specialty Retail and Restaurants, and called out 22 stocks as key ways to play the theme
of rising inflation. FULL REPORT
— Steven DeSanctis, U.S. Equity SMID-Cap Strategist
Investment Banking | Equities | Fixed Income | Wealth Management
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APRIL 2017
EMEA
Europe Insights – 20 for ‘17
Jefferies European Research selected 20 stocks that play particularly strong to one of four bottom-up themes for 2017
including: Inflection Points, Business Restructuring/Self-Help, Unjustified Valuation and Growth Dynamics. The firm’s
Buys: Terna, United Internet, Ahold Delhaize, Lloyds, Unicredit, Fiat Chrysler, AP Moeller Maersk, Veolia, Aperam,
Faurecia, Telecom Italia, Imperial Brands, IBA, RPC, Aker BP and Just Eat. Underperforms: Royal Mail, Galenica,
Standard Chartered and Amec Foster Wheeler. FULL REPORT
— Jefferies European Equity Research
Unilever NV (UNA NA) – A Marmite Stock No Longer, and Still a Positive Spread from Here
Ahead of the April review, Jefferies stays onboard and counsels investors not to underestimate the value of the
galvanizing shock that has been administered. Jefferies’ Buy case assumes faster progress on margins but not a
spin/split, which may offer insufficient risk/reward from here. The ultimate end-game remains one of building a New
World Order in home and personal care (HPC) by acquiring Colgate. Jefferies projects fair value across 4 scenarios of
€53-€56 per share, but it’s a stretch without disposals. Holding onto non-HPC assets may be preferable in pursuit of
selling a control premium later when the time is right to pay for one on Colgate. FULL REPORT
— Martin Deboo, Equity Research Analyst, European Food & HPC
ASIA
Japan Strategy – Minority Shareholders: Investing Without Representation… History Rhymes
In a July 2016 report, “Minority Investors: Investing Without Representation…,” Jefferies wrote about the conflicts of
interest at Daihatsu in its acquisition by its majority shareholder, Toyota. In an update to this report, Jefferies notes
Panasonic’s 100% acquisition of its majority owned subsidiary, PanaHome (identified as at risk in the July report), is
making headlines because of unfair treatment claims by minority shareholders. Panasonic is acquiring the remaining
46% of PanaHome shares that it does not already own through a share exchange, thereby turning PanaHome into a
wholly-owned subsidiary. Minority shareholders have publically complained that the share exchange ratio is
unfavorable—the share exchange ratio is only at a 20% premium to the share price ratio before the announcement,
which itself was at a 52-week low. Investors should be very cautious when they are minority shareholders in
companies that may potentially be taken over. FULL REPORT
— Zuhair Khan, Equity Research Analyst, Japan Strategy
China Tech – Preparing for a New Tide of Artificial Intelligence: Initiate with Positive View
Jefferies believes the tech world is shifting from a “Mobile” to an “Artificial Intelligence” (AI) era, driven by deep
learning, Big Data and GPU (graphics processing units) accelerated computing. With advances in deep learning and
Big Data, AI will drive the next cycle. The tech industry has started embedding cognitive AI in a variety of products,
with the migration benefiting cloud computing and GPU/FPGA (field-programmable gate array), which power AI, as
well as sensors, for increased AI data collection and preprocessing. Jefferies’ initiates coverage of nine stocks: Sunny
Optical and SMIC in sensor and semiconductors; Hikvision for world-class computer vision technology; iFlytek and
Kingdee in cloud computing; and ASMPT (dual camera components), ONet (anti-fingerprint coating) and Luxshare
and AAC (mobile-related acoustics) in hardware. FULL REPORT
— Rex Wu, Equity Research Analyst, China Tech
Investment Banking | Equities | Fixed Income | Wealth Management
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APRIL 2017
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
NOTABLE RECENT TRANSACTIONS
Number of Employees: 3,319
Energy
January 2017
Healthcare
February 2017
$1,215,000,000
$410,000,000
Acquisition of the
Alpha Crude Connector
Sole Financial Advisor
Common Stock Offering
Sole Bookrunner
Industrials
January 2017
December 2016
Municipals
January 2017
Power
January 2017
$1,825,000,000
Credit Facility to
Finance Acquisition of Facilities from
American Electric Power
Joint Lead Arranger
Media
February 2017
Finance
January 2017
February 2017
$1,875,000,000
$1,103,000,000
$565,000,000
$259,000,000
Senior Unsecured Notes Offering
Joint Bookrunner
Tobacco Settlement Bonds
Sole Bookrunner
Credit Facility to Finance Acquisition by
Blackstone
Joint Lead Arranger
Common Stock Offering
Joint Bookrunner
Technology
January 2017
Real Estate
January 2017
Industrials
February 2017
Finance
February 2017
$1,366,000,000
$322,000,000
$1,410,000,000
$470,000,000
Credit Facility
Sole Lead Arranger
Common Stock Offering
Joint Bookrunner
Credit Facility
Joint Lead Arranger
Senior Secured Notes Offering
Sole Bookrunner
Healthcare
March 2017
Power
February 2017
Finance
January 2017
Founded: 1962
Total Long-Term Capital: $11.4 billion
Companies under Global Equity
Research Coverage: 2,000+
$1,195,000,000
Credit Facility to Finance Acquisition by
The Carlyle Group
Joint Lead Arranger
$625,000,000
(as of 2/28/2017)
Senior Unsecured Notes Offering
Sole Bookrunner
Technology
Consumer
February 2017
GLOBAL HEADQUARTERS
520 Madison Avenue
New York, NY 10022
1.212.284.2300
EUROPEAN HEADQUARTERS
68 Upper Thames Street
London EC4V 3BJ UK
+44 20 7029 8000
ASIAN HEADQUARTERS
2 Queen’s Road Central
Central, Hong Kong China
+852 3743 8000
A portfolio company of
