Commitment to the cause: For pushing hard in cross-border lending, showing commitment to the loan product by boosting the bank’s platform at a time when others were pulling back, and keeping its head when all others were losing theirs, JP Morgan is IFR’s Loan House of the Year.
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2012 was a difficult and transformative year for the loan market and Europe as the lingering eurozone crisis dragged the continent down. It is fair to say that US and Asian banks, as well as borrowers, profited at the expense of their European peers.
Global lending was dominated by the vibrant US market – particularly the red-hot leveraged loan market – in terms of volume and profitability.
Yield-hungry US investors stampeded into credit, starved of investment opportunities in a low interest rate environment and European leveraged companies quickly crossed the pond to tap into the abundant liquidity as the eurozone crisis and Basel III continued to hit their relationship banks’ ability to lend.
Cross-border lending in all its forms was one of the major themes of a rather lacklustre 2012 overall for the loan product as the bond market continued to eat its lunch and M&A activity failed to live up to expectations.
Dynamic Asian companies proved to be the exception and embarked on an overseas buying spree, snapping up cheap European and foreign companies backed by cheap funding from domestic banks in deals that still managed to attract international attention.
A global platform to capitalise on limited M&A opportunities, and expertise in profitable leveraged finance was critical for success in 2012 as pools of global capital merged and became ever more mobile.
“Our customers are increasingly geographically agnostic. So our main objective is to get the client the best deal wherever it is in the world,” said Jim Casey, co-head of JP Morgan’s global debt capital markets.
This geographical cross-pollination was driven by the need to access liquidity wherever it could be found, as quickly as possible in volatile markets.
This often brought unexpected placement results as traditional barriers broke down.
“If a deal is originated in Europe but the best execution is going to be in North America, we’ll do that.
“If it’s a highly rated Double B issuer and we think they can issue better in the high-grade market, we’ll do that. It’s basically delivering the best solution we can for the client in any given situation,” said Andy O’Brien, co-head of global debt capital markets.
One of the best examples of a global deal and multi-centre execution was the €8bn refinancing for German auto components maker Schaeffler which is IFR’s EMEA Leveraged Loan of the Year. The deal extended Schaeffler’s maturities and rebuilt its capital structure.
Schaeffler asked four banks that were not existing lenders – BNP Paribas, Deutsche Bank, HSBC and JP Morgan – to underwrite the deal to give it certainty of funding and execution on €6bn of loans and €2bn of bond bridges.
The deal was launched to the European and US market in early 2012 in a rare example of a pure European cross-border leveraged loan. The success of the deal helped to kickstart the European leveraged loan market.
“If you don’t have a global business, you’ll be marginalised. Never before has the US platform been more important to Europe,” said Kristian Orssten, head of high-yield and loan capital markets at JP Morgan.
Flexibility in placing debt put JP Morgan squarely at the top of the global loan bookrunner tables for the awards period, with US$323bn of deals, giving the bank a 12% market share with 1,066 deals.
Restructuring pays
Chief executive Jamie Dimon announced the creation of a corporate and investment bank in July to “combine finance, funding, regulatory, strategy [operations] in a new very complex world”, as part of a wider restructuring.
The merged corporate and investment bank was provided with a US$350bn balance sheet and started to have a significant effect on JP Morgan’s lending business within months.
The bank was able to offer a range of new products including cash management, treasury services and trade finance, which helped the bank to climb the league tables in a year when its traditional strength of M&A was down.
“We have the whole lending proposition now, not just an investment banking focus. Firm-wide, that’s a big shift in how we run the business – we’re using the balance sheet more to support business and get a bigger client footprint,” said Orssten.
Lending was previously based within the investment bank, which retains the bank’s underwriting function. The addition of the corporate bank is allowing JP Morgan to increase commitments and diversify by increasing the number of clients and is also helping to subsidise lending where necessary.
The combined balance sheet allowed JP Morgan to set aside US$2bn of capital to find 50 clients to develop lending relationships and drive investment banking business as the bank saw opportunity in a more regional Europe.
Domination
JP Morgan dominated the US loan market, with bookrunner volume of US$303bn and a 18% market share during the awards period, as the house of choice for the most strategic and complex transactions.
Despite a couple of interesting deals, including the US$8bn loan for Facebook, which helped the company to make a massive tax payment after its high-profile listing, and a lead-left bookrunning role on US$9.3bn amendment and extension for Ford Motor Co, the US investment-grade market was disappointing in 2012 as M&A levels stayed off the boil.
The US leveraged loan market, however, was on a tear, both in the crossover space, where the US$11bn loan for General Motors shone, as well as the sponsor-backed leveraged market which is one of JP Morgan’s traditional strengths.
The loan for GM – one of the biggest victims of the credit crunch – was led by JP Morgan and Citigroup and was the largest-ever loan raised for a non-investment-grade company.
The refinancing was designed to beef up liquidity as the company targets a return to an investment-grade rating after three years in the wilderness after emerging from bankruptcy in 2009.
The deal, which targeted investment-grade lenders, was placed with international banks attracted by GM’s plans to outperform revenue growth and increase its capital base.
