| Bill Winters | ||||||
Last month, Euromoney caused something of a stir with a very simple proposition: the best way to establish which firm is the most powerful arranger of debt for any given region or group of borrowers is to combine the traditional bond, loan and MTN league tables.
That’s music to the ears of JPMorgan, which sits atop the overall global league table of debt arrangers. It may be that, as much by luck as by design, the merger of Chase and JPMorgan, by combining Chase’s all-powerful loan franchise and Morgan’s more than respectable bond businesses – it’s a long-established leader in emerging market bonds, asset backeds and the new European credit market and a growing force in US high grade bonds – has created a powerful new force in the debt markets.
“What we’ve got in our new company is the right model for the origination of loans and bonds,” says Bruce Carnegie-Brown, co-head of JPMorgan’s European and Asian debt capital markets. “We are indifferent as to what market we execute in, and that applies to borrowers ranging from high-yield to high-grade. Issuers like that approach, because there are no artificial barriers and our advice is objective.” It all sounds fine in theory, but hard to put into practice while bankers have been leaving because of the merger and survivors were coming to terms with new roles and new bosses.
And issuers will only continue to like the approach if the firm executes deals as well as any competitor could.
The good news is that at a time when the equity capital markets and M&A deal flow has declined, strength in debt markets is suddenly a key differentiator for investment banks. The ability to advise on and execute large debt financings for companies undergoing sudden transformation earns debt bankers the right to call on the chief financial officer and the chief executive officer, not just the treasurer.
“If our clients feel no diminution in service when dealing with us, as compared to our key competitors, then this is no flash in the pan. It’s a significant change,” says Bill Winters, global co-head of credit and rates markets at JPMorgan.
The merger was only finalized on the last day of 2000. Since then the new JPMorgan debt business has been realigned to customer groups – such as financial institutions, TMT and general industries – containing bankers with loan and bond expertise. These are supported by syndicate functions and the structured product groups.
The only way to prove that it is working is to point to deals, and JPMorgan points to several, including Daimler Chrysler’s $7 billion dual-tranche bond issue that combined an e6.5 billion Eurobond and a $1.5 billion auto-loan asset-backed deal and to the $6.5 billion senior secured credit facility for Lucent Technologies.
“Some of the most important debt-market transactions recently have been in telecoms and autos, which are industries in transition,” says Carnegie-Brown. “For companies that have lost their A1/P1 short-term debt ratings and suddenly have far fewer potential buyers of their commercial paper, assuring liquidity is crucial. The Lucent and DaimlerChrysler deals are defining examples of that.” He stresses that “it’s not just a question of having capital to underwrite bonds but also the capacity to lend for in order to take a longer view than the market”.
The investment banks that used to dominate the bond business accuse the commercial banks of strong-arming companies into awarding bond mandates by tying the continued provision of bank credit to such business. Carnegie-Brown argues that companies themselves often instigate such trade-offs. “The availability of capital in the loan market is key. Banks are withdrawing capital as a result of mergers, because they don’t like the economics or in light of rising bad debts. More and more clients are now saying to us: ‘please extend us more credit and then you can do these other deals for us.'”
The firm can point to plenty of one-stop shopping deals – such as the $5 billion credit and $1.5 billion bond it led for Northrop Grumman to finance its acquisition of Litton Industries, and the $1 billion credit, $125 million bridge loan and $400 million bond deal for Alliant Techsystems. It’s played a lead role as well in large, multi-tranche global bonds for WorldCom ($11.9 billion equivalent) and AOL Time Warner ($4 billion).
Winters makes the qualifying point that it is not the bank’s strategy to win higher-margin business by extending cheap loans. “The loan book of the previous JPMorgan’s was declining and that of Chase had been flat for several years. The real power is in underwriting and distributing loans as well as securities. In fact we want to manage our loan book down.”
He adds: “The real economy of scale is in structured products, finance and risk management as well as having the capacity to do innovative transactions with sheer strength in underwriting.”
And JPMorgan is not the only firm trying to build these strengths together. It’s largest competitor, Citigroup, is arguably even stronger in the bond markets though not as dominant in loans. Deutsche Bank combines excellent derivatives and risk management skills with powerful bond distribution, especially in Europe, and has balance sheet strength. Its evident weakness remains the US market. CSFB is building strong momentum in a range of debt-market positions. It’s a market leader in high yield and asset-backed – that’s the kind of non-traditional source of financing that many large companies, such as the telecom issuers, are now turning to. CSFB has also recently begun to notch up more jumbo bond transactions – such as appearing as a lead manager on the $16.4 billion deal for France Telecom – and emerging market new issues and debt exchanges.
Among the traditional debt market leaders, Merrill Lynch is never to be counted out. It too, has reorganized itself around client groups, and is doing more in the way of ratings and overall liability management advisory. It has executed a number of remarkable deals, such as the e4 billion bond for Siemens and the $1.3 billion tender offer for and repackaging of Eurotunnel loans.
