When in March and April market circumstances swung from being most the attractive seen for years in terms of spread and coupon levels to what were the most challenging since at least the eurozone crisis, bank borrowers lost any certainty of market access for even the plainest unsecured debt. That environment suited JPMorgan, which had the size and skillset to pilot clients through the storm.
“When market conditions get really tough, the biggest consideration for any issuer is getting their deal across the line,” says David Marks, chairman of FIG DCM at JPMorgan in London. “Our dominant position on the secondary side links to our leading position in primary and means that working with us limits execution risk for issuers. We’re just not going to be blindsided.
“The insight into investor sentiment and psychology that we get from the trading businesses, both cash and synthetic, is a fantastic advantage.”
Part of the response to this volatility was the reintroduction of significant and competitive monetary authority support for banks, reducing the need for pure funding trades and prompting a fall in overall FIG volumes of 7% in the year to September.
Another response was some regulatory forbearance with regards to capital. The resulting shift in the mix of business also played to JPMorgan’s strengths.
“One big catalyst for FIG business this year was the move by European regulators to follow UK precedent to allow additional tier one (AT1) and tier two securities to contribute to Pillar 2 capital requirements (P2R),” says Kiran Karia, head of UK & Benelux FIG DCM at JPMorgan.
Many, if not most, bankers had considered tier two to have become somewhat of an orphan asset class, with only a few refinancing exercises likely to happen, but the P2R changes boosted supply by 37% versus 2019 year to date.
“When clients have a deal that they’re really worried about, it tends to favour us,” says Markyan Szczur, head of Nordic DCM at JPMorgan. “Partly that is due to a desire to limit execution risk, but also in terms of the structuring and due diligence that goes into, say an AT1 offering as opposed to a drawdown off an MTN programme.”
The application of ESG, in particular green, to bank capital has been one of the hot new themes of the year. First came a ground-breaking €1bn ATI issued by BBVA in July, and that was followed up just two weeks later with a €500m tier two issued by De Volksbank. Both were the first green bonds in the respective asset class. The value of the innovation was underlined in September by AIB with its €1bn tier two where the green wrapping helped to navigate a more challenging market.
“The inexorable rise to prominence and efficiency of ESG offerings is a trend that is well established but what distinguishes this year is its application in the bank capital space,” says Sean Richardson, head of capital structuring at JPMorgan.
The year’s other big trend in FIG was another that favoured a bank like JPMorgan with a strong secondary franchise — the rise in the number of liability management exercises conducted by issuers. This year that has included many legacy capital securities that are approaching the end of their useful regulatory lives in 2022, as well as vanilla funding bonds that have lost their purpose amid cheap and readily available central bank liquidity.
M&A has recently appeared as a new 2020 theme for banks, another trend supercharged by Covid. However, acquisition financing has been an important theme for the insurance and asset manager sectors throughout the year with JPM again at the forefront of this trend.
There were three M&A deals announced shortly before the onset of the market weakness requiring financing from Jupiter, Phoenix and Uniqua — for all of which JPM had a lead role. JPM also led the €1bn bridge financing and tier two bond take-out for Sampo’s acquisition of Hastings, announced in the middle of the summer.
Once again, secondary flow insight was integral to the success. “It helped Sampo to find an attractive but unusual execution window shortly before the UK August bank holiday to de-risk the M&A financing in one go, with minimal new issue premium,” says Sebastien Bamsey, head of insurance DCM at JPMorgan.
Looking forward, Marks notes that green capital was pioneered by the insurance sector and then moved on to banks. “Perhaps it will also lead the way for a resurgence in bank M&A financing in 2021,” he adds.