“GM typifies a lot of the trends we’ve seen throughout the year. First and foremost, certain companies that have a global presence and global impact are able come to the market as a result of banks having more liquidity,” said O’Brien.
Flooding in
Frothy market conditions in the first quarter in the US leveraged loan market allowed arrangers to tighten spreads and refinancing, dividend recapitalisations and amend-and-extend activity soared as technicals improved and cash flooded in to the asset class.
The market softened in the middle of the year as macroeconomic headwinds grew stronger and investors grew more risk averse but took off again in September after Labor Day in a surprisingly strong end to the year which pushed loan yields to their tightest level ever.
Opportunism was the name of the game as sponsors hoovered equity out of existing portfolios. JP Morgan led one of the first holding company drive-by loan dividend deals with a US$300m term loan for Quintiles Transnational Holding, which provides clinical trials and other services for drug companies.
JP Morgan also reopened the leveraged loan market in December 2011 with an innovative US$1.45bn deal for management software company Kronos. The three-year amendment and extension of first and second-lien loans financed a dividend payment.
And the bank scored a major leveraged acquisition financing with a US$7bn deal to fund Plains Exploration & Production Co’s US$6.1bn takeover of assets in the Gulf of Mexico. The financing included US$5bn in senior secured facilities and a US$2bn bridge loan.
Digging in the dirt
Disappointing high-grade volumes due to low M&A activity in a low-growth environment continued, but leveraged lending improved, albeit off a low base.
“It is grubbier, we have to dig in the dirt to find revenue. We don’t have the large one-off revenue hits. We have more but they’re smaller which means we have to work harder,” said Orssten.
Conditions improved in the course of 2012 as money from the European Central Bank stabilised the markets and reduced bank funding costs, which allowed most banks to report improved profitability in lending relative to 2011.
Europe was largely a refinancing market in the investment-grade space, where deals with 5+1+1 year maturities were extended. A handful of European companies embarked on overseas acquisitions, including Swiss engineering firm ABB, German software company SAP and global brewer AB InBev, although these deals required less underwriting.
“There was less underwriting risk than in the past. Opportunities were not there as clients didn’t need certainty of funds. There was less risk due to less demand for risk,” said Orssten.
JP Morgan underwrote two deals for SAP, the first on a sole basis and the second with Deutsche Bank. The firm advised AB InBev on its acquisition of Mexico’s Grupo Modelo and was a joint bookrunner on its US$14bn loan and acted as financial adviser, co-ordinator and bookrunner to Italian utility Snam on its €11bn demerger financing from ENI, which is IFR’s EMEA Loan of the Year.
On the leveraged side of the business, repricings, dividend recapitalisations and amending and extending existing loans sustained profitability, although new buyouts remained in short supply.
The ability to tap the US institutional market was critical for bigger deals with the European buyside struggling to resurrect itself as CLO funds entered run-down periods. But the green shoots of replacement capital started to appear with a wide variety of low-leveraged or listed loan funds and managed accounts.
Natural selection
JP Morgan took a selective view of Asia in a strategic rather than relationship play with leading roles on a couple of interesting structured loans in Hong Kong and China.
The bank put a HK$2.95bn (US$380.6m) fully underwritten acquisition financing package together with CVC Asia Pacific to back the HK$4.951bn acquisition of City Telecom’s broadband and telecoms assets.
The deal, which was Hong Kong’s first leveraged buyout in seven years, was underwritten and prefunded by JP Morgan and Standard Chartered, and claimed several other firsts.
It was the largest underwritten LBO financing in Asia to be syndicated since the global financial crisis, the largest private equity buyout in Asia in 2012 and the largest in North East Asia since January 2011.
The facility achieved a 100% hit rate after attracting 11 banks at the MLA level and successfully expanded the target company’s banking relationships.
JP Morgan also won IFR’s China Loan of the Year for the second consecutive year for its US$500m term loan for Shandong Hongqiao New Materials Co, China’s fourth-largest aluminium producer and a subsidiary of Hong Kong-listed China Hongqiao Group.
An innovative commodity-linked structure was created to ease fears of lending to an onshore Chinese company. Offtaker JP Morgan China Commodities Corp will deposit funds into an onshore escrow account that will service the loan after receiving aluminium ingots.
The secured deal structure allowed offshore banks to lend directly to an onshore Chinese company while avoiding the risk of being structurally subordinated to onshore Chinese banks.
Lending with conviction
Overall it is fair to say that JP Morgan maintained a leading market position in a challenging year by not putting a foot wrong and keeping a firm focus on strategic M&A activity, co-ordination roles on jumbo deals, new stories and difficult deals.
The bank crafted smart and opportunistic trades, used its balance sheet aggressively and lent as much as possible when it had conviction.
Despite a turbulent year in the markets and the banking industry, there were few changes to JP Morgan’s line-up – indeed, staff were added to fill strategic holes.
“It’s been a tough year but we haven’t de-emphasised products, clients or focus. We haven’t taken headcount or capital out of the business, we’ve invested more capital and added people to focus areas. I feel great about the platform going into 2013,” said Orssten.
