US Structured Equity House: JP Morgan
Brains and brawn
JP Morgan took full advantage of the universal banking model in 2015, leveraging corporate banking relationships to dominate equity-linked issuance. The bank led not only in execution of vanilla offerings but also those customised to meet client needs. JP Morgan is IFR’s US Structured Equity House of the Year.
Structured equity has been a tough sale when juxtaposed with low funding costs available to issuers from selling straight debt. Overall volumes plummeted, once again, this year to US$34.7bn, down from US$50.2bn in 2014 and a three-year low. US high-yield issuance, in contrast, remained near historic highs.
Convertible bonds largely served to balance the debt component of acquisitions or as part of large recapitalisations, rather than to fund growth.
JP Morgan dominated on such transactions, participating as a bookrunner on five of the 10 largest CBs. The bank landed a market-leading 30 transactions and US$6bn of business, giving it a 17.4% market share.
Actavis’ US$9.24bn equity and equity-linked fundraising in February, the first in a series of capital markets transactions to fund the US$66bn acquisition of Allergan, was the year’s largest transaction and set a precedent for other large M&A financings. The absolute size of the overall financing – IFR’s Americas Financing Package of the Year – made the equity component key to maintaining Actavis’ investment-grade credit rating.
JP Morgan, which had backstopped the purchase with a bridge loan, initially structured the issue with equal-sized tranches for the common stock and mandatory convertible to maximise equity credit while minimising dilution. But the combination of an investment-grade issuer and attractive economics culminated in the mandatory being upsized to US$5.06bn and pricing at a 5.5% dividend and 22.5% conversion premium, the aggressive ends of talk.
In the following weeks, Actavis termed out borrowings with a US$22bn multi-tranche bond sale and a US$4.7bn loan facility. JP Morgan was integral at every phase.
The bank would go on to reprise the dual-tranche format in a US$2.75bn fundraising, including a US$1.925bn mandatory convertible, for Frontier Communications in June to fund a US$10.5bn acquisition that it had backstopped.
Mitigating balance-sheet risks was evident elsewhere.
Whiting Petroleum, an E&P focused on the Bakken Shale, found itself in a tricky situation in the spring. Ahead of redetermination of its asset-based revolver, and following a series of acquisitions, the company was over-levered and had few options – asset sales had failed to occur in late 2014 and an outright sale did not produce the desired bids (but did leave its stock elevated).
The strategy championed by JP Morgan, a lender on the E&P’s US$4.5bn revolver, was to confidentially market a combo issue, with an appropriate discount given M&A speculation.
The two-day wall-crossing exercise culminated in the placement of 35m shares at US$30, a 23.9% discount, and a US$1bn five-year convertible bond at a 1.25% coupon and 30% premium to the reference. The equity financing, subsequently upsized to a combined US$2.35bn on exercise of the overallotment options, paved the way for US$750m of high-yield bonds a day later.
Execution was not ideal, but necessary to plug a hole in the E&P’s balance sheet.
JP Morgan is much more than just brawn.
Anadarko Petroleum, a mid-major E&P, turned to the bank in June to unlock value in Western Gas Equity Partners, a holding company whose sole asset was a 1.8% general partnership and 34.9% limited partnership in its midstream MLP affiliate Western Gas Partners. One part of the solution was the straight-forward sale of 2m secondary shares; another, more intricate piece, was a three-year exchangeable.
The exchangeable was structured to benefit Anadarko as a senior amortising note and pre-paid equity purchase contract, allowing for tax-deductibility at a higher, senior debt rate.
Also, with Baa2/BBB– rated Anadarko as the issuer, the security could be sold to investors who were restricted from investing in the MLP underlying.
A one-day marketing period culminated in a US$400m offering priced at a 7.5% dividend and conversion premium of 20% to the reference on the concurrent sale of 2m shares at US$58.20.
GoGo’s US$340m five-year CB in March came at a time when the prospects for in-flight wireless communications had plenty of detractors, as evidenced by one-third of the free-float being on loan to short-sellers.
In order to cope with a now high borrow cost, the company completed a pre-paid forward purchase of 7.1m shares in March 2020, one month ahead of the five-year maturity, with JP Morgan’s resulting short position offered to convert arbitrage accounts.
The strategy caught short-sellers wrong-footed, contributing to a 5.6% run-up in the underlying over the marketing period.