corporate finance advisory trending topics · digital investment banking team and blockchain center...

#Blockchain #Disruption

#YieldCurve

#DistributionPolicy

#Global

#Financing

#Pensions

#Regulation#RecessionRisk

#CorporateClarity

#MarketIntelligence#LiabilityManagement #Ratings

#SPACs #TaxReform #Valuation

#M&A

#Accounting

#ICO

#Activism

CAPITAL STRUCTURE AND CAPITAL ALLOCATION .................................... 5–8

CAPITAL MARKETS .................................................................................................. 9–13

STRATEGY/M&A ....................................................................................................... 14–17

MARKET INTELLIGENCE/REGULATORY/ACCOUNTING/OTHER ...... 18–20

Corporate Finance Advisory Trending Topics A 1H 2018 Compendium

CAPITAL STRUCTURE AND CAPITAL ALLOCATION 1H 2018 Corporate Finance Advisory Trending Topics | 2

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WHITE PAPERS AND REPORTSTRENDING TOPICS

MAY 2018

Blockchain and the decentralization revolutionA CFO’s guide to the potential implications of distributed ledger technology

Disrupt, or be disrupted Corporate strategies for an increasingly disruptive world

SEPTEMBER 2017

BLOCKCHAIN AND THE DECENTRALIZATION REVOLUTION: A CFO’S GUIDE TO THE POTENTIAL IMPLICATIONS OF DISTRIBUTED LEDGER TECHNOLOGY

With the advent of blockchain and increased adoption, J.P. Morgan’s Corporate Finance Advisory team, in conjunction with J.P. Morgan’s Digital Investment Banking team and Blockchain Center of Excellence, provides an informed view on the corporate implications of the rapidly changing interplay between finance and blockchain technology.

DISRUPT, OR BE DISRUPTED: CORPORATE STRATEGIES FOR AN INCREASINGLY DISRUPTIVE WORLD

With the pace of technology development— artificial intelligence, machine learning, cloud and blockchain—continuing to increase, how can firms prepare to disrupt first before they are disrupted?

TEN STRIKING FACTS TO GUIDE YOUR CORPORATE FINANCE DECISIONS IN 2018

An annual (January) publication by the Corporate Finance Advisory team that presents eye-opening statistics, as well as the potential strategic and value implications for corporate decisions-makers.

STRATEGY/ M&A

CAPITAL STRUCTURE/CAPITAL ALLOCATION

REGULATORY/ ACCOUNTING

MARKET INTELLIGENCE

CAPITAL MARKETS

Every two weeks, Corporate Finance Advisory (CFA) writes on four themes or trends to serve as a source of thought-leadership for management teams.

1H 2018 Corporate Finance Advisory Trending Topics | 3TABLE OF CONTENTS

Table of Contents

CAPITAL STRUCTURE AND CAPITAL ALLOCATION

#TaxReform #FinancingIs your offshore cash still “trapped” too? ............................................................................................................................5

#Disruption #ValuationDigging into the data: CapEx/R&D spend led by the Tech sector ............................................................................................ 5

#Pension #Valuation #LiabilityManagementPension risk transfer frenzy? ....................................................................................................................................................6

#LiabilityManagement #Financing #Global #TaxReformPost-tax reform liability management transactions to optimize debt structure and cost of capital ..................................... 7

#TaxReform #DistributionPolicyU.S. Corporate Tax Reform: Investors start to press firms on capital allocation ....................................................................8

CAPITAL MARKETS

#Global #FinancingCompetition for global IPOs heats up as APAC exchange listing rules are relaxed ................................................................9

#ICO #Financing #BlockchainStrong momentum in ICOs indicates digital tokens are here to stay .................................................................................... 10

#YieldCurve #FinancingUnderstanding the flattening yield curve and implications for bond issuance decision-making ..........................................11

#SPACs #Financing #M&AWhere will the $11bn of available SPAC capital be deployed in the next one to two years?................................................. 12

#TaxReform #FinancingTime to shine, preferreds ....................................................................................................................................................... 13

STRATEGY/M&A

#M&A #LiabilityManagement #CorporateClarity #FinancingSpin-off structuring to maximize proceeds and achieve capital structure objectives .......................................................... 14

#M&A #CorporateClarityRise of the (taxable) spin-merge transaction......................................................................................................................... 15

#Blockchain #ICOBlockchain and the Decentralization Revolution ................................................................................................................... 15

#M&A #CorporateClarity #GlobalShrinking to grow: European separation activity kicks into high gear in 2018 ..................................................................... 16

#TaxReform #CorporateClarityCorporate structure: The benefits of a C-Corp versus partnership for public companies .................................................... 17

1H 2018 Corporate Finance Advisory Trending Topics | 4TABLE OF CONTENTS

Table of Contents

MARKET INTELLIGENCE/REGULATORY/ACCOUNTING/OTHER

#Global #RegulationEasing of Chinese government restrictions represents the next step toward accessing the Chinese investor base ........... 18

#Financing #MarketIntelligenceThe CDS and financing markets are intertwined, afterall ..................................................................................................... 18

