Over the bridge
Issuers and underwriters faced unprecedented circumstances in 2022 as volume plummeted and deals fell apart. For being a disciplined voice in unstable and uncertain markets and advising clients through the worst of the year, JP Morgan is IFR’s Bond House, Latin America Bond House and North America Leveraged Finance House of the Year.
It was good to be a bank with a big balance sheet in a year as unpredictable and volatile as 2022. Inflation soared and rates rose. The era of easy money ended abruptly. A major war broke out in Europe, straining oil and gas supplies. Energy prices surged. The corporate bond and leveraged loan new issue markets – reacting to all this and more – went haywire.
JP Morgan’s debt financing business, backed by the US lender’s fortress balance sheet, was one of the few to emerge from this tumult relatively unscathed. It did so while maintaining the top spot across a number of league tables, including all international bonds, according to Refinitiv data.
These successes owe a lot to the US bank’s sheer size and attitude towards risk throughout the peculiar year as well as to a heap of good fortune. Many factors beyond the bank's control, for instance, allowed JP Morgan to avoid the biggest loss-making leveraged trades that competitors have still not been able to offload.
Nonetheless, as the bank’s top executives said throughout 2022 – often responding to analyst concerns on leveraged finance exposure – risk discipline played a major role in the bank’s outperformance relative to its peers.
That discipline was most obvious in leveraged finance, specifically high-yield bonds, leveraged loans and the bridge commitments that underpinned them. JP Morgan was simply not on the year’s biggest loss-making financings for leveraged buyouts, including the deal for Citrix Systems.
Chief executive Jamie Dimon, speaking on the bank’s second-quarter earnings call on July 14, offered a good reason why. “If you look at our bridge book, it's smaller than it was because we priced ourself out of the market. That was a good thing because a lot of people will lose a lot of money there, and we lost a little,” he said.
The day before Dimon spoke, the CPI print said June inflation in the US had hit a four decade-plus high of 9.1%. In the previous 12 months, the 10-year Treasury yield had more than doubled, while the average US high-yield bond and investment-grade bond spreads had gapped out about 250bp and 70bp, respectively, ICE BofA data show.
As a result, bankers everywhere were rethinking debt commitments made in more optimistic times.
JP Morgan had started 2022 working on multi-billion US dollar leveraged buyout financings for McAfee and Athenahealth. As the year wore on, and market conditions and deal terms worsened, however, the bank showed up less and less on bridge commitments backing new LBOs and other debt-funded acquisitions.
This by no means meant JP Morgan abandoned the debt markets. Quite the contrary. In the leveraged loan market, it focused on refinancings, dividend deals and general corporate purpose deals as well as middle-market opportunities. Still a dominant player in leveraged finance, the bank ended the year as the largest US institutional bookrunner with US$18.5bn in volume, 100 closed deals and a 6.33% market share, according to Refinitiv LPC data.
The New York-based bank was likewise top of the table for North American high-yield bonds, even though the market was as good as closed for much of the year. Volume in 2022 was, at US$89.3bn, only about 20% of that in 2021, Refinitiv data show.
The bank’s big US leveraged finance successes came at the start of the year when rates were still low and deal terms reasonable. After advising on the US$14bn LBO of cybersecurity company McAfee, JP Morgan was also a lead underwriter on the US$2bn unsecured note and US$6.96bn-equivalent term loan B in February which backed the purchase. The bank was lead-left arranger on the US$6.9bn loan backing the buyout of Athenahealth and a bookrunner on the deal’s US$2.35bn senior note, all of which wrapped up in January.
Even as the markets soured, it did not completely shy away from risk, taking a lead-left position on a US$3.275bn eight-year note in April for Carvana. The deal, which partially funded a crucial acquisition, struggled to gain traction. But in the end Carvana was able to access the liquidity it needed, despite the broader pushback on the company’s attempt to disrupt the US used car market.
In the US investment-grade bond market, JP Morgan participated in many of the year’s most important trades. When executives needed to get a tricky deal done – and basis points mattered – they often chose JP Morgan.
