What a Difference Three Months can Make

To Our Clients

What a difference three months can make. With help from the European Central Bank, the threat of an imminent breakdown in the European financial system appears to have been averted, at least for now. This creative and significant backstop of liquidity into the European banking system was the first step in allowing for an orchestrated initial restructuring of debt in Greece. We have long believed that the financial markets could handle organized sovereign debt restructurings, but only if they allowed the banks to remain solvent, significant debt reductions to be achieved and CDS triggers to be orderly. There is a clear difference between a major restructuring that is effected in an orderly manner, such as what was orchestrated with AIG in the United States, versus a precipitous and chaotic default such as what we all experienced with Lehman Brothers. While the fundamental problems have only begun to be addressed and the all-clear flags should not be waved, we believe there is now the beginning of a potential path to further progress and an orderly transition. There is no doubt that global coordination and cooperation is occurring, as it has become painstakingly obvious that the entire globe is “in this together.” Thankfully, this forceful and collective action has resulted in a level of relative stability and, at least for the time being, a healthy level of market functionality has been restored. Thus, with the issues and risks somewhat dimensioned, markets around the world began the calendar year with an upward bias and momentum continued throughout the first quarter.

So far this year, credit markets have rallied back to their highs, and there is robust demand from investors for new loans and bonds. Equity markets are also strong and, while volumes are nowhere near the levels in the fixed income markets, good equity transactions are getting done, as investors return to stock picking versus the high level of correlation that permeates fearful times. The U.S. IPO market appears to be opening and performing reasonably, and we expect an increasing number of deals going forward. In general, we believe all companies are well advised to use this period to strengthen their balance sheets and assure future needs. Raising capital when you can, not when you must, remains sage advice and a mantra to which we at Jefferies adhere strictly.

We also see momentum among our corporate clients in pursuit of strategic growth, as abject risk has dissipated and comfort with economic risks has somewhat improved. Companies generally have remained very healthy, as the past few years have resulted in significant cost reductions, low-cost debt refinancings and the resulting buildup of cash reserves. Additionally, the slow “melt up” in stock valuations gives buyers a currency to utilize and allows targets to achieve reasonable exit valuations. All of these factors, combined with the challenge of achieving organic growth in a slow-growth world, will lead to what we expect will be increasing levels of M&A activity as the year progresses.

The most significant strategic development at Jefferies during the first quarter was our absorbing Hoare Govett in London. It is always hardest to play offense when the environment is in great turmoil and visibility limited, but acquiring and building during downturns is a strategy that has afforded Jefferies great opportunities to enhance our platform throughout our history. One of the UK’s premier corporate broking franchises, Hoare Govett completes our capabilities to serve our European corporate clients and investors across the cycles. Our deep, sector-focused investment banking and research efforts, combined with our robust capital markets capabilities, now including corporate broking, offers UK corporate clients a unique focus on their needs.

We are pleased to serve you and, as always, are personally available to help in any way we can.

Thank you,

Rich and Brian