#RecessionRisk #Ratings #MarketIntelligenceCorporate debt to GDP near all-time highs…is it a reason to worry? ................................................................................... 19

#Valuation #Disruption #MarketIntelligenceSeeking growth (and value creation) in a disruptive world ................................................................................................... 19

#ICO #Regulation #BlockchainRegulators weigh in on virtual currencies and initial coin offerings .....................................................................................20

See page 21 for additional topics, for which the text can be found at www.jpmorgan.com/directdoc/AdditionalTopics1H2018.

www.jpmorgan.com/directdoc/AdditionalTopics1H2018


JUNE 11, 2018#TaxReform #Financing

Is your offshore cash still “trapped” too? Post-tax reform, companies are still facing hurdles returning offshore cash to the U.S. Many companies that invested their trapped cash in a portfolio of U.S. Treasuries or corporate bonds find themselves with temporary losses due to the recent rise in rates. However, firms are unwilling to crystallize these losses since the instruments will approach par as maturity dates approach, and, consequently, are not selling the securities. Separately, certain companies face tax issues that prevent cash/securities from being brought back. These issues can be temporary (such as non-calendar tax year ends) or more technical (e.g., lack of sufficient foreign earnings and profits to cover the dividend amount).

Subject to company-specific facts, different financing alternatives may be available to help firms access their offshore cash with favorable tax and accounting treatment.

#Disruption #Valuation

Digging into the data: CapEx/R&D spend led by the Tech sectorIn 2017, four technology companies (Amazon, Alphabet, Intel, and Apple) collectively spent over $100bn in CapEx and R&D. Year-over-year, this represents approximately a +50% increase for Amazon, +25% for Alphabet, +10% for Intel, and +5% for Apple. While these four companies were the top four largest domestic spenders, other technology companies were also well represented. Of the top 15 largest spenders, an additional two came from the technology sector, with two companies only in each of the consumer discretionary, healthcare, telecommunications, and energy sectors (plus one industrial company). This is a contrast from 2010, in which only three technology companies made the top 15.

Equity analysts are expecting that this investment trend will continue into 2018. While explicit estimates for R&D are less common for most companies, CapEx estimates have the Tech sector outspending other industries. Of the top 10 expected CapEx spenders for 2018, five are in the technology space (Amazon, Alphabet, Intel, Apple and Facebook). Today’s investment is likely to be tomorrow’s growth and recent spending trends likely solidify large-cap tech’s ongoing role in both U.S. and global economic growth.

KEY TAKEAWAYS

• Many companies are still unwilling or unable to bring back offshore cash and securities post-tax reform due to a variety of issues, including losses on marketable securities (due to rising interest rates), non-calendar tax year ends, or limited foreign subsidiary dividend capacity

• Financing alternatives exist for clients looking to access offshore cash in the near term, depending on their specific fact pattern

KEY TAKEAWAYS

• Technology companies have been investing the most money (in absolute dollars), via CapEx and R&D, of any sector

• While tax reform and access to offshore cash is likely a contributing factor, this trend was also evident in the pre-tax reform world

• Non-tech companies may need to reconsider their own investment strategy to stay competitive in an increasingly disruptive world


APRIL 16, 2018#Pension #Valuation #LiabilityManagement

Pension risk transfer frenzy?For pensions, 2017 is known as the year of record accelerated funding to lock-in deductions at 35% corporate tax rate ahead of tax reform. However, less known is that 2017 was also the year of second largest volume of pension buyouts, totaling $23bn.1 Volume in 2018 is estimated to be even higher, at $25–$30bn in buyouts.2

Drivers of increased pension de-risking activity:

• Steep rise in Pension Benefit Guarantee Corporation (“PBGC”) premiums has significantly increased the cost of maintaining a pension plan

— PBGC premiums are expected to increase even further over the next few years

• Fierce competition among life insurers to win business has kept the cost of a pension buyout low

— Pension liability associated with retirees can be settled with minimal funding/cash outflows from the plan sponsor

• Precedent buyouts over the last few years have shown positive reaction from equity investors and rating agencies

• Volatile asset performance and prolonged low interest rates have renewed the importance of having a disciplined and proactive approach to managing firms’ pension plans

KEY TAKEAWAYS

• Pension buyout activity increased significantly in 2017, and it is expected to be even higher in 2018

• Cost of maintaining a Defined Benefit pension plan will continue to increase over the next few years, making a pension buyout even more attractive

• Firms that have been funding their plans are now well-positioned to decrease a portion of their pension liabilities at minimal cost

• A pension buyout can be used by firms pursuing strategic transactions (acquisitions, separations) to improve valuation and balance sheet post-transaction

1 Source: LIMRA2 Source: MERCER


APRIL 2, 2018#LiabilityManagement #Financing #Global #TaxReform

Post-tax reform liability management transactions to optimize debt structure and cost of capitalTax code provisions, such as the 30% of U.S. EBITDA/EBIT limitation (“Section 163(j)”), Global Intangible Low Tax Income (“GILTI”), and the Base Erosion Anti Abuse Tax (“BEAT”) have all received significant attention this year. Each has its own set of complexities and all interact with third party debt and intercompany debt interest payments in various ways (some of which are still to be determined). However, in working through these complexities, tax and treasury teams have the opportunity to re-structure debt placement via liability management transactions to minimize cost of capital for the firm.

