JP Morgan forced to cut deal size as Treasuries tighten

[NEW YORK] JP Morgan was forced to cut the size of its deal after launch by US$1 billion late Thursday afternoon, after a plunge in Treasury yields spooked the market.

In a rarely seen move, JPM relaunched the deal after 4pm as a US$6.15 billion offering of five and 10-year fixed rate notes and five-year floaters after first launching the offering as a US$7.15 billion transaction just after 1.30pm.

JPM did not comment, but financial institution group bankers thought the downsizing was probably due to investors backing out at the last minute after watching an extraordinary move tighter by the 10-year Treasury yield between 2.45pm and the close at 4pm.

The 10-year Treasury opened at 1.81% and was down to around 1.78-1.8 per cent after the deal's launch of US$3 billion each of fives and 10s and US$1.15 billion of five-year floaters. Then after 2.45pm the 10-year yield dropped like a stone to close at 1.74 per cent at 4pm, taking the rally in the 10-year Treasury to more than 40bp since the start of the year.

At the relaunch, both fixed rate tranches were cut by US$500 million to US$2.5 billion a piece.

Bankers were worried that seeing one of the most sophisticated issuers get caught out by Treasury volatility would set the primary market back, just when it looked like it was firing up. "Everything looked great until JPM downsized its deal," said one coverage banker. "Now we expect tomorrow to be quiet going into a three day weekend." So far this year only US$51 billion of deals have been issued,according to IFR Markets data, so far the lowest January in three years.

Even so, US$15.15 billion of issuance on Thursday, the best day so far this year, was at least indicative of strong demand technicals pushing investors to engage in the primary market,which enabled JPM issue US$6.15 billion, Pemex US$6 billion of fives, 10s and 30s and Wells Fargo US$2 billion of Tier 1 preferreds. "At the end of the day JPM did an amazing deal," said one financial institutions group origination banker. "They didn't pay more than 10bp of NIC." Pemex received more than US$16 billion of demand for its US$6 billion deal and Wells Fargo US$6 billion for its perpetual non-call 10 perpetual preferreds.

That said, the market is without a doubt a challenge. "If this was a corporate issuing US$6 billion they would have had to pay NICs north of 20bp to get it done in a market like this," said one banker.

Investors in Tier 1 bank capital were at least heartened by the drop in Treasury yields, because it meant a chunky 399bp over Libor floating rate back end on Wells Fargo's US$2 billion of perpetual non-call 10-year preferreds.

The bigger the back end floating rate level, the greater the confidence that the issuer will call the deal in year 10. "This goes to show that with these prefs, investors are more focused on the back-end coupon than the front end," said a head of FIG syndicate.

Bankers away from the deal commended Wells's decision to start out prudently with a 6 per cent handle, with IPTs of 6.125 per cent. It priced at 5.875 per cent, just an eighth wider than secondaries.

REUTERS