Securitisation House
Leading from the front: JP Morgan has an unrivalled commitment to the securitisation market, built around its balance sheet and its relationships with clients. For its leading role across asset classes and jurisdictions, as an underwriter, an issuer, a trading house, an adviser and a buyer, JP Morgan is IFR’s EMEA and Global Securitisation House of the Year.
JP Morgan is all-pervasive. Its domination of the global securitisation market is illustrated by one simple statistic: excluding self-funded business, its global presence accounts for 20% of the market. Its market share is double the size of its nearest competitor – and the two close behind that – and is greater than the remaining top 10 combined.
“We are the strongest global player on the Street – period,” said David Duzyk, JP Morgan’s head of securitised products. “We’ve been the rock throughout this crisis.”
Nowhere is the firm’s presence more keenly felt than in Europe, where its lead has been most pronounced, and it has used its balance sheet to support the reopening of the market.
The bank proved particularly dominant in the European RMBS sector, where it was responsible for reopening the public market with Permanent 2010-1 in January. Not only was this the first RMBS deal of the year, it was the tightest print for any UK RMBS for the whole year.
At a time when the very life-blood of the market depends on growing the investor base, the deal was notable for bringing 74 different investors on board and, critically, there was no element of pre-placement. It was the largest number of accounts on any European securitisation all year.
This enviable result was in part down to the inclusion of a US dollar tranche, which reopened the US market for UK issuers. At £2.5bn the significantly upsized deal (from £1.6bn) was at the time the largest public securitisation seen in Europe since 2007.
Competitors complain bitterly and often that the demand from JP Morgan’s chief investment office for structured finance deals gives it an unfair advantage because the CIO often bought large clips of deals it was underwriting. But while the CIO’s appetite was certainly an advantage, it was hardly an unfair one.
On the contrary, JP Morgan was willing and able to put its money where its mouth is. “Our unrivalled balance-sheet commitment to the asset class validates the conviction value we have in this product for other investors,” said Oldrich Masek, head of the firm’s EMEA securitised products group.
Though JP Morgan’s CIO has been the dominant European ABS investor, the bank’s core strategy is to build a wide investor base and attract repeat business for a sustainable market. It is committed to using securitisation as a market-based funding solution and moving away from central bank support. And its own presence in the market has undoubtedly been instrumental in restoring investor confidence.
JP Morgan’s roll-call of European RMBS is impressive, illustrating that the firm’s “success is underpinned by a strong commitment towards engaging the whole spectrum of issuer and investor clients, through the whole cycle”, said Masek.
As well as the Permanent 2010-1 deal, other highlights included the debut RMBS from the Co-operative Bank following its merger with Britannia Building Society. Together with HSBC, JP Morgan placed £2.5bn of Triple A bonds for Silk Road Finance Number One.
JP Morgan’s forward commitment and securities lending agreement put a minimum size on Silk Road, giving the Co-op enough confidence to approach the market. Silk Road was launched in mid-February with £375m of issuance being publicly placed, despite events in Greece the preceding week damaging investor confidence and causing the UK prime RMBS sector to soften.
Another notable moment came in early September when the bank was mandated by Santander UK for Fosse 2010-4, Santander’s third issue in as many months. In contrast to the privately placed 2010-2 and 2010-3, the £1.25bn Fosse 2010-4 was a public transaction. It reopened the public market after the summer and was placed with 43 investors in nine countries.
The firm has also proved its mettle in the wider European space through gaining market share in Dutch RMBS, with three public transactions in 2010. The €900m Saecure 9 transaction in September was particularly noteworthy as it was launched into the market with competing supply, including a parallel marketed Dutch RMBS deal, testing the depth and resources of the European investor base. The fact that the A1 notes were priced inside guidance is testament to JP Morgan’s execution.
The bank also issued the first partly placed Spanish ABS since the onset of the financial crisis, GAT FTGENCAT 2009; the first securitisation of Danish government guaranteed loans; and the largest RMBS since the crisis began, the £4.6bn equivalent Arran residential Mortgage Funding 2010-1, for RBS. Aegon, Achmea, Lloyds Banking Group, Nationwide, RBS and Volkswagen all chose JP Morgan for their debut deals after the onset of the financial crisis.
Saving Europe
Evidence of the firm’s dominance was not only seen in the deals it worked on, but in the behind-the-scenes help it provided in an advisory and restructuring capacity. Nowhere was JP Morgan’s presence more significant in Europe than in its work as the sole provider of structuring and ratings advice to the €440bn European Financial Stability Facility.
It advised on credit enhancement considerations and analysis, debt market capacity and other investor considerations for a vehicle that in many respects resembles an overcollateralised CDO. All three agencies assigned top ratings to the EFSF, a body that is vital to restoring stability to the European Union and the region’s sovereign bond markets.
JP Morgan has done much other work for public institutions. Since the onset of the crisis the bank has been mandated by clients to assist them in the design of asset protection solutions with a combined dollar equivalent of more than US$1trn.
In December 2009, it was engaged by a major central bank to advise on the portfolio valuation of structured finance securities financed as part of the bank’s day-to-day repo arrangements. A dedicated team worked on the project for weeks, constructing bespoke models to derive indicative valuations under different assumptions. The central bank gained an in-depth understanding of the market – thereby enhancing its internal market valuation processes of ABS securities.
One reason for JP Morgan’s success is that – unlike many of its rivals – it has been able to keep its structured finance team relatively stable. This has benefited not just those who deal with its syndicate desk, but also its trading and research efforts, giving clients a solid, unified team they could rely on.