Notably, in March 2018:

• Lionsgate (Ba3/B+), a Canada domiciled company, launched a transaction to move debt from the foreign parent to the U.S. subsidiary

— A revolver, Term Loan A, and Term Loan B were re-domiciled from the parent to the U.S. subsidiary, all US$

— A par-for-par exchange (25bp) moved US$ HY bonds from the parent to the U.S. subsidiary, retaining a parent guarantee and substantially similar covenants

— J.P. Morgan acted as Lead Arranger, Lead-Left Book Runner, and Sole Dealer-Manager

• CCEP US, LLC (A3/BBB+), a U.S. subsidiary of Coca-Cola European Partners Plc, launched a transaction to move its bonds from the U.S. entity to the European parent

— The par-for-par exchange and consent (15bp) is on both EUR and USD denominated bonds.

KEY TAKEAWAYS

• Tax reform is driving firms to reassess their debt structures and execute on liability management

• J.P. Morgan maintains deep expertise at the intersection of tax and capital markets to execute complex transactions post-tax reform


FEBRUARY 2, 2018#TaxReform #DistributionPolicy

U.S. Corporate Tax Reform: Investors start to press firms on capital allocationWith the start of earnings season, firms have begun to communicate their capital allocation policies, though many are still cautious to give specific guidance on post-tax reform. Some remain proactive, including highlighting no change in policy, while others have been peppered with specific questions by analysts. In a sample of ~100 corporates:

• 23% highlight dividends and 21% highlight repurchases, while 15% of firms mention both

• 47% mention capex whereas only 15% specifically highlight M&A

• Only 12% highlight debt pay-down, and 10% of firms talked about pension contributions

• Of firms that give guidance, 58% highlight more than one capital allocation priority post-tax reform

Select examples include:

• Dividend policy: notable dividend per share increases include Comcast +21%, Boeing +20%, YUM +20%, Norfolk Southern +18%, Valero +14% and Intel +10%

— Interestingly, Juniper announced an 80% increase in its quarterly dividend

— In contrast, Johnson & Johnson highlighted that they are comfortable remaining at their current target of a 50% payout ratio

• Buyback guidance: P&G increased its share repurchase outlook from $4–7bn to $6–8bn and 3M from $2–4bn to $2–5bn

• Pension plan contributions: Praxair, Caterpillar, Raytheon, Northrop Grumman ($500mm), 3M ($600mm) and Abbvie ($750mm) announced either recent or future contributions to underfunded pensions, in some cases accelerating previously planned contributions

KEY TAKEAWAYS

• Though many initial tax reform announcements were centered around employee bonuses, the earnings season has revealed generally conservative approaches in firms’ responses to tax reform — There appear to be few dramatic shifts in capital

allocation strategies in the near term…with many firms delaying announcements until their upcoming analyst days

• Companies have also been attributing distribution increases to economic trends/company performance, rather than simply to tax reform

CAPITAL MARKETS 1H 2018 Corporate Finance Advisory Trending Topics | 9

JUNE 25, 2018#Global #Financing

Competition for global IPOs heats up as APAC exchange listing rules are relaxed The Singapore (“SGX”) and Hong Kong (“HKEX”) bourses have proposed to loosen the listing requirements to attract high profile global technology firms in an attempt to make their exchanges more competitive, particularly relative to U.S. exchanges. SGX is relaxing the rules on dual-class listings, such as a minimum market cap and sunset clause requirements that automatically convert a dual-class structure into a traditional share structure. The HKEX removed its rule of “one share, one vote” by allowing dual-class shares, eliminated minimum financial eligibility tests, and established a new secondary listing route for Chinese and international companies that wish to secondary list in Hong Kong.

The relaxing of the listing requirements gives both local domestic and global corporations an additional option for equity listing, thus increasing the stakes for exchanges to win a piece of the upcoming pipeline of global IPOs. In an interesting dichotomy, as the APAC exchanges relax requirements, both U.S. and global indices have been concurrently tightening restrictions on the same rules, in response to investors’ desires for more balanced corporate governance.

