NEW YORK, Feb 28 (IFR/RLPC) - JP Morgan CEO Jamie Dimon
delivered a confident message at the bank's global high-yield
conference this week, telling attendees it would be no more
cautious than any other Wall Street bank when it comes to
lending, according to investors present at the event.
But the bank's decision not to extend a revolving credit
facility for Freescale Semiconductor earlier this month,
a move confirmed by two market sources, appeared to send a very
different message to the market.
It was deemed an unusual decision mainly because revolvers
are usually private deals with relationship banks. By not
extending the maturity of the revolver, JP Morgan
passed up fees, which some bankers said did not make sense as it
still had to honor the existing facility.
JP Morgan declined to comment.
The revolver got done - and at a larger size. Citigroup,
Goldman Sachs, Credit Suisse, Deutsche Bank, Barclays and Morgan
Stanley all committed to the deal, which was increased by up to
USD50m to a total of up to USD450m.
The decision demonstrates how carefully banks are
scrutinizing which loans, and how many, they will commit to -
and there is clearly a ripple effect from the leveraged lending
guidance issued about a year ago by regulators.
Some reckon JP Morgan made the correct bet on Freescale,
which was taken private by sponsors Blackstone, Carlyle, TPG and
Permira in 2006 in one of the biggest leveraged buyouts of all
Although the company listed five years later, its leverage
"You could say JP Morgan has been smart," said one senior
banker at a rival bank. "Maybe it made a judgment and thought
the company was not a big client, and therefore, not worth
doing. The bank's the largest underwriter of leveraged loans in
the market, so this is only natural."
Freescale and its private equity owners were either not
immediately available or declined to comment.
SUBSTANDARD REPORT CARD
The rationale behind JP Morgan's decision, the sources said,
was that the loan could have been considered "substandard" - one
of the definitions that regulators have applied to "criticized"
or "non-pass" loans under their guidelines.
Another category - "special mention" - is more common.
Considered less risky, those loans are also less likely to rile
regulators, bankers said.
"It's a bit like a report card. If you're going to have bad
marks, you'd rather have more Bs than Cs," said the banker. "The
Freescale revolver, a C grade, was substandard already."
A loan may be criticized if companies are not able to
amortize or repay all of their senior debt from free cashflow or
half of their total debt in five to seven years. Leverage levels
exceeding six times debt to Ebitda after asset sales are also
viewed as problematic.
According to Moody's latest report on Freescale, even after
it pays down debt with proceeds of a recent share offering,
adjusted debt to Ebitda will still remain in the low seven times
The guidelines aim to prevent a return to reckless
underwriting practices, but until recently the market believed
regulators would be more focused on new leveraged buyouts. In
fact, the implications of the greater scrutiny are far wider
"The guidance does capture refinancing, though not
necessarily an amendment," said Tess Virmani, assistant general
counsel at the Loan Syndications and Trading Association.
The Federal Reserve, the FDIC and the Office of the
Comptroller were either not immediately available or declined to
Even so, some argued JP Morgan was being too conservative,
and said its decision was more about the bank wanting to be seen
to be toeing the line, and a desire to keep out of the headlines
after paying a USD13bn fine last year to settle multiple
government claims over dealings in mortgage securities.
"When he was asked at the conference whether JP Morgan would
react differently because of its recent issues, Dimon said he
expected all banks to behave the same," said one investor who
attended the leveraged finance gathering in Miami.
There is, nonetheless, growing annoyance among bankers who
are convinced that regulators have not thought through the whole
"They have said that they don't want us to stop
lending to companies that are in trouble and need financing. But
there are lots of grey areas, and it's very frustrating," said
How this will all play out remains to be seen. The
regulators publish report cards on banks' loans in what is known
as a Shared National Credits Program to help communicate what
are, and what are not, quality loans.
The SNC last year showed criticized and classified assets
remained at elevated levels at 10% and 6.2% respectively in
2013. The volume of criticized assets increased 2.4% to
USD302bn, but as a percentage of total commitments, the
criticized asset rate fell from the year before.
One banker said it would be interesting to see the reaction
to fines doled out if banks are too reckless. Others said that
fines were unlikely.
"I don't think the punishment will be fines. There are lots
of ways for regulators to turn up the heat. Just coming into the
bank to meet the risk people, and telling them they are unhappy
would be enough to get banks to stop," said a banker.