High-Yield Bond House

IFR Review of the Year 2012
15 min read
, Natalie Harrison

Standing on top: In a record-breaking year that saw global high-yield volumes reach all-time highs, one bank dominated the landscape. For repeatedly demonstrating innovation and creativity, bringing forth well-structured deals, and making a successful push into the European market, JP Morgan is IFR’s High-Yield Bond House of the Year.

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This was a year like no other in the high-yield bond market. Apart from the occasional downturn that sent issuers scurrying to the sidelines, low interest rates created prime conditions for companies selling debt. With such a strong tailwind, issuers kept turning out in droves.

And no bank did more to harness the surge in the high-yield space than JP Morgan.

For the 2012 awards period, JP Morgan easily took top spot on the global lead-left league table, spearheading US$70.5bn in issuance from 110 high-yield deals for a market share of 20.1%.

The bank also topped the lead-left league tables for the awards period in the US, pricing US$64.5bn from 102 issues for a market share of 21.7%.

But the raw numbers alone do not tell the whole story of how JP Morgan used expertise and innovation on a wide array of transactions of virtually every size and variety, including tightly priced and highly complicated deals.

“They aren’t just using their muscle to get deals,” said one investor. “I’d say they are actually more conservative than some others. They just have the brand – and no one is really outperforming their ability.”

Take the March offer from Air Lease, an unrated US$1bn 5.625% senior unsecured offering due 2017. JP Morgan acted as sole bookrunner for the aircraft leasing company, a first time issuer that chose not to be rated because it expected to become investment grade in the near future – a decision that created a challenge.

To convince investors to participate in such a large, unrated deal, JP Morgan came up with a creative solution – coupon step-ups if the company did not achieve a particular credit rating by a set deadline. This structure worked so well that it was later replicated by other issuers.

Another example was the US$1.5bn eight-year non-call four senior notes offering for Inmet Mining, which came to market in May – just as the mining sector was coming under pressure due to slowing growth in major production centres.

Overall, trade was mired in a risk-off tone at the time, with Greek sovereign debt concerns weighing on the market.

But as other mining names attempting to tap the market pulled out, Inmet went ahead – and JP Morgan even managed to upsize the B1/B+ rated deal by US$500m, pricing it at 8.75% at a discount to yield 9%.

The deal was mission-critical for the issuer, with proceeds being used to fund development at its Panama mine.

And while the issue priced wide of original talk, the 9% level accommodated the upsize, and outflanked the sector downturn and broader market weakness.

Air Lease and Inmet were among several first time issuers in deals underwritten by the bank, along with Neuberger Berman, Ladder Capital, NCR and EP Energy. It was another key segment of the market that JP Morgan simply dominated.

“These are all mission-critical deals,” said Jim Casey, the bank’s co-head of global debt capital markets. “You don’t want to fail on your first foray in the market.”

Over in lev land

Meanwhile, though LBO issuance failed to gather much momentum in 2012 – refinancing was the key driver of issuance throughout the year – Getty Images came to market with a US$550m eight-year non-call three senior notes offering in October with JP Morgan at the helm. (Proceeds were used to fund Getty’s US$3.3bn buyout by The Carlyle Group.)

The Caa1/CCC+ rated deal priced at 7% at par, on the tight end of talk. At the time it was the tightest LBO pricing since the onset of the financial crisis.

Around the same time, JP Morgan also seized the opportunity to price several PIK toggle dividend offerings, as the appetite for these riskier deals returned.

Transactions included a US$550m five-year non-call one senior PIK toggle note for Petco Holdings. On the back of significant demand, the Caa1/CCC+ rated bonds priced tighter than price talk, at 99.50 with a cash coupon of 8.50% to yield 8.624%.

Following Petco’s success, JP Morgan priced PIK toggle offerings for Jaguar Holding (PPD) and Jo-Ann Stores. All three issues priced in line with talk and traded up – and all were considered to be very aggressively structured, not just in terms of the PIK toggle feature but also in terms of call protection, with issuers able to take them out within one to two years.

“Every time the market gets really good, other things like covenants may get changed but the Holy Grail is call protection,” said Casey. “So gaining an insight that people are willing to drop the call protection is really critical – and that’s an insight that we had early.”

As one US account put it: “They know how to price the deals appropriately. They get investors excited about their deals.”

Across the pond

JP Morgan’s dominance also stretched into Europe, where it pioneered new sectors, put its balance sheet to work in an aggressive manner on some tricky refinancing trades, and led some major cross-border transactions.

The bank’s global platform was best put to use on some major transatlantic financings that took place throughout the year, the most high profile of which was Schaeffler’s €2bn-equivalent four-pronged bond (IFR’s EMEA High-Yield Bond of the Year).

Other cross-currency trades for chemicals company Ineos, business travel operator Carlson Wagonlit, packaging firm Smurfit Kappa, Lawson Software and more challenging deals such as for specialty chemicals firm Perstorp were also notable, especially as, in many cases, the US dollar tranche created a competitive dynamic on the pricing of the euro tranches.

JP Morgan also had its fair share of drive-by deals for the likes of Continental, but its greatest strength was bringing diversity, helping it crack the top three spot in EMEA lead-left and joint physical bookrunner league tables.

When market conditions began to stabilise, investors began to demand more variety and JP Morgan played a pivotal role in helping to wean them from safer Double B rated credits.

The bank led a €735m dual-tranche deal from first time issuer Techem, a German meter-reading company, that flew off the shelf in September in what was one of the biggest debut deals of the year.