KEY TAKEAWAYS

• Asia Pacific exchange operators are courting global corporations by relaxing listing requirements — The overhaul is in response to Alibaba’s decision

to list on the NYSE in 2014 (world’s biggest ever IPO at $25bn)

• The changes reflect the region’s goal of attracting high-growth innovative companies with dual-class share structures and growing bio-tech companies that have not established a track record of revenues and profits — Interestingly, the move is in contrast to recent

changes in major index rules (S&P and Russell, with MSCI in proposal stage) limiting inclusion or weightings of multi-class share structures

• APAC easing its listing requirements has raised the stakes for the red-hot global IPO market, while providing corporations new regional sources of capital


JUNE 11, 2018#ICO #Financing #Blockchain

Strong momentum in ICOs indicates digital tokens are here to stayThe use of blockchain technology for the purpose of raising capital continues to evolve. Most ICOs executed to date have been done by pre-product or pre-IPO firms seeking to fund a specific project. In return for capital, these firms have provided buyers “utility tokens” that give the holder the right to access the future product or service being developed. As the market for ICOs matures, deals are getting bigger (Block.one is on track to raise $4bn through its EOS token in the largest ICO to date) and brand names are starting to explore alternatives (the headphone/audio component maker Monster announced plans for a $300mm ICO). ICOs have the potential to provide both public and private companies with access to new forms of capital offering the potential benefits of a more diverse investor base while providing the opportunity to monetize existing networks and assets at a reduced cost.

The ICO structure continues to have many challenges: technical hurdles, uncertain regulatory treatment, limited liquidity, regulatory oversight, and a lack of registered exchanges still make the market immature, particularly for larger, established companies. If history is any evidence, however, these issues are likely to be resolved quickly and issuers should be prepared for and understand the state of the digital asset marketplace. The Corporate Finance Advisory team outlined many considerations in its recent report1 and continues to help clients better understand the art of the possible.

KEY TAKEAWAYS

• ICOs (Initial Coin Offerings) have raised $13bn this year alone, and $17bn in aggregate since the beginning of 2017 versus $19bn raised via the traditional tech IPOs over the same period

• So far, ICOs have been utilized by start-ups to fund the development of new projects, by selling “utility tokens” that are intended to provide users with access to a product or service

• It may not be long before more “established”

companies consider issuing tokens that would entitle holders to rights/features similar to those found in equity or debt securities

1 For further reading, see our paper Blockchain and the Decentralization Revolution: A CFO’s guide to the potential implications of distributed ledger technology.

https://www.jpmorgan.com/country/US/EN/cfa/blockchain?source=cib_em_ap_cfablock0518&M=ac3c6ad5-d9db-4b7d-9942-3e13c8c23f2d

https://www.jpmorgan.com/jpmpdf/1320745566550.pdf


KEY TAKEAWAYS

• Corporates should consider issuing long dated bonds, as the curve is the flattest it has been over the past 10 years

• Rising 3m Libor when compared to Fed Funds appears to be related more to market technicals than worries of bank’s creditworthiness or systemic risk

APRIL 2, 2018#YieldCurve #Financing

Understanding the flattening yield curve and implications for bond issuance decision-making The U.S. Treasury (UST) yield curve is the flattest it has been over the past 10 years: the current difference between 2y and 10y UST yields is only 47bps (with a 176bp average and 291bp high) and the difference between 2y and 30y Treasury yields is just 71bps (with a 262bp average and 402bp high). Further to the flatness in the UST curve, 3m Libor has also recently spiked to its highest level since the financial crisis without an equivalent rise in term rates.

• The recent spike in 3m Libor when compared to Fed Funds has more to do with market technicals than systemic risk in the bank market (with bank CDS near all-time lows)

— Likely linked to recent high issuance of 3m T-bills that has pushed up short-term yields

— Long-term rates have not repriced higher, indicating that the market does not expect 3m Libor to continue increasing at its current pace

• One negative of rising 3m Libor is increased interest burden for floating rate notes (FRNs) although J.P. Morgan’s economists estimate the extra burden to non-financial borrowers may be limited to $11bn annually

• The investment grade bond market has already started to see a switch towards issuance of bonds with maturities of 20 years or longer

— 24% of issuance YTD has been 20 years or longer versus 16–20% in the last five years


MARCH 19, 2018#SPACs #Financing #M&A

Where will the $11bn of available SPAC capital be deployed in the next one to two years?The rising number Special Purpose Acquisition Company (“SPAC”) IPOs has caught the eye of the market. SPACs have represented ~15% of the IPO market year-to-date and ~19% in 2017. With about 39 existing SPACs actively looking for acquisitions in the market today and expiry dates in the next one to two years, a significant amount of capital is expected to be deployed towards acquisitions of small to mid-sized private or public companies.

• Currently, there is ~$11bn of M&A capital available spread across a variety of sectors

— Energy (23%), TMT (23%) and Healthcare (12%) represent the top three target sectors when measured by available capital

— Approximately 20% of the SPACs do not have a sector focus

— Some SPACs are focused on geographical areas, such as Latin America, Mexico and India

• PE-backed SPACs from well-known sponsors continue to be active with recent participation from Thomas H. Lee Partners, Fortress Investment Group, TPG, and the Carlyle Group, as well as previous activity from Riverstone and Blackstone

— Financial sponsor involvement in SPACs often increases the likelihood of obtaining committed capital to complete an acquisition

KEY TAKEAWAYS

• The SPAC capital war-chest for private company M&A and reverse IPOs has grown substantially in 2017–2018 to over $11bn — Sector/regional focus, and founders’ credentials

should be factored before being acquired by a SPAC

• J.P. Morgan advised on two SPAC M&A transactions and led four SPAC IPOs in 2017 and maintains both structuring and market expertise in the space


MARCH 19, 2018#TaxReform #Financing

Time to shine, preferredsAs we mentioned last year in CFA Trending Topics, non-dilutive preferred stock is a more attractive financing tool in a post-tax reform world. With lower corporate tax rates and limitations on deductibility, the value of a tax deduction has arguably decreased, especially if non-deductible forms of capital offer other benefits, such as rating agency equity credit and equity accounting treatment.

