Sometimes in investment banking, it is the deals you don’t do.
JPMorgan has avoided most of 2022’s so-called hung deals that have cost competitors billions of dollars in paper losses. Whether by luck or by design, the biggest US bank didn’t make loans backing takeovers of companies such as Twitter, Citrix Systems and Nielsen, which fell in value as markets turned choppy.
JPMorgan’s record contrasts with that of Bank of America, which made large loans for buyers of Twitter, Citrix, Nielsen and others. Bank of America Chief Executive Brian Moynihan has consistently sounded an optimistic note about the U.S. economy, clashing with JPMorgan head Jamie Dimon’s gloomier warnings.
There is one thing Dimon feels good about — his firm’s low exposure to bad buyout loans, which bankers call leveraged loans.
“There are no real leveraged loan write-downs this quarter and that market isn’t yet cleared,” Dimon said on an October conference call with Wall Street analysts. “Our share of it is very small, so we’re very comfortable.”
Competitors attribute JPMorgan’s absence as a lender on big deals in 2022 to a diminished relationship with private equity firms in recent years. The bank also served as an adviser on some of the mergers, like Nielsen, which prevented it from providing loans, they said.
JPMorgan ranks fourth among US arrangers of buyout bonds and loans this year while Bank of America is third, according to data from Dealogic. JPMorgan’s average rank over the past 10 years is seventh, compared with its average of third place during the prior decade.
JPMorgan also is grappling with the fallout from some relatively recent buyout financing that went sour, such as loans it made backing the purchase of sports betting company William Hill International. Still, it has far fewer hung deals on its balance sheet than competitors, leaving it with more cash to win new business.
Private equity firms, corporations and individuals that acquire companies often pay in part with loans made by investment banks to the businesses they buy. The banks aim to unload the debt to fund managers for more money than they lent out, pocketing the difference.
Buyout loans account for only a small portion of total lending in the US, and funding them doesn’t necessarily mean that a bank has an unusual risk exposure.
Still, the strategy backfired this year for firms such as Bank of America, Barclays, Goldman Sachs and Morgan Stanley, which committed in the winter and early spring to bankroll large takeovers. Interest rates subsequently rose, turning debt investors cautious and sending the price of leveraged loans tumbling. Now the banks must choose between liquidating the loans at a loss or keeping them on their balance sheets at marked-down prices.
JPMorgan’s global head of corporate debt, Kevin Foley, was a midlevel banker during the 2008 credit crisis, when the bank was swamped with deals gone wrong. JPMorgan was lead lender on J.C. Flowers’ $25bn takeover of student loan lender Sallie Mae, which eventually was cancelled, and Cerberus Capital Management’s troubled purchase of car maker Chrysler.
Foley switched from making loans to restructuring them, tussling with other creditors — often hedge funds — to recover as much money as possible from companies in bankruptcy court. He worked on some of the most contentious workouts of the era, including automotive supplier Lear Corp. and newspaper publisher Tribune Media Co.
This time around, JPMorgan dialled back its appetite for buyout loans in the autumn of 2021, people familiar with the matter said. Foley and his team thought the price inflation then cropping up in the U.S. would last for years because of supply disruptions and wage inequality, the people said. They also thought that risk was climbing in buyout deals as rising valuations were forcing buyers to borrow excessively to make winning bids, the people said.
In January, Vista Equity Partners and the private-equity arm of Elliott Management Corp. won the buyout of cloud computing company Citrix Systems with a $16.5bn bid. Bank of America, Credit Suisse and Goldman Sachs committed to financing the bulk of the purchase with $15bn of debt. By September, they and other banks had collectively taken $500m of paper losses, The Wall Street Journal reported at the time.
Write to Matt Wirz at firstname.lastname@example.org
This article was published by The Wall Street Journal, part of Dow Jones
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