While other new issues launched during the same week fell or hovered around reoffer, Techem’s secured and unsecured tranches rose two and three points, respectively – and have remained well above par since then.

“For the last 10 years we have been talking about the European high-yield bond market growing, but this is the first time we can categorically say that the high-yield market has come of age,” said Chris Munro, the bank’s managing director of leveraged finance capital markets in London.

“Banks are still over-levered and need to reduce their exposure to assets. We can bring those assets to bond markets, and one of our big strengths is using our broad and diverse platform to do so.”

The flavour of FIG

JP Morgan also succeeded in bringing FIG deals to the high-yield bond market, which was not always an easy task.

The first such deal of the year came in March, when the bank priced a £200m seven-year senior secured bond for Lowell Group Finance alongside Lloyds.

The bond, which priced with a 10.75% coupon, struggled in the secondary market for some time before investors gradually became more comfortable with the credit. It is now trading at a cash price of 107 to yield 9.2%, proving a good investment for funds, and especially those that bought at its weakest levels.

JP Morgan followed that success by acting as a lead-left bookrunner in September on a €265m 10.375% senior secured bond for Cabot, which has jumped to 106 and is yielding 9.2%.

Thirty accounts bought Lowell, while 70 took part in the Cabot trade several months later.

“The investor base in Europe is not as mature as in the US, so JP Morgan has done pretty well to introduce a new sector, and for those bonds to trade well,” said one high-yield investor.

Getting deals done

Another of the bank’s most high-profile transactions was for French cable company Numericable, a B2/B rated credit that typically generates plenty of chatter in the high-yield market. Investors tend to either love or hate the credit, but there is no disputing the strong return delivered to investors who bought its debut 12.375% €360m senior secured bond in February.

JP Morgan was sole physical bookrunner on the transaction, after other banks that had been sitting on the mandate for 18 months failed to pull the trigger. Some investors called it the deal of the year – and by the time Numericable’s second issue came to market in October, the debut 2019s had rallied to yield 9.4%.

“We were not an incumbent lender, but we came in, back-stopped the deal on our own and got the deal done successfully,” said Munro.

The announcement of the long-rumoured second transaction came a day after Numericable’s €360m bond jumped by around four points on the back of media reports that it was in talks about a potential tie-up with Vivendi’s SFR mobile unit.

That clearly worked in the issuer’s favour in terms of cost of funding, as it printed an upsized dual-tranche €500m deal – split between a 8.75% €225m bond and a €275m floating-rate note both due 2018 – on which JP Morgan was lead-left.

Asian values

Even in Asia, where the record year in US dollar bond issuance did not properly translate into loads of high-yield deals – or into profits proportionate to the number of deals completed – JP Morgan nevertheless had a hand in some of the region’s most important, innovative (and controversial) deals.

Alongside HSBC, the bank was bookrunner and one of the driving forces behind the November transaction from Chinese property developer Gemdale, a groundbreaking high-yield trade that addressed growing concerns among investors about their recourse to assets on the mainland in the event of a default.

Given that foreign investors have no legal recourse to onshore assets, a structure was devised to provide them with extra safety. The issuer of the bond was a foreign subsidiary of Gemdale that owns some of the onshore assets. This was one of the reasons why Moody’s rated the deal Ba3 and S&P rated it BB–, two notches below Gemdale’s Ba1/BB+.

While it could not legally pass these assets on to investors, the parent in China signed a guarantee that, if it were to go into restructuring, it would immediately buy these assets onshore and pay the offshore issuers – thereby effectively guaranteeing the payment.

Rating agencies did not change their read on the risk, but the additional comfort of the standby letter seemed to soothe investors and helped generate a US$1.5bn book for the US$350m five-year bond.

JP Morgan also participated in the syndicate for two key deals earlier in the year, the five-year bonds of China Shanshui and Mongolian Mining Corp (the latter is IFR’s High-Yield Bond and Emerging Asia Bond of the Year. Mongolian Mining Corp was the largest Single B bond in Asia in 2012, while the former was arguably one of the most challenging transactions this year.

Shanshui was executed by Credit Suisse, Deutsche Bank, HSBC and JP Morgan when investors were highly suspicious of China, and especially the country’s cement companies. The US$400m five-year was the first dollar bond from a Chinese industrial since Sino-Forest went into restructuring in 2011.

Of course, JP Morgan has not been universally praised for every deal, and has endured its share of criticism. The bank was lead-left on a US$2bn five-year transaction for Australian miner Fortescue in March (a deal that was doubled in size thanks to surging demand and priced at the tight end of talk). A few months later, however, the company ran into trouble – and the 6% notes dropped in the secondary market. Late in November, the bonds were still being quoted at 96.50, US$3.5 below the reoffer.

Berau Coal’s US$500m five-year bond in early March was another blemish. At the time, the deal was an important indicator that the high-yield market was open for business. And with a coupon of 7.25%, the B3/BB– company got enviable pricing.

But as the Bakrie saga developed and coal prices were hit, the company’s bonds were punished in the secondary market. In late November they were trading at 91.00, having priced originally at par. In that case, however, Bank of America Merrill Lynch and Credit Suisse were the global co-ordinators with JP Morgan coming in as joint bookrunner.

Despite those bumps in the road, however, JP Morgan has had an exemplary year in the high-yield space. As a US investor said: “They clearly dominate.”

Standing on top