Progressive Corp appears to be one of the first to capitalize on this theme (and is not driven by regulatory capital needs):

• Progressive (A2/A) issued $500mm of preferred at 5.375%, redeemable at 100% any time after year five

• Though their effective tax rate has historically been in the 32–33% range, they have guided to a significantly lower tax rate post-tax reform of ~20%

• The company’s Moody’s rating was also bolstered by 50% equity treatment on the preferred

— Most peers historically have issued tax-deductible hybrid debt at only 25% Moody’s equity credit

KEY TAKEAWAYS

• Management teams should re-assess the fixed income capital markets where perpetual, non-dilutive capital is more attractive in a post-tax reform world

STRATEGY/M&A 1H 2018 Corporate Finance Advisory Trending Topics | 14

JUNE 25, 2018 #M&A #LiabilityManagement #CorporateClarity #Financing

Spin-off structuring to maximize proceeds and achieve capital structure objectives In an equity-for-equity exchange, the Parent offers to acquire its own shares from Parent stockholders in exchange for the retained SpinCo shares, offering a discount on the SpinCo shares to incentivize participation in the exchange. Discounts depend on market conditions and other factors, with precedents in the 10–20% range. In a debt-for-equity exchange, the Parent exchanges the retained SpinCo shares for Parent debt. Specific parameters of the transaction are usually covered by an IRS Private Letter Ruling, but in general the transaction steps are: (1) banks acquire Parent debt for cash (sometimes involving a third-party tender for bonds); (2) banks hold the debt for at least 14 calendar days (tax requirement); (3) banks exchange Parent debt for SpinCo equity; and (4) immediately thereafter, banks sell the SpinCo stock pursuant to a marketed follow-on offering. The discount in a debt-for-equity exchange is typically the same as it would be in a regular-way follow-on offering—ranging from a few percentage points to 10%, depending on market conditions. In the debt-for-equity exchange, SpinCo shares are sold to public investors at a potentially lower discount, and Parent debt is retired (instead of Parent equity).

On June 21, J.P. Morgan completed a debt-for-equity exchange for MetLife of its 19.2% retained stake in Brighthouse Financial, after evaluating various alternatives for the retained stake. The equity priced at a file/offer discount of 3.3%, a discount to last sale of 1.7%, and an “unaffected” discount to the pre-tender launch price of 8.1%. The overall result helped achieve MET’s publicly announced capital structure goals: a tax-efficient disposition of the Brighthouse stake, retirement of nearly $1bn debt, and use of available liquidity to repurchase MET shares.

KEY TAKEAWAYS

• U.S. companies typically pursue spin-offs to maximize value of business divisions

• Parent companies can generally receive SpinCo debt proceeds tax-free in a spin-off through the use of basis or other structuring techniques

• The tax-free spin-off rules allow the Parent to retain up to 19.9% of the stock for a period of time (usually 12 months)

• These “retained shares” can be used by Parent to achieve capital structure objectives, including liability management and share repurchase using the techniques described here


MAY 29, 2018#M&A #CorporateClarity

Rise of the (taxable) spin-merge transactionSpin-merge transactions allow a parent company to spin off a divested business to shareholders (usually without corporate tax leakage) while simultaneously combining it with a merger partner. The merger, in turn, delivers scale and operational synergies, creating additional value for shareholders. Since late 2017, there have been over a half dozen spinmerge transactions announced, including a number of large-scale transactions. Recently, the spin-merge technique has been increasingly utilized to facilitate an outright acquisition of a target company, which in turn makes the spin-off component taxable at the corporate level. Tax-free transactions are preferred (requires Parent Company shareholders to retain greater than 50% of combined company), but taxable spin-offs can also be pursued where there is a compelling value creation story. (Recent taxable transactions include; Disney/21CF, Wyndham Worldwide/La Quinta, GE/Wabtec, Boeing/KLX, Genuine Auto Parts/Essendant).

MAY 15, 2018#Blockchain #ICO

Blockchain and the Decentralization Revolution While much has been written about blockchain, or “distributed ledger” technology, there has been less focus on the possible corporate finance implications. In our most recent publication1, J.P. Morgan’s Corporate Finance Advisory team, in conjunction with J.P. Morgan’s Digital Investment Banking team and Blockchain Center of Excellence, explains blockchain technology in non-technical terms, summarizes the potential blockchain use cases that may impact corporate finance, and presents an action plan for corporate decision-makers evaluating blockchain’s potential.

