But JP Morgan tried to get ahead of the curve in August by selling a US$2.5bn callable bond designed in part to reduce the cost of complying with TLAC. The ground-breaking transaction was so successful that it triggered a wave of copycat deals.
The self-led five-year deal incorporated a call option after four years, theoretically allowing the bank to save money by redeeming the debt before it lost its TLAC benefit.
Call options are uncommon in US bank bond deals, and this was the first time a bank had used one for TLAC purposes – although that was not the only regulation the deal was designed to address.
“We wanted to utilise a funding structure that could help us efficiently address our evolving long-term funding and liquidity requirements, while also meeting our investors’ needs,” said Anthony Paquette, global head of funding and liability management at JP Morgan.
Investors initially demanded a big premium over typical bullet structures, but JP Morgan’s treasury kept pushing.
“Treasury’s belief in the depth of this market was extraordinarily high,” said Bob LoBue, JP Morgan’s co-head of global debt syndicate, who led discussions with investors.
“They believed we could improve on early feedback in terms of both scale and cost premium, to create an industry solution for a very complex funding issue.”
When the deal eventually came to market it was a huge success, attracting an order book of US$5.5bn with around 350 accounts involved.
The deal was priced at 123bp above Treasuries, a hefty 25bp wider than where the bank’s five-year bullets were trading. But JP Morgan had proved demand for the structure existed – and then the floodgates opened.
Over the following three months, US banks issued nearly US$28bn-equivalent of callable TLAC debt, with two deals even coming in euros.
While the structure is compliant with the Federal Reserve’s proposed interpretation of the TLAC rules, the final rules have yet to be announced.
But JP Morgan nevertheless managed to educate investors about the structure and convince them of their incentive to call the bonds.
“People understand the regulatory environment more and more every year,” said LoBue. “Their growing knowledge about the rules these banks are navigating has assisted the building of confidence in the structure.”