Sometimes in investment banking, it’s the deals you don’t make.
JPMorgan has avoided most of the so-called suspended contracts in 2022 that have cost rivals billions of dollars in paper losses. Whether by luck or design, the largest U.S. bank did not lend to support acquisitions of companies such as Twitter, Citrix Systems and Nielsen, which fell in value as markets became volatile.
JPMorgan’s record contrasts with Bank of America, which provided large loans to buyers of Twitter, Citrix, Nielsen and others. Bank of America CEO Brian Moynihan has been consistently optimistic about the U.S. economy, contradicting more gloomy warnings from JPMorgan CEO Jamie Dimon.
That’s one thing Dimon is comfortable with — his company’s low exposure to bad acquisition loans, which bankers call leveraged loans.
“There are no real leveraged loan write-downs this quarter and that market is not yet cleared,” Dimon said on a conference call with Wall Street analysts in October. “Our share of that is very small, so we feel very good.”
Competitors attribute JPMorgan’s absence as a lender to major deals in 2022 to reduced engagement with private equity firms in recent years. The bank was also an adviser on some of the mergers, such as Nielsen, which prevented it from making loans, they said.
JPMorgan is ranked fourth among US bond and credit planners this year, while Bank of America is third, according to data from Dealogic. JPMorgan’s average ranking over the past 10 years is seventh, compared to an average of third over the past decade.
JPMorgan is also grappling with the fallout from relatively recent buyout financings that went sour, such as a loan it made to support the purchase of sports betting firm William Hill International. Still, it has far fewer pending deals on its balance sheet than its competitors, leaving it with more cash to win new business.
Private equity firms, corporations, and individuals who acquire businesses often pay in part with loans that investment banks make to the companies they buy. The banks aim to release the debt to the fund managers for more money than they lent out, and put the difference in their own pockets.
Purchase loans are only a small part of total lending in the United States, and financing them does not necessarily mean that a bank has unusual risk exposure.
Still, the trend backfired this year for companies like Bank of America, Barclays, Goldman Sachs and Morgan Stanley, who committed this winter and early spring to big acquisitions. Interest rates rose as a result, which made debt investors cautious and caused the price of leveraged loans to fall. Now the banks have to choose between writing off the loans at a loss or keeping them on the balance sheet at a reduced price.
Kevin Foley, JPMorgan’s global head of corporate debt, was among the bankers during the 2008 credit crisis, when the bank was awash in deals gone wrong. JPMorgan was the lead lender on JC Flowers’ $25 billion takeover of student lender Sallie Mae, which was eventually abandoned, and Cerberus Capital Management’s troubled acquisition of automaker Chrysler.
Foley switched from making loans to restructuring them, wrangling other creditors — often hedge funds — to recoup as much money as possible from bankrupt companies. He worked on some of the era’s most controversial practices, including automaker Lear Corp. and newspaper publisher Tribune Media Co.
This time, JPMorgan again scaled back its appetite for buyout loans in the fall of 2021, people familiar with the matter said. Foley and his team believed that the inflation that would then develop in the U.S. would last for years due to supply disruptions and wage inequality, the people said. They also believed that risk was rising in buyout deals as rising valuations forced buyers to borrow excessively to make winning bids, the people said.
In January, Vista Equity Partners and private equity firm Elliott Management Corp. acquisition of cloud computing company Citrix Systems in a $16.5 billion bid. Bank of America, Credit Suisse and Goldman Sachs committed to finance most of the acquisition with $15 billion of debt. By September, they and other banks had collectively taken $500 million in 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, a division of Dow Jones