Though still a nascent technology, the growth of various aspects of blockchain technology has been striking:

• There are over 86,000 existing blockchain projects (including Bitcoin)

• $6bn was raised via Initial Coin Offerings (“ICOs”) in Q1 2018 • The current market value of all cryptocurrency in circulation is

above $400bn • Bitcoin’s average daily trading volume is $6.5bn

KEY TAKEAWAYS

• Even though blockchain remains in its early days, it is not difficult to see how wider adoption of the technology could have far-reaching implications for corporate finance

• Firms may wish to evaluate strategic blockchain partnership opportunities—either within their own industries or with blockchain thought leaders like financial institutions and start-ups

• Blockchain is the latest in a line of technology developments that will require the focus and understanding of the entire C-suite as business models and markets evolve

KEY TAKEAWAYS

• The first half of 2018 has seen a number of spin-merge transactions across several industries

• In an environment with increasing antitrust regulatory scrutiny and focus on deal closing risk, along with lower overall corporate tax rate, the use of taxable spin-offs to facilitate acquisitions may continue to feature more prominently than before (the more prevalent tax-free iteration is frequently referred to as a “Reverse Morris Trust” or “RMT”)

1 For further reading, see our paper Blockchain and the Decentralization Revolution: A CFO’s guide to the potential implications of distributed ledger technology.

https://www.jpmorgan.com/country/US/EN/cfa/blockchain?source=cib_em_ap_cfablock0518&M=ac3c6ad5-d9db-4b7d-9942-3e13c8c23f2d



APRIL 30, 2018#M&A #CorporateClarity #Global

Shrinking to grow: European separation activity kicks into high gear in 2018European firms across all sectors continue to unlock value and increase corporate clarity through separations (e.g., carve-out, spin-off). In the last 24 months, separation activity in Europe has been comparable to that of the U.S. However, the EMEA trend is on the rise with five announcements in 2018YTD (versus only one in the U.S.1) and strong median outperformance since announcement (~9%).

Focusing only on spin-off and carve-out transactions in the Stoxx 600 greater than €500mm in value, we note the below:

• In the last 24 months; firms announcing separations have outperformed the market; generating median excess returns of 11%

— Recent precedents include: Altice (Altice USA); Kering (Puma); Telecom Italia (network business); Fiat (Magnetti Marelli); Prudential (M&G Prudential); Whitbread (Costa Coffee)

• Though there have been many spin announcements recently, carve-outs remain on the rise

— Roughly 33% of transactions were carve-outs from 2008–2013, and since then about 50% have been carve-outs

• Notably, the strongest outperformance is observed in companies smaller than €20bn, reinforcing the value of the focus premium

KEY TAKEAWAYS

• Firms across the globe should take a second look at separation opportunities across their portfolios

• Though mega caps have long focused on optimizing their portfolios, medium to large cap firms can enjoy the strong market outperformance

• Separations through carve-outs are on the rise, though spinoffs may still make sense for the right cases

1 2018YTD data pertains to S&P 500 spin-offs only and excludes Reverse Morris Trusts


FEBRUARY 16, 2018#TaxReform #CorporateClarity

Corporate structure: The benefits of a C-Corp versus partnership for public companiesA management team’s choice around corporate structure has the ability to unlock value, and non C-Corp public companies have been increasingly considering making a change. In recent years, several Master Limited Partnerships (“MLP,” energy related businesses) executed full C-Corp conversions (such as Kinder Morgan) or looked to incorporate a C-Corp vehicle known as an Up-C (such as Plains All American). Alternatively, some firms have elected to remain a legal partnership but be taxed as a C-Corp, such as asset management firm Ares Management LP, who announced the change this week.

The benefits of a C-Corp are wide ranging and may be further enhanced in a post-tax reform world:

• Expansion of investor base to include: (1) investors unwilling to deal with partnerships’ onerous K-1 filings and (2) foreign investors

— In recent times, C-Corps have enjoyed superior access to the capital markets

• Potential eligibility in major stock indices and increased trading liquidity

• Improved capital structure and capital allocation flexibility

• Post-tax reform, the relative advantage of after-tax distributions to shareholders is reduced for a partnership versus a C-Corp

However, key considerations remain:

• All-in double taxation remains higher for C-Corps than pass-throughs and not all shareholders are tax sensitive—benefits of conversion need to overcome the potential tax drag

• Conversion to a C-Corp is not easily undone—companies must carefully evaluate change of law risks

KEY TAKEAWAYS

• Tax reform serves as yet another reason for firms in partnership form to explore alternatives around C-Corps

• Technical details around tax, legal form, and capital market implications are all important in maximizing shareholder value

MARKET INTELLIGENCE/REGULATORY/ACCOUNTING/OTHER 1H 2018 Corporate Finance Advisory Trending Topics | 18

JUNE 11, 2018#Global #Regulation

Easing of Chinese government restrictions represents the next step toward accessing the Chinese investor base China has recently published and implemented a set of policies that further open its financial markets to outside investors. These policies include the allowance for majority ownership of securities houses by foreign entities and the relaxation of restrictions on accessing the China A-shares market through “Stock Connect” programs. Chinese A-shares are equity interests in Chinese corporations that historically could only be owned by Chinese investors. The “Stock Connect” programs now allow for trading between China’s mainland markets and the Hong Kong Stock Exchange, effectively enabling approved foreign institutional investors to own certain Chinese A-shares.

