Awards for Excellence 2005
JPMorgan
No other firm is as proficient in structuring innovative, complex convertible issues
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| Viswas Raghavan |
The past 12 months have been very tough for the equity-linked market. In every region except Asia, volumes fell to nearly half what they were the year before. In Asia issuance fell about 25%.
Bumper opportunistic issuance in 2003 meant that there were fewer corporates seeking financing, while the strength of secondary equity markets and a decline in volatility led to a slight worsening of conditions. Other factors, such as changes in both US GAAP and the IFRS accounting standards, also put a damper on equity-linked issuance.
The year was tough for convertible bond investors too. Convertible arbitrage funds turned in some of the worst performance figures of any hedge fund strategy as many aggressively priced transactions fell out of the money. Despite a ravenous hunger for new issues, a healthy fear for losing any more money instilled a discipline on pricing.
“The market is awash with liquidity but participation in deals is very selective,” says Viswas Raghavan, head of equity and equity-linked capital markets at JPMorgan, winner of the global award for best equity-linked house. “Funds not making money are not prepared to suffer principal erosion, so deals that are too aggressively priced receive outright rejection. I think this is a trend that will continue for some time.”
JPMorgan ranks as the number one bookrunner for international convertibles and is number one in the EMEA region and number two in Asia. In the highly commoditized US convertibles market JPMorgan ranks far behind rivals such as Morgan Stanley, the top bookrunner, but it does consistently rank in the top 10.
But more important than its league table position is its track record for innovation. JPMorgan has been a clear leader in structuring complex convertibles over the past 12 months, a fact clearly illustrated by its stunning €3.9 billion “all-in-one” transaction for German insurer Allianz in January 2005. The incredibly successful transaction, which solved Allianz’s entire yearly financing needs in one go, involved three simultaneous deals including an innovative €1.3 billion index-linked exchangeable, a €1.6 billion treasury share mandatory exchangeable issued by JPMorgan itself, and a €800 million accelerated deal that acted as a delta hedge.
The index-linked exchangeable allows Allianz to settle using shares in either Munich Re, BMW, Siemens, or any combination of these stocks, helping it to unwind its cross-holdings in these companies while at the same time giving it the chance to benefit if any of the underlying stocks out-perform the DAX.
The mandatory exchangeable meanwhile sorted out the mess created from Allianz’s Dresdner bank subsidiary’s holding of Allianz shares that were a capital drain. JPMorgan arranged for Dresdner to sell its Allianz shares to JPMorgan while it sold a call spread to Allianz to secure any upside. JPMorgan repackaged the two as a mandatory exchangeable issued by itself into Allianz.
The entire deal succeeded in raising capital cost effectively, without raising leverage, and in reducing Allianz equity exposure. Allianz’s share price was left virtually unchanged. It was also easily the most impressive equity-linked deal globally.
JPMorgan has also maintained its leadership in the government use of exchangeables for privatizations, sole-leading a deal in Hungary for the government’s sale of its stake in pharmaceuticals company Gedeon Richter, and jointly leading a deal for the Malaysian government’s stake in highway operator Plus. The €639 million Hungarian deal was the first exchangeable by a central European issuer and was covered within three hours. The Malaysian deal, which was covered in two hours, was the largest equity-linked deal ever in Malaysia and the first government exchangeable.
JPMorgan also stood out in Japan where its innovative ¥126 billion ($1.2 billion) “death spiral” convertible stood out as the most interesting deal of the year. The mandatory convertible into preference shares was the only way for Mitsubishi Motors to get the new equity injection it needed to survive.
