JPMorgan signals it is eager to step up its activity in buyout financing
• Investment bank is making a cautious return to market that has saddled its competitors with billions in debt
JPMorgan Chase is on the hunt for buyouts to fund, and it is hoping to gain market share in leveraged financing after avoiding the dozens of clunkers that have cost its competitors billions of dollars.
Executives of the investment banking group decided in 2022 to cut back on risk in leveraged finance, a choice that surprised customers and competitors. That decision helped the bank avoid losing money from big buyouts such as Citrix Systems and Twitter, and now gives it more capacity to pivot.
“We want to gain market share with smart underwrites,” said Daniel Rudnicki Schlumberger, the bank’s co-head of Middle East and Africa leveraged finance.
“We will not do anything kamikaze, no shooting overthe-hill underwriting assuming the market will get better.”
This is a careful return to a market that has left the biggest global banks saddled with about $40bn of debt they have been unable to sell.
Late last year and earlier this year, banks agreed to fund big leveraged buyouts on the assumption that they would be able to sell bonds and loans to investors quickly. That bet proved wrong as central banks have hiked interest rates repeatedly to tame inflation, cutting into the value of existing debt.
Banks have had to choose between offloading their leveraged buyout exposure at discounted prices now, forcing them to realise losses, or keeping the debt in the hopes that the market will eventually recover.
JPMorgan has avoided much of that pain. The bank lost a little more than $250m on buyouts and corporate loans in the last two quarters, well below rivals including Morgan Stanley and Bank of America.
In late 2021, JPMorgan was advising WM Morrison’s Supermarket on selling itself in the biggest UK leveraged buyout deal in a decade.
A bank would normally offer financing to the buyer, but JPMorgan did not. It similarly sidestepped funding Inetum, an information technology company the bank also advised. It avoided financing the buyout of Nielsen Holdings and Tenneco, two transactions where banks have struggled to sell debt.
“Some deals we said no to as we didn’t like the credit,” said Schlumberger.
The bank generally stepped back from committing to funding high-profile transactions at a particular price, focusing instead on “best efforts” deals, where it promised the best possible market pricing for customers. That gave it less exposure when yields started jumping on loans and bonds earlier this year.
“We may have been viewed as intransigent at the time, but we had to trust our judgment,” said Ben Thompson, head of EMEA leveraged finance capital markets at JPMorgan.
“It feels as if relative to our position in volume league tables we are underrepresented on expected losses.”
The buyout business is famously difficult for banks to time well. Loans that look like good business in one month can be turkeys just a few months later as investors grow reluctant to take risk.
Wall Street as a whole has gotten better at managing losses from bad buyout loans. After the 2007-2009 financial crisis, companies faced a $200bn backlog of loans to offload. That was far more than banks’ current exposure, according to estimates by Deutsche Bank, which are now closer to $35.98bn. The lower exposure is in part because of new postcrisis rules that have made it harder for banks to hang on to risk tied to financing acquisitions.
JPMorgan benefited from trying to cut its exposure, but luck played at least some role. Just about every bank sought to help finance Citrix’s leveraged buyout, which included around $15bn of debt, which could have netted banks some hefty fees.
JPMorgan avoided being part of that financing by pressing the software company to give it the right, if necessary, to raise interest rates on some of the debt to the point the bank wanted, a level above what other lenders agreed to. Had Citrix agreed to JPMorgan’s demand, the bank would have been part of the group of lenders, and would have suffered losses.
And the bank certainly did finance some deals that ended up costing it money.
JPMorgan agreed to help finance the buyouts of KronosNet, an outsourcing provider, and 888 Holdings’ acquisition of international assets from bookmaker William Hill, all of which had their issues and sold at prices low enough for the bank to take losses. But many of these deals were relatively small, with banks offloading about €400m of Kronosnet loans while retaining an amount equal to that, for example.
“We did miss a number of the bigger things, some were tactical, others where we were not crazy about the credit or where we fell out over the negotiated terms,” Thompson said. “We tapped the brakes on underwriting risk fairly early on. We were not convinced it was a great window for accepting the most aggressive terms.”
On a call with investors in October, JPMorgan CEO Jamie Dimon said he was convinced the worst was behind the bank in terms of losses on buyout financing. He noted that the bank had “no real leveraged writedowns” for the third quarter.
“Our share is very small, so we’re very comfortable,” Dimon added.
WE MAY HAVE BEEN VIEWED AS INTRANSIGENT AT THE TIME, BUT WE HAD TO TRUST OUR JUDGMENT
Ben Thompson EMEA leveraged finance head