Effective June 2018, index provider MSCI began including over 230 Chinese A-shares companies in its Emerging Markets indices, giving foreign retail investors exposure to these Chinese corporations for first time. By the end of 2018, the completion of the London-Shanghai Stock Connect initiative will result in the further opening of the Chinese financial markets. This initiative paves the way for global corporations to list on Chinese exchanges as CDRs giving them access to the second largest capital markets in the world.

MAY 29, 2018#Financing #MarketIntelligence

The CDS and financing markets are intertwined, after allSeveral precedents of this fact pattern have emerged, however each has a different flavor. In each case the party offering financing would protect its CDS position—for a CDS seller, ensuring continued receipt of premia payments, and CDS buyer, a more beneficial/likely payout on contractual default. RadioShack and Sears (reportedly) have had CDS sellers offer financing that would help stave off a default. McClatchy had a CDS seller offer financing along with a reorganization of debt structure, resulting in “orphaned” CDS contracts, significantly reducing any chance of a contractual default. Additionally, Codere and Hovnanian had CDS buyers who offered financing that also involved a technical default on CDS contracts.

These transactions are prevalent in situations where there are sizeable CDS positions relative to debt. When the stars align these third party contracts appear to result in one winner: firms in need of a lifeline.

KEY TAKEAWAYS

• China’s government and regulators are actively encouraging corporate transparency, improving market accessibility and implementing financial reforms

• As a result, MSCI is adding large capitalization domestic Chinese equities to two of its benchmark Emerging Market indices

• The move reflects China’s commitment to further opening up its domestic financial markets to global players

• In the future, western businesses may be able to list on mainland Chinese exchanges via Chinese Depository Receipts (“CDRs”), thereby accessing a new investor base

KEY TAKEAWAYS

• Through credit default swaps (CDS), investors can replicate synthetic corporate credit positions with low upfront capital

• Recently some of these investors have become true capital providers to firms (depending on incentives and willingness to lend)

• Firms have taken these financing lifelines while regulators and market participants are working to better understand the potential legal implications and impact to the CDS market


MARCH 19, 2018#RecessionRisk #Ratings #MarketIntelligence

Corporate debt to GDP near all-time highs…is it a reason to worry?Despite a rosy economic backdrop, several measures of domestic corporate leverage are at their highest in the modern era, such as non-financial business debt-to-US-GDP rising above 73%, its highest level since the pre-1980 timeframe. We note:

• Rising interest rates coupled with new interest deductibility limitations could exacerbate downturns

• S&P recently published a report warning of high debt levels in a rising interest rate environment

• However, Moody’s appears more optimistic in contrast, citing strong economic growth and shrinking number of low quality high-yield companies

• Debt is also not as industry-concentrated as pre-2008, and more fixed-rate debt has been locked in at low rates

MARCH 2, 2018#Valuation #Disruption #MarketIntelligence

Seeking growth (and value creation) in a disruptive worldGiven the prevalent theme of business disruption, the market has become increasingly focused on acquisitions that offer novel avenues of growth (see CFA white paper1). With new access to overseas cash flow and cash balances via tax reform, many firms are eyeing fresh acquisition targets. Larger corporates valued on profitability may pause in evaluating acquisitions of faster growing companies with either significantly higher multiples or disparate valuation methodologies. The prospect that an acquired company could be “re-rated” to an acquirer’s relatively lower profitability multiple can make an acquisition seem especially expensive.

• Within the technology space, however, mega caps, such as Microsoft, Cisco, Oracle, and SAP are getting some credit from equity investors and select analysts for their faster growing businesses

• Using a sum-of-the parts (SOTP) approach, the more mature business may be valued on an earnings metric and the faster growing parts of the business may be valued on a revenue metric, consistent with the valuation for the faster growing segment’s peers

KEY TAKEAWAYS

• While increased cash flows post tax reform can support further increases in leverage, management teams should stress test counterparty credit risk — Downsides could be exacerbated by rising rates,

limited interest deductibility, and contagion

• Recession risk models are sensitive to market dynamics, such as growth and borrowing rates, and may not fully incorporate potential heightened downside risk

KEY TAKEAWAYS

• In today’s environment, large companies may be able to get market credit for the value of faster growing, less profitable business segments

• Separate reporting of the faster growing segment, or even revenue splits alone with some guidance on profitability, can lead the Street to SOTP valuations — The considerations of additional disclosure need

to be weighed, since this could also lead to further investor scrutiny/activism, and/or unintended lower valuation to the extent it shines a light on weaker performance in a core segment

1 For further reading, see our paper Disrupt, or be disrupted: Corporate strategies for an increasingly disruptive world.