The bank’s global securitisation research team is recognised as a market leader in terms of the analytical contribution it makes. Its ABS secondary trading desk has been instrumental in injecting confidence into the sector, providing liquidity and pricing transparency throughout the crisis, with more than US$60bn traded over the last two years in Europe.
Size and bandwidth
The story is not very different in the US, where JP Morgan’s consistency and continuity, as well as the sheer size of its securitisation bandwidth, is formidable. Not only has it been the top underwriter for public US ABS over the past five years, it has been involved in the broadest range of asset classes.
It dominated mandates on auto, credit card and equipment deals in 2010, and completed novel insurance-premium, timeshare, and storm-recovery finance transactions. It was also instrumental in the reopening of the CMBS market.
“We have consistently provided liquidity to issuers post-TALF, and they have a level of trust with us,” said Duzyk.
Moreover, it has been the structuring agent on the majority of deals that it leads. In its auto and equipment offerings, for example, it was the structurer of 21 out of the 27 deals it led or co-led in 2010.
JP Morgan has also been successful in bringing funding solutions to clients through reverse enquiries: it has placed more than US$2.5bn of private, reverse-driven transactions for its clients.
Despite the ending of the US FFELP programme for student loans, JPM has been one of the top student loan ABS underwriters, loan originators and term structurers over the last year. It is extremely active in valuing and trading student loan collateral, and is one of the largest conduit warehouse facility providers for student loan agencies.
The bank even quietly sold residuals for Sallie Mae in the summer, something it had been contemplating for some time.
It has also structured more retail auto and auto-lease deals than any competitor over the last two years, helping bring several key issuers back to market. The bank acted as structuring lead manager on BMW’s first auto-lease transaction of 2010 and the company’s first Rule 17g-5 compliant term ABS transaction. The offering was well received by the marketplace, with 40 investors participating and strong oversubscription levels on all tranches.
JP Morgan was also structuring lead on Toyota Motor Credit Corp’s first term ABS issuance since September 2003. The deal was executed successfully, despite coming in the midst of Toyota’s recall headlines, with each tranche oversubscribed by 1.6 to five times, before testing at spreads below initial price guidance. The deal, TAOT 2010-A, was priced at the tightest blended spread level of any retail auto transaction in 2010 at plus 12.95bp.
In other firsts, it helped Navistar with its first retail auto term transaction since 2005, and led the US$2bn Chrysler auto-lease 2010-A deal – the largest auto offering in 2010 and Chrysler’s first-ever term lease issuance.
JP Morgan does not only lead with its balance sheet, however. It has also undertaken several speciality ABS and hybrid deals that illustrate its thought-leadership. It was lead left and structurer for Premium Financing Specialists’ transaction to facilitate the acquisition of AIG’s premium finance lending business. PFS’s principal business consists of making short-term loans to commercial customers to finance property and casualty insurance premiums. JP Morgan refinanced that facility through US$1.2bn of notes issued to capital markets investors, including TALF funds.
“The merger of PFS and AIG’s premium financing business created the second largest premium finance lender in the industry, as measured by dollar value of loans outstanding,” said John Cho, a managing director overseeing consumer ABS.
Even JP Morgan’s broader investment banking team has used securitisation technology for innovative purposes. The bank closed a seminal transaction for Digital Cinema Implementation Partners this year to finance the conversion of movie theatres to digital technology, using securitisation technology to structure the cashflows but issuing into the leveraged loan market.
“The DCIP financing was a watershed moment for the theatrical movie exhibition business in that it really finally saw the floodgates open for a full conversion to digital cinema,” said Jeffrey Katzenberg, CEO of DreamWorks Animation. “The structure of the deal has become a template for many other financings on a worldwide basis.”
JP Morgan has also been a powerhouse in the recently re-animated CMBS market. It has a 43% market share among all US CMBS bookrunners and helped establish important market benchmarks in 2010. It successfully led or co-led four of the six single-borrower transactions that have been issued since the market reopened, and has issued deals as both an agent and a principal across a variety of asset classes.
In December 2009, JP Morgan successfully completed a milestone US$500m CMBS transaction for Inland Western Real Estate Trust, which was the first full term (10-year), full leverage loan that was distributed in its entirety without reliance on the Fed’s TALF programme.
“JP Morgan principled the loan for Inland, and put capital on the line,” said Kunal Singh, an executive director in the CMBS group.
Significantly, following RBS’s inaugural CMBS of the year, RBSCF 2010-MB1 – the first multi-borrower transaction post-crisis – JP Morgan priced the US$716.3m JPMCC 2010-C1 in June. That was the first traditional “conduit” pooled transaction since mid-2008 and the first since the crisis to have a B-piece. It also used a new method for determining the controlling class, whereby the combination of appraisal reductions and realised losses determines which classes are appraised out.
JP Morgan was also active in Australian structured finance, the only market in the Asia-Pacific that remains anything more than a backwater. One highlight came when it used its distribution expertise in the US to sell the first US securitisation of Australian auto receivables for Macquarie, the US$500m SMART Series 2010-1US.
The deal was the second-ever sale of US dollar bonds to American investors backed by foreign auto contracts, and demonstrates the bank’s impressive ability to remain ahead of trends. The bank worked with Macquarie for a full year, structuring the transaction, addressing legal concerns and marketing it to investors, paving the way for additional cross-border auto securitisations in the future.
“The transaction established access to the broader and more liquid US ABS market, diversifying Macquarie’s funding options and providing additional strategic flexibility going forward,” said Cho.
Macquarie will be returning to the US market in the first quarter of 2011 with a similar offering. Investors and issuers “choose to come back to us,” said Duzyk.
Adam Tempkin, Helen Wray, William Thornhill