The timing seems designed to unnerve.
Jamie Dimon was on Wednesday reserved in his outlook for the global economy and for the capital markets. But the overriding message heard by investors was that the worst was over. There were no nasty surprises in the bank’s numbers and the absence of outright disappointment was good for a 6.7 per cent share price bump.
So why launch an unexpected capital raising, which by virtue of its timing appeared rather clandestine?
Pass. But last night JPMorgan lodged a preliminary prospectus for the issue of perpetual preferred stock, which Bloomberg interpreted as follows:
JPMorgan Chase & Co., hours after saying the credit-market crisis is almost over, made plans to raise $6 billion in its biggest offering of perpetual preferred stock, according to data compiled by Bloomberg.
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.
It’s the stuff that conspiracy theorists’ dreams are made of. Why not refer to a capital raising in the results or on the conference call, wonders Paul Jackson at Housing Wire?
Felix Salmon is similarly bemused:
A yield of 7.9% over 10 years is expensive capital indeed for a bank which is (a) profitable, (b) currently well capitalized, and (c) doesn’t have an obvious stock of loans needing to be written down. That’s $474 million a year in interest payments: three years’ interest, and you’ve got the entire Bear Stearns acquisition price. And raising this money the day of your earnings announcement, without so much as mentioning it on the conference call?
Investors may have taken Dimon’s suggestion that the credit squall was “working itself out” as a signal of sunnier times ahead. But the bank faces a stream of provisions in its traditional lending business, with an uptick in prime and Alt-A delinquencies.
JPMorgan’s weakened capital ratios, with Tier 1 down 10bp to 8.3 per cent, are well ahead of the regulator’s requirements - but they may prefer a more substantial cushion given with prospect of a hard economic landing ahead.
As CreditSights put it: “As the economy softens and asset (namely housing) prices seemed poised for further declines, the company faces a difficult challenge to prudently manage growth in light of a high level of uncertainty for future credit expectations.”
Alongside the complexities of handling the Bear buy and Dimon’s restated interest in seeking growth through acquisitions, the appeal for the bank of raising funds when it can, rather than when it has to, is obvious. In nervy markets, though, the impression of being less than frank is unfortunate.
Related links
JPMorgan seeks fresh acquisitions - FT.com
JPMorgan’s strength - Lex note
