J.P. Morgan Bonds Fall on Concern Over Loan Defaults (Update1)
By Terence Flanagan
New York, Feb. 13 (Bloomberg) -- J.P. Morgan Chase & Co., as recently as November a benchmark for borrowing rates among the biggest American banks, is getting drubbed in the bond market because of its lending to Argentina and Enron Corp.
The bank's $2 billion of notes maturing in February 2011 have declined to 101.5 from 104 a month ago, pushing up their yield to 6.56 percent from 6.16 percent. During the same period, bonds with comparable maturities sold by the five other biggest banks in the U.S. fell 1 point on average.
For J.P. Morgan, which sold bonds 13 times last year, the increase in yields may translate into higher borrowing costs when the bank returns to the debt markets. The yield on the bank's benchmark 10-year bond is now the highest among the 10 biggest U.S. banks. In November, it ranked fourth lowest.
``When you have higher borrowing costs, it puts you at a disadvantage to your competitors,'' said Phil Larkins, strategist at Legacy South Inc., an Atlanta-based money manager that oversees $400 million and doesn't own J.P. Morgan Chase bonds. ``Higher costs put pressure on their net interest margins, and that is the bread and butter for bank earnings.''
The lagging bond performance is a sign that the market lacks confidence in the successors to a banking tradition dating back to Vice President Aaron Burr, who owned the Manhattan Bank, and financier John Pierpont Morgan. J.P. Morgan Chase is the merger of J.P. Morgan & Co., Chase Manhattan Corp., Manufacturers Hanover Corp. and Chemical Bank Corp., all of which were among the nation's biggest money center banks when they were independent.
Higher Than Rivals
J.P. Morgan, which has $44 billion of debt, has sold new securities every year since at least 1991, and is likely to sell more this year, analysts say. A 50-basis-point difference in yield means $5 million in extra interest expense a year per $1 billion borrowed. A basis point is 0.01 percentage point.
The bank has $9.5 billion in debt maturing this year and $5.8 billion maturing in 2003. Spokesman Michael Dorfsman declined to comment.
The yields on J.P. Morgan's bonds are also rising relative to those of Citigroup Inc., its biggest competitor, which last month reported a 36 percent rise in fourth-quarter profit even after writing off $698 million for Enron Corp.'s bankruptcy and Argentina's default.
Yields on J.P. Morgan's 2011 bonds climbed to 0.51 percentage point above the yield on Citigroup's $2.5 billion of bonds due in January 2011, from 0.28 percentage point on Jan. 14 and 0.15 percentage point in early December.
J.P. Morgan's bonds yield more than even some rivals with lower credit ratings. Last month, Bank One Corp.'s notes due in 2011 yielded 0.02 percentage point less than J.P. Morgan Chase debt. Now they yield 0.33 percentage point less. J.P. Morgan Chase is rated two steps above Bank One by Standard & Poor's.
The company's stock also has lagged rivals. J.P. Morgan Chase shares have fallen 38 percent in the past year, while Citigroup declined 16 percent and Bank One lost 3.2 percent.
J.P. Morgan Chase notes yield more because investors perceive more risk to the securities.
``The market is concerned about their exposure to Argentina, Enron, et al.,'' said Joe Jackson, who sold J.P. Morgan bonds and bought Bank of America debt in November for the $3 billion he helps manage at BB&T Asset Management in Raleigh, North Carolina.
Chief Executive Officer William Harrison last week told employees that J.P. Morgan Chase assumed too many risks in dealings with Enron. The bank wrote off $456 million of trading losses and loans to the company and still has exposure to potential losses of $2.06 billion. The company also wrote off $351 million for its exposure to Argentina.
The company's debt is rated ``Aa3'' by Moody's Investors Service and ``AA-'' by S&P, each the fourth of 10 investment-grade ratings. S&P cut its outlook for J.P. Morgan Chase debt to ``negative'' from ``stable'' on Jan. 16, while Moody's changed its outlook to ``stable'' from ``positive'' in December.
``There was a steady drip of negative developments in 2001,'' including declines in the quality of J.P. Morgan Chase's loan portfolio and a drop-off in investment banking, said S&P analyst Tanya Azarchs.
Bank One's debt is rated ``A'' with a stable outlook by S&P. Moody's rates Bank One ``Aa3'' with a negative outlook.
Rocky Integration
A negative outlook means the credit rating is more likely to be downgraded than upgraded. A decision whether to cut J.P. Morgan's rating will likely be made this year, Azarchs said.
J.P. Morgan Chase's notes maturing in 2011 yield 1.72 percentage points more than Treasuries, compared with premiums of 1.19 percentage points to 1.42 percentage points for its five biggest rivals, which include Wachovia Corp., Bank One, and Wells Fargo & Co.
J.P. Morgan Chase was formed in January 2001 when Chase Manhattan Corp. bought J.P. Morgan & Co. for $32 billion. The firm has been integrating its commercial-banking business, which loans money to companies, and its investment-banking arm, which makes money by advising on mergers and acquisitions and managing deals such as stock and bond sales.
The integration has been rocky, said Sean Egan, managing director of Egan-Jones Ratings Co., and the struggle manifested itself in J.P. Morgan Chase's decision to extend hundreds of millions in loans to Enron in an effort to win investment-banking business from the company, which was once the largest energy trader.
``There was pressure from the investment-banking side to get the deal done,'' Egan said. ``It seems credit evaluation took a back seat.
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