While JP Morgan has not dramatically shifted its overall borrowing levels, the company has raised its profile in the unsecured market through the issuance of more liquid securities, combined with a touch of innovation. Meanwhile, the completion of its US$60bn Bank One acquisition has further solidified its securitisation presence. By Andrew Stein.
On the back of a more than three-fold increase in its unsecured US dollar-denominated issuance – to US$10.35bn – JP Morgan's overall borrowing is up 19% to US$13.7bn.
Financial issuers have found strong demand for floating-rate paper at the front of the curve amid anticipation of further rate increases, and JP Morgan has been no exception to that trend. It has tapped the market for US$4.75bn in three-year floaters in two of its last three offerings, after last year relying solely on fixed-rate debt which totalled US$3.15bn.
"Right now, it's easier for the banks to issue paper with maturities five-years and in, but investors are generally less excited about 10-year bank paper," said John Guarnera, credit analyst with Banc of America Securities.
Although financial paper with longer tenors may not elicit too much investor excitement, JP Morgan created some interest on its latest 10-year US dollar offering in February as the borrower unveiled a mirrored two-part transaction in different currencies.
The credit issued US$1.25bn of 10-year fixed-rate notes and €500m of 10-year FRNs on orders that topped what equated to US$5bn. The US dollar portion priced at 63bp over Treasuries, 2bp through talk, and the euro tranche printed at three-month Euribor plus 25bp, through talk of the high 20bp area over Euribor.
Each book was said to have involved more than 100 investors, with about 20% of the dollar portion placed outside the US. The dual-currency effort was said to have saved the borrower a couple of basis points, as the funding on the US dollar portion was 2bp better than on the euro tranche.
At the time of the transaction, a source close to JP Morgan's borrowing plans said the company does not expect to issue an overwhelming amount of debt this year – and is therefore attempting to be opportunistic. The source noted that borrowers were beginning to inquire about financing opportunities upon completing their Sarbanes-Oxley requirements and “this was done to get in front of that supply."
Indeed, Wachovia, which is often regarded as a proxy for JP Morgan pricing, entered the market immediately following the JP Morgan dual-currency trade.
"JP Morgan paper typically trades at least 10bp back of similarly dated Wachovia issues," said Banc of America's Guarnera. "JP Morgan trades more in line with the brokers rather than banks because of the company's sizable capital market operations and the integration of the Bank One merger."
The spread pick-up on JP Morgan paper in relation to Wachovia is often over 10bp, and that gap is likely to be reflected in any subsequent issues of the two credits.
Wachovia's 5.25% notes due 2014, which are A1/A- rated subordinated holding company paper, recently traded at 68bp over Treasuries after pricing at 94bp over last July. JP Morgan's 5.125% notes due 2014, which are sub holding company paper rated A1/A, recently changed hands at 86bp over after printing at 95bp over last September.
JP Morgan's sub holding company issue was its first deal since completing the Bank One merger last July and its first issue with a 10-year tenor this year. The borrower's need to replace older sub debt drove the trade. "As sub debt approaches maturity, the Fed haircuts it," said one capital markets official at the time of the deal, pointing out that sub debt that originally sported a 10-year tenor but has rolled down to two years to maturity which offers very little capital benefit. "You need to replace it."
In addition to its unsecured offerings, JP Morgan continues to be a frequent issuer in the secured market as the Bank One acquisition has increased its credit card operations. Through the end of May, the credit had a trend of bringing at least one credit card issue per week off its CHAIT shelf.
Its latest was a Triple A rated US$800m five-year, which priced 1bp inside of talk at swaps plus 2bp. The self-led deal was increased slightly from an announced US$750m.
"Credit card issuance continues to lag behind last year's pace and if you want to get this paper, you really need to step up," said one trader of the latest CHAIT transaction. "There are only a handful of issuers left and the shorter average life product is in demand. Nearly every transaction is upsized thanks to investor interest."