Thursday, 18 October 2018

US Equity House: JP Morgan

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Flexing its muscles

One bank outpunched its rivals in 2016, using a mammoth balance sheet and strength in volatile sectors such as energy and healthcare to dominate the league tables. JP Morgan is IFR’s US Equity House of the Year.

No deal demonstrated JP Morgan’s success in US ECM this year better than the US$2.2bn block trade in the shares of independent exploration and production company Anadarko Petroleum.

The September deal – the biggest E&P risk trade on record – netted the bank an estimated US$50m in underwriting fees, in an era in which block trades are better known for their poor economics. Moreover, the bank’s Wall Street rivals did not share a penny of the payday.

It was the kind of outcome that showed not only why JP Morgan topped US equity underwriting league tables in 2016, but why it has been a Wall Street cornerstone for some 150 years.

JP Morgan ranked number one (up four places versus the prior year) in US IPOs with a 10.3% market share and served as bookrunner on the most new issues (26) during the awards period. In a year when secondary offerings stole a bigger piece of the ECM pie, the firm held first place for all US common stock issuance with a 15% market share, up three percentage points, while six of the top 10 firms lost ground.

In total, JP Morgan raised US$22.3bn in proceeds (from 143 issues – easily the most), a 9% fall over the previous year but far milder than the industry’s 28.5% slump.

League tables are not always the crucial criteria in IFR’s awards determinations, of course, but the bank’s ability to exploit its size and strength in a market where clients demanded more than ever was impossible to ignore.

The Anadarko block – to finance a US$2bn acquisition – required the bank to take on the overnight risk that oil prices might slump before it could sell the stock.

With its US$2.5trn balance sheet, JP Morgan was able to underwrite the deal on its own without pre-sounding market demand as other banks typically must to get comfortable with that level of risk. Pre-sounding raises the possibility of an expensive leak – something that Anadarko was able to avert by using only JP Morgan.

“If you are a large-cap company doing large-cap M&A, you want confidentially above all else,” said Jeff Zajkowski, JP Morgan’s co-head of ECM in the Americas.

Power play

A 40% increase in issuance from the energy and power sectors – where JP Morgan was the leading underwriter – bolstered the bank’s fortunes.

A shift away from issuance by MLPs and towards E&P companies and utilities saw the bank steal a march on its rivals.

JP Morgan led the way in helping the E&P sector recapitalise and repair balance sheets after a slump in oil prices forced many independents to raise equity in the first quarter. As oil prices recovered, the firm remained in the thick of the action as M&A took over as the primary trigger for stock sales.

“Within E&P, we have longstanding banking relationships stretching all the way back to Texas Commerce Bank, a bank that was acquired by Chemical Bank in 1987 [now part of JP Morgan Chase],” Zajkowski said.

“We just have a very good footprint in the E&P space and we have been there for clients as they have needed to recapitalise and as they have needed strategic advice.”

The long tenure of JP Morgan’s ECM leadership lends further weight to the bank’s heft with clients. Zajkowski and Americas ECM co-head Michael Millman report to global ECM head Liz Myers. Including these three, the majority of the division’s dozen managing directors have been with the firm for 15 years or more.

Healthcare has long remained a strong suit of JP Morgan’s, as it was again last year.

During the awards period the bank was easily the top bookrunner in healthcare ECM issuance, the bedrock of the IPO market in recent years and a source of financing for large-cap pharma M&A. JP Morgan was bookrunner on consecutive financings for Baxter International spin-off Baxalta, sponsor blocks in Zimmer Biomet and VWR, and IPOs for Editas Medicine and iRhythm Technologies.

Although biotech IPOs slowed in 2016 and relied more on insider support, their resilience as a major source of deal flow suggests they will remain a busy sector for years to come.

“It’s a more scrutinising investor base, but the investor base is there,” said Zajkowski. “And for the right stories, financing is readily available.”

JP Morgan’s annual healthcare conference each January in San Francisco, with 9,000 attendees this year, has helped win early-year mandates, while underscoring JP Morgan’s credentials with small and mid-cap issuers.

As much as JP Morgan’s commitment to the smaller end of the market dates back to Chase’s 1999 acquisition of Hambrecht & Quist, a big player in that era’s IPO boom, JP Morgan’s real advantage may stem from its commercial banking footprint.

“We have a fabulous commercial bank franchise that covers mid-cap companies and supports their traditional commercial banking needs,” Zajkowski said. “But every now and then those mid-cap companies need to do a high-yield deal or go public, or the founder wants to bring in private equity.”

JP Morgan hopes to take this further in the next decade, Zajkowski said, using its nationwide commercial banking presence to uncover the next group of great American companies from a wide range of sectors.

It is a footprint that means the bank has bankers from Albany to Tallahassee.

For all its many qualities, of course, the bank is still not immune to the difficulties in the ECM space.

Apart from market volatility, the languid IPO market, quickly opening and closing windows, and the fee pressure from blocks, a broader challenge is outflows from stock-pickers (active managers) to index-huggers (passive).

This is something the bank is well aware of.

“Looking ahead five years, there’s potential you could see a dramatically different landscape with [reduced] buying capacity among actively managed institutions,” Zajkowski said.

“We could see volatility, because if there is a shock to the system, there could be less liquidity. And there’s potential we could see significant inflows and outflows within ETFs that might create outsized price movements.”

The ultimate impact, of course, remains to be seen. But JP Morgan is surely better placed than many of its peers to meet the challenges ahead.

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