Bond House, US Bond House, SSAR Bond House and Emerging EMEA Bond House: JP Morgan

IFR Awards 2019
15 min read
Paul Kilby, Helene Durand, Sudip Roy

League of its own

JP Morgan is the pre-eminent bond house. It is equally adept in the SSA sector as it is in high-yield; in US dollars and euros as in smaller currency markets; in flow transactions as in more heavily structured credits. No other firm can rival its dominance in so many segments of debt capital markets. JP Morgan is IFR's Bond House, US Bond House, SSAR Bond House and Emerging EMEA Bond House of the Year.

Sometimes the simplest observation is the most apposite: JP Morgan is a bond market powerhouse.

Be it SSA, investment-grade corporates, high-yield or emerging markets; US dollars, euros or non-core currencies, the US bank is a dominant force.

No other bank in 2019 can boast the performance that JP Morgan can: number one in US dollars, number two in euros, number three in emerging markets.

Overall, the US bank had transacted more bonds by volume (US$285bn) and number of deals (1,243) than any other firm in 2019 as of November 15, according to Refinitiv data.

But JP Morgan is more than just a deal-churner, and while markets have been broadly supportive, the firm's bankers have had their mettle tested on several occasions.

"This year we've had tremendous market conditions across the board, which usually is not great for JP Morgan. But in reality execution hasn't been straightforward," said Marc Baigneres, head of investment-grade DCM in EMEA.

But JP Morgan’s integrated approach combined with the value that clients put on its advice meant the bank was able to navigate whatever the market threw at it.

"It's about the quality of the dialogue," said Daniel Rudnicki Schlumberger, co-head of leveraged finance in EMEA.

COMPLEX TRANSACTIONS

That's especially the case on more complex transactions, which can take 12 months or more to come to fruition, such as a project financing for Italian toll road operator Societa di Progetto Brebemi in October.

The €2.1bn deal took 18 months of work. The concept was simple: to refinance bank loans for the A35 motorway that stretches from Brescia to Milan.

The detail was much more difficult. Not only did the bank need investors to get comfortable with taking on Italian risk but the asset itself has lost money every year since 2014 and has high debt costs.

There were also negative headlines around Italian motorways to contend with following the collapse of a bridge in Genoa in August 2018 that killed 43 people.

But JP Morgan was able to structure a transaction that overcame those hurdles, distributing the risk across a broad range of investors.

The trade consisted of class A1 amortising floating-rate notes due 2038, class A2 amortising fixed-rate notes due 2038, class A3 zero-coupon notes due 2042, all senior secured, and a subordinated secured extendable floater.

And although pricing was tightened, yields were still attractive for investors especially as the three senior tranches were rated investment grade. The €934m A2 tranche priced at 3.375% and the €1.205bn A3 note at 3.875%.

The two FRN tranches – one a €15m 2038 A1 note, the other a €172m junior bond due 2029 – were sold to specific accounts. The unrated junior bond, for example, went to one infrastructure investor, which required certain features such as step-ups.

DIAMOND DEAL

JP Morgan's strengths in structuring and distribution were also on display on a US$4.875bn transaction for Diamond Sports, which was the biggest junk bond sold in the US market during the review period.

The bank helped price a US$3.05bn senior secured seven-year non-call three note (rated Ba2/BB) and a US$1.825bn eight-year non-call three unsecured tranche (B2/B) as part of an US$8.2bn debt funding package for the acquisition of Disney's regional sports networks.

Investors largely shrugged off concerns about unusually loose covenants for a non-sponsored deal and bought into a story they knew and liked. The large liquid notes from an issuer in an industry that everyone understands added to the deal's appeal.

Debt funding for the acquisition also included a US$4.65bn loan package, while US$1.025bn in preferred stock and US$1.385bn of cash from Diamond's parent, US broadcaster Sinclair, rounded out the overall financing.

With so many moving parts, the deal required all of the bank's advisory, capital markets and financing teams to work seamlessly.

STAND AND DELIVER

Diamond Sports showcased the bank's ability to navigate the US high-yield and leveraged loan markets, but there are plenty of examples of what JP Morgan's business is about at the high-grade end of the funding spectrum.

Simply put, this is a bank that is relied upon to deliver by corporate America, a fact illustrated by the roster of clients it has raised money for this year: Walt Disney, IBM, Mars and PayPal to name but a few (the latter two made their debuts in the market, raising US$5bn each).

JP Morgan was also involved in some of the headline Yankee deals of the year, most notably Saudi Aramco's US$12bn multi-tranche debut offering and Italian utility Enel's US$1.5bn bond linked to the UN's Sustainable Development Goals.

The latter's structure might not have appealed to every investor – some green funds baulked at the lack of restrictions around the use of proceeds – but it enables an issuer to align its funding with the company's wider strategy and is an important development for the ESG market.

JP Morgan was one of the few banks entrusted by Enel from the outset to gauge investor interest in the structure, as the US house helped line up meetings with some of the most important accounts.

STRONG PLAYER

But JP Morgan's success does not depend solely on the US dollar market. As the Brebemi deal showed, the bank is equally comfortable in taking issuers to the euro market.

"We've always been a strong player in the euro market," said Baigneres.

It's nonetheless remarkable that in 2019 (up to November 15), only BNP Paribas had led more euro supply across all asset classes than JP Morgan (even bearing in mind the fact that it was a busy year for reverse Yankee issuance).

That reverse Yankee trend is one that JP Morgan has been completely on top of, leading more deals and for more volume than any other bank.

"We saw early that the euro market was very attractive versus dollars from a pricing arbitrage perspective and that issuers could get low coupons," said Baigneres.

And with the euro market now demonstrating that it can offer size and a range of tenors, US companies were quick to take advantage.

