Sometimes it’s the deals you don’t make in investment banking.
JPMorgan has blocked many of the deals that cost rivals billions of dollars in paper losses in 2022. Whether by luck or design, the largest U.S. bank has not made loans to support takeovers of companies such as Twitter, Citrix Systems and Nielsen, which fell in value as the markets faltered.
JPMorgan’s record contrasts with that of Bank of America, which has made large loans to buyers of Twitter, Citrix, Nielsen and others. Bank of America CEO Brian Moynihan sounded an upbeat note about the U.S. economy, contrasting with more gloomy warnings from JPMorgan chief Jamie Dimon.
One thing Dimo feels good about is his firm’s low exposure to bad purchase loans, which banks call leveraged loans.
“There are no real loan losses this quarter, and this market has not yet been cleared,” Dimon said on an October conference call with Wall Street analysts. “Our share is very small, so we are very comfortable.”
Opponents attribute JPMorgan’s absence as a lender to major deals in 2022 to a decline in ties to private equity firms in recent years. The bank also acted as a consultant to some mergers, such as Nielsen, which hindered the granting of loans.
According to data from Dealogic, JPMorgan is the fourth largest arranger of US purchase bonds and loans this year, and Bank of America is the third. JPMorgan’s average ranking over the past 10 years is seventh, compared to third in the previous decade.
JPMorgan is also grappling with weaker results from relatively recent acquisition financings, such as the loans it backed to buy sports betting company William Hill International. Still, it has fewer closed deals on its balance sheet than its competitors, leaving more money to win new business.
Private equity firms, corporations, and individuals who acquire companies often repay a portion of the loans made by investment banks to the businesses they buy. Banks aim to offload debt to fund managers for more money than they lent, pocketing the difference.
Purchase loans represent only a small portion of total lending in the United States, and financing them does not mean that the bank is exposed to unusual risk.
Yet this year, that strategy has backfired for firms such as Bank of America, Barclays, Goldman Sachs and Morgan Stanley, which committed to financing big acquisitions in the winter and early spring. Interest rates subsequently rose, forcing debt investors to exercise caution and driving down the price of leveraged loans. Banks now have to choose between canceling loans at a loss or keeping them on their balance sheets at low prices.
Kevin Foley, JPMorgan’s global head of corporate debt, was a mid-level banker during the 2008 credit crisis, when the bank’s deals went awry. JPMorgan was the lead lender in JC Flowers’ $25 billion takeover of student loan originator Sallie Mae and Cerberus Capital Management’s troubled acquisition of automaker Chrysler.
Foley moved from lending to restructuring companies, wrangling with other lenders — often hedge funds — to get as much money as possible from companies in bankruptcy court. He is the automotive supplier Lear Corp. and worked on some of the most controversial ventures of the era, including newspaper publisher Tribune Media Co.
This time, JPMorgan has renewed its appetite for purchase loans in the fall of 2021, people familiar with the matter said. Foley and his team assumed that price inflation would continue for years in the United States due to supply cuts and wage inequality. People also believed that the risk in buyout deals was rising because rising prices forced buyers to borrow too much to make winning bids.
In January, the private equity arm of Vista Equity Partners and Elliott Management Corp won a $16.5 billion bid to buy cloud computing company Citrix Systems. Bank of America, Credit Suisse and Goldman Sachs committed to finance the bulk of the purchase with $15 billion in debt. By September, they and other banks had taken a combined $500 million in paper losses. The Wall Street Journal said the time.
Email Matt Wirz at firstname.lastname@example.org
This article was published by The Wall Street Journal, a division of Dow Jones