It was one of two global coordinators on the US$30bn 11-tranche bond offering – the year’s biggest – that helped finance the much-hyped creation of content powerhouse Warner Bros Discovery. The bank was also active bookrunner on Rogers Communications’ US$7.05bn five-part bond offering in March, and in July, amid rockier markets, it worked on the US$7.5bn bond backing Celanese’s purchase of DuPont's Mobility and Materials business.
Many of the themes in its US business were also evident in Europe. While the bank did not exactly emerge from the region’s leveraged finance market without a scratch, it did dodge two bullets in particular – it was not on the £6.6bn Morrisons underwrite or the €2.1bn Ekaterra one, both of which saw banks suffer losses.
The bank saw on those underwrites a level of pricing and flex with which it was not comfortable. It also had a different view on pricing than the other banks. As ever with these issues, the success or otherwise of the bank’s leveraged finance business came down to a mix of luck and critical decision-making.
In a year when so little was going on in such a dysfunctional high-yield primary market JP Morgan also turned its attention to other ways to help its clients. A good example was an exchange offer in October for German pharmaceutical company Stada Arzneimittel to roll over maturing legacy debt. The company, owned by Bain and Cinven, sought to convince holders of its €1.885bn 3.50% 2024 senior secured notes to exchange into a new four-year senior secured bond issue, in a bid to extend a minimum of €500m of debt by two years.
The final outcome was a huge success, with more than €1.385bn of the 2024s rolled over thanks to an eight-point upfront payment. It was the largest high-yield exchange offer since 2018 and a crucial deal for the company.
Away from the leveraged finance and high-yield markets, JP Morgan scored well across various products in the euro bond market. Indeed, for all euro-denominated issuance in 2022, the bank came second in the league table, a remarkable feat for a non-European house.
The bank also had a strong year in global emerging markets. In a year of falling supply, JP Morgan ranked second, though the most important deal it worked on was one that isn’t eligible for the league tables. That was its role as sole solicitation agent on Ukraine’s proposal to seek debt relief on its Eurobonds and GDP warrants.
“It was very intense and involved a lot of work,” said Stefan Weiler, the bank's head of CEEMEA debt capital markets.
Latin America, though, is where JP Morgan wins a regional bond house award. Despite international bond issuance plunging in 2022, JP Morgan found opportunities in a difficult environment and topped the international bond league table for Latin America.
Things started relatively well for Latin American bonds – before volumes fell precipitously. In fact, first-quarter volume of international bonds, at US$34.3bn, was more than the total for the rest of 2022, according to Refinitiv data.
"During three challenging quarters, we focused on staying very close to our clients, supporting with balance sheet and presenting creative solutions to their financial challenges,” said Lisandro Miguens, head of DCM for Latin America.
Before the market shut, JP Morgan was one of two global coordinators on a key financing in March for Mexican telecoms company America Movil, which was working on the spin-off of its tower business, Sitios Latinoamerica. Instead of waiting for a moment closer to the spin-off day, JP Morgan advised America Movil to issue a bond that would eventually sit with Sitios Latinoamerica when it separated from the parent, a so-called “travel bond”.
"The travel bond was a very unique way of executing the deal as soon as possible to anticipate any potential consequences of the Russian invasion of Ukraine and the rise in interest rates," Miguens said. “We are proud to have shown issuers the ability to tap tight windows that were few and far between.”
JP Morgan’s bond market prowess extends to ESG. It was top of the 2022 league table for global ESG bonds, including use-of-proceeds and sustainability-linked formats, with US$38.8bn and a 5.5% market share.
It managed to play a leading role on deals for major companies including General Motors, Intel, Kia, JAB Holdings, EQT, L’Oreal and Santander.
Paul O’Connor, the bank’s head of ESG DCM, said JP Morgan did a “pretty good job of scaling the market” in 2022 and “driving huge volume”. He also noted among its key achievements during the year was “building out the ESG capability into everything the bank does” and making contributions to the development of the evolving market standards.
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