Undisclosed
$500,000,000
$182,000,000
$2,550,000,000
Sale to
Golden Gate Capital
Joint Financial Advisor
Senior Secured Notes Offering
Joint Bookrunner
Initial Public Offering
Global Coordinator and Joint Bookrunner
Credit Facility
Joint Lead Arranger
Technology
February 2017
Industrials
January 2017
Industrials
February 2017
Consumer
January 2017
$1,030,000,000
$310,000,000
$288,000,000
$850,000,000
Credit Facility to Finance Acquisition by
KKR
Joint Lead Arranger
Senior Secured Notes Offering
Joint Bookrunner
Convertible Notes Offering
Joint Bookrunner
Senior Secured Notes Offering
Sole Bookrunner
Finance
January 2017
Industrials
February 2017
$1,007,000
$690,000,000
Acquisition of investment portfolio of
SVG Capital Plc
Sole Financial Advisor
Common Stock Offering
Joint Bookrunner
Technology
January 2017
Metals &
Mining
February 2017
$1,100,000,000
$660,000,000
Credit Facility to Finance Acquisition by
Clearlake Capital Group, L.P.
Joint Lead Arranger
Credit Facility
Sole Lead Arranger
Investment Banking | Equities | Fixed Income | Wealth Management
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Jefferies.com
APRIL 2017
IMPORTANT DISCLOSURES
This material has been prepared by Jefferies LLC, a U.S.-registered broker-dealer, employing
appropriate expertise, and in the belief that it is fair and not misleading. Jefferies LLC is
headquartered at 520 Madison Avenue, New York, N.Y. 10022. The information upon which this
material is based was obtained from sources believed to be reliable, but has not been
independently verified; therefore we do not guarantee its accuracy. This is not an offer or
solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute
our best judgment as of this date, and are subject to change without notice. Jefferies LLC and
Jefferies International Limited and their affiliates and their respective directors, officers and
employees may buy or sell securities mentioned herein as agent or principal for their own account.
In the United Kingdom this material is approved by Jefferies International Limited and is intended
for use only by persons who have professional experience in matters relating to investments falling
within Articles 19(5) and 49(2)(a) to (d) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (as amended), or by persons to whom it can otherwise be lawfully
distributed. In the member states of the European Economic Area, this document is for distribution
only to persons who are “qualified investors” within the meaning of Article 2(1)(e) of The
Prospectus Directive. For Canadian investors, this document is intended for use only by professional
or institutional investors. None of the investments or investment services mentioned or described
herein is available to other persons or to anyone in Canada who is not a “Designated Institution” as
defined by the Securities Act (Ontario). For investors in the Republic of Singapore, this material is
intended for use only by accredited, expert or institutional investors as defined by the Securities and
Futures Act and is distributed by Jefferies Singapore Limited, which is regulated by the Monetary
Authority of Singapore. Any matters arising from, or in connection with, this material should be
brought to the attention of Jefferies Singapore Limited at 80 Raffles Place #15-20, UOB Plaza 2,
Singapore 048624, telephone: +65 6551 3950. In Australia this information is issued solely by
Jefferies LLC and is directed solely at wholesale clients within the meaning of the Corporations Act
2001 of Australia (the “Act”) in connection with their consideration of any investment or
investment service that is the subject of this document. Any offer or issue that is the subject of this
document does not require, and this document is not, a disclosure document or product disclosure
statement within the meaning of the Act. Jefferies LLC is regulated by the Securities and Exchange
Commission and the Financial Industry Regulatory Authority, under the laws of the United States of
America, which differ from Australian laws. Jefferies LLC has obtained relief under Australian
Securities and Investments Commission Class Order 03/1100, which conditionally exempts it from
holding an Australian financial services license under the Act in respect of the provision of certain
financial services to wholesale clients. In Japan this material is issued and/or approved for
distribution by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this material is
issued and/or approved for distribution by Jefferies Hong Kong Limited and is intended for use only
by professional investors as defined in the Hong Kong Securities and Futures Ordinance and its
subsidiary legislation. In India this material is issued and/or approved for distribution by Jefferies
India Private Limited. Recipients of this commentary in any other jurisdiction should inform
themselves about and observe any applicable legal requirements in relation to the receipt of this
material. Jefferies International Limited is authorized and regulated in the United Kingdom by the
Financial Conduct Authority. Its registered office is at Vintners Place, 68 Upper Thames Street,
London EC4V 3BJ; telephone +44 20 7029 8000; facsimile +44 20 7029 8010.
This communication is being provided strictly for informational purposes only. This information is
not a solicitation or recommendation to purchase securities of Jefferies and should not be construed
as such.
Reproduction without written permission of Jefferies is expressly forbidden. All logos, trademarks
and service marks appearing herein are the property of Jefferies LLC.
© 2017 Jefferies LLC. Member SIPC
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