JPMorgan's head of liability management in London is building the business from the bottom up. He is a new arrival at the bank following the acquisition of Bear Stearns, creating a new team as the bank makes a foray into debt restructuring.

For Mark Goldstein, 2008 was the year when restructuring took on something of a personal meaning. Perhaps more than half of the London staff at the stricken Bear Stearns were made redundant when the bank was acquired by JPMorgan. Mr Goldstein was one of the survivors, and his new employers had a particular use in mind for his long experience of the high-yield bond and leveraged loan business, which extends through several credit cycles. He was involved in his first restructuring deal in 1988 and, 20 years later, he helped form the core of a new liability management business for Europe, the Middle East and Africa (EMEA) at JPMorgan.

Mr Goldstein speaks of having a core team of just four, including himself. But this disguises a much larger capability. The unit can call on about 120 frontline product or sector specialist staff from the vast capital markets and credit desks to work exclusively on liability management when required.

In fact, JPMorgan's efforts appear to run counter to the claims made by boutique advisory firms and independent investment banks such as Rothschild and Lazard, which have argued that the larger banks responsible for originating many of the private equity leveraged loan and high-yield deals will not be trusted by creditors to undertake restructuring.

Global presence

In situations where a haircut necessitates what he calls "going toe-to-toe with creditors", Mr Goldstein acknowledges that he might be more reluctant to accept an assignment for an obligor for whom JPMorgan was originally the underwriter. However, this dilemma is more marked in the US, given the bank's very high underwriting market share there. In Europe, there are more 'national champion' banks, especially in the UK, France, Spain and Italy, which originated many of the leveraged and high-yield deals now under pressure.

And even where JPMorgan was involved in the origination process, he does not rule out getting involved on the liability management side. "We are extremely cautious about that, making sure our investment banking and credit areas have a strict firewall, but it depends," he says. In numerous cases where a write-down is not required, existing clients were quite receptive to having JPMorgan as their advisor. "For example, we are a creditor to one media group, and the client came to the decision that, given its maturity profile and the associated sensitivities, if JPMorgan went to the market and said 'we are prepared to support this amendment, and we recommend that you do as well', the market was more likely to accept it," says Mr Goldstein.

Indeed, he believes the reach of the bank's loan and capital markets activities gives him a natural base to build upon. "Other banks have massively shrunk their platforms in the loan and bond markets. We still have full-service platforms across those markets - sales, trading and distribution - across investment grade, non-investment grade, developed and emerging markets, the whole nine yards," he observes.

JPMorgan as a whole has a different business model from the independent investment banks, with a cost base that relies on scale, so it may set a higher threshold on deal size to maintain its margins. Follow-on business such as associated lending or capital markets distribution is also more likely to play a part in choosing which clients to take on.

Upbeat on growth

Understandably, Mr Goldstein is reluctant to publicly put numbers on how far he thinks his team can grow. But he is upbeat about the large volumes of potential business. Given the global presence to draw on, if the bank supports his ambition, there is no obvious reason why the liability management team should not grow to match more established restructuring franchises such as Rothschild and Lazard, which typically pull in more than $100m in annual fees.

That kind of income will not be reached in 2009, especially as restructuring deals often take a long time to close, but he suspects the team will have time to build its franchise.

"The amount of capital deployed in 2005 to 2007 - both by corporates and by financial sponsors - was very extensive, the downturn has been severe, banks have been more crippled in this cycle, and there is also a huge wall of maturities, both above and below investment grade, coming in 2010 to 2012, so you have a recipe for an extended restructuring cycle," says Mr Goldstein.

Certain sectors are clearly worst affected, including the automotive industries and their feeders such as parts and steel manufacturers, together with construction or real estate. JP Morgan has a mandate from a Spanish real estate company, as well as advising a French construction materials company with a private equity sponsor on resetting the covenants on its debt. The severity of the slowdown means that even companies that had comparatively low leverage are not immune from covenant triggers or even financing difficulties.

"A company could be two times levered today, but five times levered in six months, because its earnings fall by 60%. Most businesses have some dimension of fixed costs that take time to eliminate, especially as there aren't any buyers for excess real estate or production capacity right now," he says.

And even though financing conditions began to improve in the second quarter of 2009, a large number of companies in vulnerable sectors are still facing the maturity of credit lines that were arranged very cheaply before the crisis.

Untested jurisdictions

Not only was the volume of funds deployed in the boom years striking - its geographic reach was also remarkable. The level of international borrowing by companies in eastern Europe and the Gulf states in particular was unprecedented.

Mr Goldstein already has a mandate for a Ukrainian steel company, and is closely watching the unwinding leverage which he says is playing out right across the Gulf, not just in Dubai. So far, Russia and oil-rich Gulf states have refinanced companies deemed strategic, but their resources are not limitless, and difficult choices will have to be made.

Mr Goldstein says many senior executives who have built their businesses during almost a decade of unbroken high economic growth in these regions are ill-prepared to handle the sudden change in climate.

"In the first three months of my job, I met with various companies which had ultimately fired in excess of 100,000 staff. Lives are changed forever. Unfortunately, the companies are unable to provide the speed of response and they don't have the expertise to anticipate what creditors will look for. The focus was on generating new customers, expanding capacity, whereas now it is on cash preservation," explains Mr Goldstein.

Varied approaches

The role of government intervention has been another distinctive feature of this credit cycle downturn. JPMorgan became an advisor to German ballbearings manufacturer Schaeffler, as it sought help from the federal authorities to refinance the debts accumulated for its takeover of much larger automotive parts firm Continental. The bank was retained by the combined group after originally advising Continental on its defence against the Schaeffler bid.

However, the speed with which credit conditions have deteriorated at some companies, combined with the rise of special state funds such as France's Strategic Investment Fund, has made the job of the liability management advisor more unpredictable. As initial mandate and fee structures are agreed upfront, Mr Goldstein keeps a close eye on what he calls "scope drift" if the nature of the advice needed begins to change.

In the first instance, Mr Goldstein's team seeks to classify whether a transaction will be pure advisory, or involve capital markets activity such as discounted debt buybacks. Linked to this is whether a liability management is funded (for instance, through a rights issue or the injection of fresh cash by a private equity sponsor or the issuance of new debt) or unfunded.

Equally important is whether the company is stressed - possibly with an actual or potential debt covenant breach - or in serious distress, with difficulties making upcoming repayments.

Although JPMorgan has a substantial presence in funding leveraged buyouts, most of Mr Goldstein's mandates to date are for companies without private equity sponsors, and for advisory rather than capital markets solutions. Ultimately, the team will also assess opportunities for JPMorgan's own credit book, but he is in no rush to propose investment opportunities at such a volatile time for the global economy.

"The lack of visibility is incredibly high, so the pricing we would need to achieve is probably not something that would be acceptable to the client, relative to their existing cost of capital," he says.

Career history

Mark Goldstein

2008 - in November, appointed head of newly created liability management practice for Europe, Middle East and Africa at JPMorgan.

2008 - in March, joins JPMorgan on the acquisition of Bear Stearns.

2007 - relocated to London to become European head of investment banking and leveraged finance for Bear Stearns in London.

2006 - head of business development for investment banking at Bear Stearns in New York.

1994 - in January, joined Bear Stearns as a managing director in the financial sponsors team in New York.

1984 - after gaining a BSc in accounting and a BA in international relations and history, began his career as M&A analyst at Salomon Brothers in New York.

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