Financial services technology provider Fiserv, for example, complemented a US$9bn deal in June with a €2.6bn-equivalent offering encompassing euros and sterling to help fund its US$22bn purchase of First Data. JP Morgan was one of three banks on both the US and European transactions.

And to further demonstrate its ability to take issuers to different funding markets, the bank was also a lead on Berkshire Hathaway's ¥430bn (US$4.01bn) inaugural multi-tranche yen bond issue, the biggest foreign yen offering in almost a quarter of a century.

HEAD AND SHOULDERS

JP Morgan does not just distinguish itself in terms of its ability to help issuers access different currencies; its ability to dominate different segments of the market is equally pronounced.

Take the public-sector space, where JP Morgan stood head and shoulders above its competition. With a 9.2% market share across SSARs in all currencies, the bank was well ahead of its nearest competitor, which held a 7.6% share, according to Refinitiv.

Not only that, but the bank dominated across the sovereign, agency and supranational league tables in euros and dollars, SSA issuers’ most important funding currencies.

A febrile end to 2018 meant that many were approaching 2019 with trepidation. But JP Morgan was quick to spot one of the defining trends of the first quarter: investors' demand for longer-dated debt.

It led Belgium's €5bn June 2050 syndication at the end of January, which was the first in 2019 from a eurozone sovereign in the 20-year-plus compartment and was the issuer's largest long-end benchmark since 2004. That transaction kicked off a flurry of follow-on long-dated issuance, including an €8bn 2049 trade for Italy.

But while that was indeed an important deal for Italy, the groundwork had been laid a few weeks before when JP Morgan led a €10bn March 2035 syndication for the sovereign, its largest internationally syndicated deal.

That 2035 transaction marked a turning point for Italy, which had not braved the institutional syndicated market for a year after political volatility in May 2018 and a confrontation with the European Commission over its 2019 budget drove spreads wider.

JP Morgan was also entrusted by the sovereign to lead manage its first US dollar trade in almost a decade – a US$7bn five, 10 and 30-year that re-established the issuer in the currency.

The transaction, Italy's largest ever in US dollars and the first from a eurozone sovereign since September 2017, was the outcome of months of work by the Italian treasury.

The US bank also proved its mettle when it came to leading the ESG pack, a key topic for SSAR issuers.

It led the European Investment Bank's US$1bn 10-year climate awareness bond in October – the first deal done under the EIB's new CAB use of proceeds language in the US dollar market.

The bank's expertise in the ESG sector also meant that it was trusted to be on the top line for a €1bn sustainable 15-year for Action Logement Services, the French agency's bond market debut.

New issuers in SSA are rare but the bank steered the International Development Association through its inaugural euro trades, hitting the perfect pitch for the Washington supranational, a notably difficult task.

Unlike their European counterparts, Washington supranationals are not part of the European Central Bank's asset purchase programme that restarted in November. But not only did IDA, with the help of JP Morgan, successfully rise to the challenge, but it did so with gusto, with pricing on the €1.25bn seven-year seeing the IDA become the first non-European supranational to issue at a negative yield.

HUNDRED-PERCENT RECORD

Another segment of the bond market where JP Morgan excels is emerging markets – nowhere more so than in Central and Eastern Europe, the Middle East and Africa.

"JP Morgan is pushing how big and frequent issuance in this market can be," said Nick Darrant, head of CEEMEA debt syndicate.

But even more impressive than the number of deals is JP Morgan's execution record. It has a 100% record over the awards period of executing announced deals.

The bank is a force throughout the broader region, but it is most dominant in Russia, where it executed 24 out of the 27 corporate and FIG deals over the awards period.

"We've hardly missed a trade despite not being a lender to many issuers," said Stefan Weiler, head of CEEMEA debt capital markets.

Those trades have included US dollars, euros, yen, Euroroubles, private placements, AT1s and Tier 2s. "It's across the piece," said Weiler.

Some people question how truly international some of these Russian deals are but it's a criticism that JP Morgan's team is unperturbed by.

"There is a lot of price sensitivity but you can't get these deals done on Russian support alone," said Darrant. "Having a sense of where that elasticity is is not a given – it requires judgment, experience and a lot of work."

JP Morgan's CIS business is not just about Russia. It has been a leading force in countries such as Georgia, Ukraine and Uzbekistan too.

In Ukraine the bank demonstrated its commitment to the country when in March it was sole bookrunner and buyer of a US$350m tap of the sovereign's November 2028 bonds through a private placement.

The trade underscored JP Morgan's belief that Ukraine was heading in the right direction – despite the huge challenges facing the country – and its willingness to put its balance sheet at risk.

In the Middle East, JP Morgan was one of two global coordinators on the US$12bn Aramco trade in April. "There was clear guidance to price inside the sovereign. Everyone believed that to be impossible but we came 20bp inside," said Hani Deaibes, head of Middle East and North Africa DCM. "That was testimony to our global platform."

And while the bonds did underperform, Deaibes said that doesn't detract from the significance of the deal. "It truly was groundbreaking in expanding the investor base for EM issuers," he said.

While Aramco was the equal-biggest CEEMEA trade of the year, along with a sovereign bond by Qatar, JP Morgan showed that it can also deliver the sub-benchmark deals.

The bank helped Bank of Georgia and peer TBC Bank sell US$100m and US$125m AT1s, respectively, at double-digit yields, while a US$200m five-year non-call three for fixed-line and mobile operator Silknet priced at a yield of 11%.

"At the point of announcement there's no certainty that these deals will print," said Darrant. "There's enormous risk."

Weiler added: “For these sorts of transactions if you go to investors unprepared they're not going to bother. These are the deals where you show added value."

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