JPMorgan Tightens Bond Grip as Whale Loss Weighs
JPMorgan Chase & Co. (JPM) is tightening its grip on the global corporate bond market while Bank of America Corp. (BAC) sees its market share decline with issuance on pace to exceed $3 trillion for a fourth straight year.
JPMorgan, the most profitable U.S. bank, underwrote 6.8 percent of sales, excluding self-led deals, in the first half of 2012, up from 6.4 percent in all of 2011, according to data compiled by Bloomberg. Charlotte, North Carolina-based Bank of America dropped to third, with 5.2 percent from 6.1 percent.
Jamie Dimon, JPMorgan’s chief executive officer, is benefiting from debt underwriting as offerings approach $2 trillion, including a record $1.19 trillion in the first three months of the year. The New York-based lender is the top choice of companies even as it suffers more than $2 billion of losses from derivatives tied to corporate credit markets.
“They have an advantage in the marketplace and they’re taking advantage of it,” Richard Bove, an analyst with Rochdale Securities LLC in Lutz, Florida, who recommends the firm’s stock, said in a telephone interview. “They have the ability, given their incredible capital strength, to attract customers presumably because their cost of capital is lower,” which they can pass on to clients, he said.
JPMorgan has underwritten $110.9 billion of corporate bonds this year, versus $94.5 billion at New York-based Citigroup Inc. (C), which ranks second with a 5.8 percent share, the data show. Citigroup came in fourth in 2011, with a 5.7 percent share.
Issuance for the full year in the U.S. and Europe will probably trail 2011, as Europe’s debt crisis threatens global markets, according to Barclays Plc (BARC) strategists.
“JPMorgan tends to do better in more difficult markets,” Jim Casey, co-head of global debt capital markets at the bank in New York, said in a telephone interview. “When the going gets tough, some of the smaller players arguably will reduce their capital allocation, whereas we tend not to do that.”
Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. declined for a second day, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 1.7 basis points to a mid-price of 110.6 basis points as of 11:55 a.m. in New York, according to prices compiled by Bloomberg.
That’s the lowest level on an intra-day basis since May 14 for the index, which typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of bond market stress, rose 1.66 basis points to 26.16 basis points as of 11:58 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
Bonds of Citigroup are the most actively traded dollar-denominated corporate securities by dealers today, with 38 trades of $1 million or more as of 11:57 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Sales of corporate bonds worldwide declined 10.9 percent last week to $60.1 billion from $67.4 billion in the period ended June 22, Bloomberg data show. For the first half of the year, issuance fell to $1.93 trillion from $1.99 trillion in the corresponding period of 2011, Bloomberg data show.
JPMorgan managed $42.4 billion of offerings last quarter, excluding self-led transactions, a 38 percent decline from $68.5 billion in the three months ended March 31, Bloomberg data show. That compares with a 47 percent drop at Bank of America, which underwrote $29.3 billion in the April-through-June period.
“One of the ways you can grow is by taking share from others, and the investment bank is probably a place where JPMorgan is doing this,” Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis, said in a telephone interview. “We’re by no means in a strong capital markets environment, but to the extent that the economy continues to recover, this segment is a revenue generator, so I think there’s a lot of push to grow.”
John Yiannacopoulos, a spokesman at Bank of America, and Mark Costiglio of Citigroup declined to comment on underwriting market share.
Investors are pressing leaders in the 17-nation euro region to contain a sovereign-debt crisis that’s threatening a contagion across the financial system such as the one that followed the failure of Lehman Brothers Holdings Inc. in 2008.
Following a summit last week in Brussels, policy makers dropped requirements that taxpayers get preferred-creditor status on aid to Spain’s banks, opening the way to recapitalize lenders directly. Euro chiefs said they’re determined to “break the vicious circle between banks and sovereigns” that began in Greece in 2009.
While sales of dollar-denominated company debt declined 42 percent in the second quarter from the three months ended in March, euro issuance dropped 54 percent as the region’s faltering economy dissuaded borrowers from tapping debt markets. The European Central Bank has forecast a 0.1 percent contraction in the euro-area economy for 2012.
Citigroup strategists led by Jason Shoup revised their issuance estimate for investment-grade debt to $827 billion in 2012, including $462 billion from non-financial companies, according to a June 29 report. That’s down from a January estimate of $855 billion with $490 billion from non-financials.
“For some credits, it’s currently easier to do a deal in the U.S. than in Europe,” said Chris Whitman, head of global risk syndicate at Deutsche Bank AG (DBK), which ranks fourth in global underwriting with a 5.2 percent share, down from 5.9 percent in 2011 and coming in third. “The U.S. benefits from a bigger and deeper credit market.”
Investors added $57 billion to U.S. fixed-income mutual funds in the second quarter, compared with $2.3 billion of outflows from European funds, according EPFR Global data.
“The U.S. market has been the most consistently liquid market,” Huw Richards, co-head of investment-grade finance at JPMorgan in New York, said in a telephone interview. “There’s no doubt that having insight on those investor flows, we’re definitely able to translate that into international borrowers” coming to market to issue dollar-denominated debt.
JPMorgan’s share has increased even as it faces Congressional scrutiny after its London chief investment office built a portfolio of credit derivatives so large it distorted prices and earned trader Bruno Iksil a nickname: the London Whale.
At the start of the year, the group was ordered to reduce its positions and instead executed a series of trades that left the bank with even bigger and harder-to-manage exposures, Dimon told the Senate Banking Committee in Washington last month.
While the losses amount to “a short-term blow to their reputation,” it probably won’t be a meaningful problem in the long run, Richard Staite, a London-based analyst at Atlantic Equities LLP who recommends JPMorgan stock, said in a telephone interview. “Looking across the investment banking landscape, JPMorgan is one of the best placed to pick up market share” as European competitors cut employees, he said.
Rounding out the top 10 underwriters, excluding self-led deals, are Barclays at No. 5; HSBC Holdings Plc. at No. 6; Goldman Sachs Group Inc. at No. 7; Morgan Stanley (MS) at No. 8; UBS AG (UBSN) at No. 9; and Credit Suisse Group AG (CSGN) at No. 10 with a 3.3 percent share.
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