FEBRUARY 16, 2018#ICO #Regulation #Blockchain

Regulators weigh in on virtual currencies and initial coin offeringsAccording to CFTC estimates, the total value of all virtual currencies is ~$365bn, a significant sum but dwarfed by gold at $8tn, while the WSJ cites that cumulative Initial Coin Offering (ICO) funding passed $4bn through December 2017. On February 6, the Senate Banking Committee, along with the chairs of the CFTC and SEC, held a hearing on the role of regulators on cryptocurrencies, ICOs, and related emerging technologies.

Companies and regulators have been contemplating:

• In the context of ICOs, where should a “coin” fit in a company’s capital structure?

— The Canadian Securities Exchange plans to treat a coin as an equity or debt security, simply with a new technology supporting the fundraising process and secondary market

— Depending on the features, should the coin fit somewhere else in the capital stack? Or not be treated as a security at all?

— The SEC indicated they view most ICOs as securities and should be regulated as such

— To date, not a single ICO has been registered with the SEC

• It is worth noting that the CFTC already established in 2015 that virtual currencies meet the definition of a commodity

KEY TAKEAWAYS

• The SEC, CFTC, and other related bodies are actively working to bring these new financial technologies and fundraising techniques under appropriate regulatory oversight, while capital markets and financial infrastructure continue to evolve at a rapid pace — Globally, financial infrastructure professionals

have been making strides on the underlying technology, such as implementation of blockchain on several exchanges

• Management teams should educate themselves about these developments as they refine their corporate finance toolkits and frameworks

ADDITIONAL TOPICS 1H 2018 Corporate Finance Advisory Trending Topics | 21

Additional TopicsFor full text, see www.jpmorgan.com/directdoc/AdditionalTopics1H2018.

CAPITAL STRUCTURE AND CAPITAL ALLOCATION

MAY 29, 2018#TaxReform #Ratings

Tax reform ripple effects on ratings?

MAY 15, 2018#TaxReform #Ratings #DistributionPolicy

Moody’s reacts to post-tax reform capital return plans by Tech companies

APRIL 16, 2018#TaxReform #DistributionPolicy

Increase in dividends post-tax reform

MARCH 2, 2018#Financing #Ratings #RecessionRisk

Rates may rise, but rating agencies remain more concerned about 2022

FEBRUARY 16, 2018#TaxReform #Ratings

Rating agencies release formal guidance and begin to react to post-tax reform announcements

JANUARY 19, 2018#TaxReform #DistributionPolicy

U.S. Corporate Tax Reform: What companies are saying

#TaxReform #Ratings

Rating agencies’ developing views in the context of tax reform

www.jpmorgan.com/directdoc/AdditionalTopics1H2018


CAPITAL MARKETS

JUNE 25, 2018#Financing #MarketIntelligence

Strong momentum in the convertibles market

APRIL 30, 2018#Disruption #Blockchain #Financing

J.P. Morgan readies USD blockchain debt issuance for prime time

#RecessionRisk #YieldCurve #MarketIntelligence

Insights into the yield curve and strategies for the current market environment

APRIL 16, 2018#Disruption #MarketIntelligence #Valuation

Understanding Spotify’s direct listing and its implications for capital markets

FEBRUARY 2, 2018#Financing #YieldCurve

Going long with 30-year debt might just be a winning play for 2018

JANUARY 19, 2018#Disruption #Financing

Creative options for entering the capital markets


STRATEGY/M&A

MAY 29, 2018#MarketIntelligence #Valuation

How can volatility impact strategic decision-making and valuation?

APRIL 30, 2018#Activisim #M&A #Disruption

Activism remains a predominant theme into 2018

APRIL 2, 2018#Valuation #Regulation #TaxReform

A FERC ruling has driven MLP valuations even lower and sponsors are again left to consider the long-term viability of the structure

MARCH 19, 2018#M&A #Regulation

The political/regulatory landscape: Key considerations in the context of high-profile M&A today

MARCH 2, 2018#CorporateClarity #M&A #TaxReform

Focus on corporate clarity and realizing value of tax attributes in M&A


MARKET INTELLIGENCE/REGULATORY/ACCOUNTING/OTHER

JUNE 25, 2018#MarketIntelligence #Global

Buy or Sell? Wait a minute…GOAL!

MAY 15, 2018#TaxReform #Regulation

Potential SALT deduction cap workaround?

#Global #Regulation

Tariffs, Tariffs, Tariffs!

APRIL 16, 2018#Disruption #Regulation

What will potential regulation mean for the disruptors?

APRIL 2, 2018#Accounting #Ratings

Moody’s proposed changes to its treatment of operating lease obligations: Key considerations moving forward

MARCH 2, 2018#CorporateClarity #M&A #TaxReform

Focus on corporate clarity and realizing value of tax attributes in M&A

FEBRUARY 16, 2018#TaxReform #Accounting

Disclosures and debates around tax and accounting post-tax reform

FEBRUARY 2, 2018#MarketIntelligence #Disruption

The market reacts to strategic partnership announcement in healthcare

JANUARY 19, 2018#MarketIntelligence #M&A #Valuation

View from the markets: Investors are anticipating 2018 will be a big year for M&A and that target companies will be well compensated for selling

1H 2018 Corporate Finance Advisory Trending Topics | 25

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