Giant JPMorgan Preferred Issue in the States

In news certain to make Assiduous Reader madequota (who hates new issues) glad that he’s north of the border, JPM has come out with a $6-billion fixed-floater:

The non-cumulative securities priced to yield 419 basis points more than U.S. Treasuries due in 2018 and pay a fixed rate of 7.9 percent for 10 years. If not called, the debt will begin to float at 347 basis points more than the three-month London interbank offered rate, a borrowing benchmark, currently set at 2.73 percent. A basis point is 0.01 percentage point.

Writedowns have reduced JPMorgan’s Tier 1 capital ratio, which regulators monitor to assess a bank’s ability to absorb loan losses, to 8.3 percent from 8.4 percent. That compares with ratios of 7.5 percent at Wachovia Corp. and 7.1 percent at Citigroup Inc. as of Dec. 31.

The minimum for a “well-capitalized” rating from regulators is 6 percent. The assets are calculated by weighing each type relative to its chance of default

Lehman Brothers Holdings Inc., the fourth-largest securities firm, sold $4 billion of preferred shares on April 1 that pay a coupon of 7.25 percent and are convertible to stock when Lehman shares reach $49.87. Citigroup, which has reported subprime losses of $24 billion and raised more than $30 billion in capital since November, pays 8.13 percent for preferred stock it sold in January. Bank of America Corp. is paying 8 percent on perpetual preferred shares sold the same month.

3 Responses to “Giant JPMorgan Preferred Issue in the States”

  1. madequota says:

    Yes, that is a pretty numbing issue at a pretty interesting yield.

    On the subject of new issues, and my “feelings” about them, I should clarify a few points! I actually don’t “hate” new issues. In fact, at the right price, I like new issues. I wouldn’t use the word “love”, since that is slightly too emotional a word to apply to bank-issued debt, but I do like them.

    The most recent ones, after predicting where they would open, and after observing their opening day trading activity, have actually become quite interesting to me. (Refer to yesterday’s comments on NA.PR.M at 9:40AM opening day as an example.)

    The thing I “hate”, and that is still a touch strong, but I suppose applicable . . . is the market reaction in Canada to new issues. As soon as the IPO is announced, most comparables sink in value, and prefholders who are long this stuff take an immediate, and sometimes long-lasting hit.

    I also “dislike” several issuers’ seemingly ill-planned coupons with their IPO’s. Mr. Hymas would be quick to point out that discounting is necessary to sell volume, but some of the more recent issues, to me anyway, appeared underpriced. One would immediately argue that since they’re pretty much all underwater, then they must actually have been over-priced. I would argue that not to be the case. The only reason everything in Canada seems to go underwater on release is because Canadian pref investors have absolutely no tolerance for dilution, and immediately punish issuers regardless of the coupon.

    National could have come out at 5.8%, 6.0% as they did, or 6.2% . . . the stock would have opened at $24.80 regardless. Look at most IPO’s in the past 6 months . . . assorted coupons, various market factors at play, but most open underwater, usually in the $24.75- $24.80 range . . .BNS.PR.N, TD.PR.P, BNS.PR.N, etc.

    Moral of the story is pretty clear . . . want an IPO? buy it on opening day in the market . . . and, like the ING guy says, “save your money”!

    As far as JP Morgan goes, a comparable would be JPM.PR.K . . . last traded at $22.18 . . . up .08 . . . I think I’m going to move.


  2. jiHymas says:

    As soon as the IPO is announced, most comparables sink in value, and prefholders who are long this stuff take an immediate, and sometimes long-lasting hit.

    If you feel that’s reproducible, then you should be net short until immediately following an announcement.

  3. madequota says:

    Yes, but you kinda need to time the play in sync with an announcement, and you would have to hope that nothing outstanding (to the upside) happens while you’re short.

    The better play unfortunately, is that as soon as an IPO announcement hits the newswire, simply sell your entire comparables position, with a view to re-purchase at a later date.

    The other factor that is very real is the gradual dampening of ex-announcement hysteria we’ve seen over the past year. Last fall, when BMO, BNS and TD came out with the first wave of new discount perps, the selloff was swift and dramatic. Subsequent issues have stirred progressively less “sink effect”, to the point where the National issue’s effect on comparables (including their own) was quite minimal.

    Will this dampening continue? I wish. The problem is that at any minute another issuer can come to market and re-kindle the whole negative sentiment thing.

    Tough to short . . . tough to long . . . I guess if it was easy, then everybody would be doing it, and opportunity would evaporate.


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