Dancing on both sides of the ballroom

JPMorgan Chase’s Institutional Trust Services division (ITS), perhaps best described as trust and issuer services, breaks the mould in terms of offering operating services for debt and equity issuances. Part of JPMorgan’s Treasury and Securities Services division, the innovation and creativity of ITS’ issuer services springs from inclusion in the process of crafting deal structures for other parts of the bank at an early stage, as well as being a major component of the deal itself. Through early involvement, ITS can save issuers from onerous tax or payment structures, making a sophisticated collateralised debt obligation more appealing to an issuer’s investors, for example. ITS provides this service alongside the more traditional trustee, paying agent and portfolio administration services. The firm’s current position dates back to the efforts of several predecessor firms. After Manufacturers Hanover Trust Company’s merger with Chemical Bank in the early 1990s, significant resources were dedicated to varied trust products spread among the new firm’s business lines. That trend of increased resourcing, and ultimately consolidation of the business’ diffuse efforts, was dramatically enhanced in the Chemical/Chase Manhattan merger later in the decade. When Chase bought JPMorgan in 2001, ITS was reborn under the JPMorgan banner. The firm’s board of directors signalled its support for the thriving business by providing capital for the purchase of the Bank One trust book in June 2003 – prior to the merger with Bank One itself, announced in January this year.Peter Lighte, senior vice-president and head of Europe and Asia, says: “Prior to the Bank One merger, JPMorgan Chase was an aspiring universal bank in that it had investment banking, retail and operating services, but on balance, the retail side needed beefing up. Bank One brought that and something very valuable to the franchise. The value of our annuity businesses [business lines where revenues are much more predictable], of which ITS is very much a part, really offsets the greater volatility in investment banking and private equity. We have really been reborn with the merger. What is recognised, especially in ITS, is that we combine the greater surety of the [revenue] stream, which is a hedge against volatility, along with innovative opportunity.” Own M&A team ITS is a $250bn business in the EMEA region, with organic growth at around 25% a year. But more than that, inorganic growth is woven into the division’s fabric and feeds its success. Unlike competing entities, ITS has its own M&A team constantly on the look-out for both new trust business and infrastructure opportunities that enable rapid expansion of the operation. The purchase of Bank One’s trust book for $720m was the largest single acquisition since the establishment of JPMorgan Chase. “This in itself was a great show of faith in the business – a show of faith equalling capital, which is very comforting. It is unusual to have a dedicated M&A team inside a business like ours, which again gives us more credibility and has become a centre of excellence across the firm’s entire Treasury and Securities Services business,” says Mr Lighte. Key acquisition Another more recent purchase is Dublin-based hedge funds administration firm Tranaut Fund Administration Services. Mr Lighte comments: “There were several reasons for the purchase. On the one hand we have big investment managers, which are already huge custody clients of the bank. And they are investing into hedge funds, so we wanted to be able to service them. The other half of the equation is that we also wanted to grow the business and provide hedge fund services to the growing market of small, independent hedge funds as well. That’s why this acquisition was a joint venture between Institutional Trust Services and Investor Services, JPMorgan’s custody business, because both constituencies are being addressed by this purchase.” Tranaut offers fund creation, fund accounting, debt asset value reporting and shareholder services for hedge funds, adding a new key growth area for ITS through the acquisition. This proactive approach to offering such services to smaller hedge funds is what Mr Lighte believes distinguishes ITS from its competitors, such as State Street, Bank of New York and Citigroup, which are perhaps more focused on existing clients at the high end of the market. “As a firm, we are dancing on both sides of the ballroom now, by servicing the big custody clients as well as going out to the designer hedge funds,” says Mr Lighte. While Mr Lighte says that the business’ accountability has been crucial to its success, he also highlights the importance of early involvement in deals with an arranger. “The earlier we become involved, the more certain we are about things going well. We might be adventurous when it comes to creativity, but we are not so when it comes to detail – there is no broad brush,” he says. Having developed track records with the broker dealers and investment banks, ITS deals with those arrangers on the most complicated structured finance deals. Early participation Two recent deals with French insurer AXA clearly show what can be achieved from early participation in the deal structure from the service end. A E3.1bn collateralised debt obligation (CDO), called Overture, carried out in 2003, was the largest European CDO ever. More recently, ITS was involved in the structuring and servicing of a deal called Aria, the first widely-offered synthetic CDO to combine CDO and medium-term note (MTN) technology. ITS provided MTN and fully managed synthetic CDO servicing. The deal involved bespoke tranches targeted to investor demands, including multi-currency payment requirements across three geographic regions, used both fixed rate and floating notes, and also had some linkage to European and US inflation indices. Both Overture and Aria were done in partnership with JPMorgan’s investment bank. Mr Lighte says: “If you consider the complexity involved in making this happen over the multi-year life of the transaction, you can understand why we have to be both creative and compulsive about delivering the service. The role that we play in the execution of the deal goes from providing technology to modelling standardised investor reporting, where we have an interesting analytics team that is very important in a deal of this complexity. We have this incredible flexibility, which offers multi-currency functionality, and we also have the scale and resource of our global footprint required to make this kind of deal work. Alongside this, we act as trustee, paying agent and handle portfolio administration. With all these moving pieces, it shows how crucial it is that we are part of the deal negotiations from very early on.” Ground-breaking move Another area where ITS has branched out and truly broken the mould in issuer services is actually getting involved in building infrastructures – something Mr Lighte refers to as being “systemically involved” in the markets; the firm believes that this approach inextricably ties the firm in with service provision and secures long-term growth. He says: “If you can deal with five entities as clients instead of one, why not?” To this end, ITS, which operates a large global clearance and settlement business, recently stepped up its targeting in the quickly-evolving German market. With the imminent removal of their government backing, Germany’s Landesbanks have begun expanding into international equities trading and needed a solution for clearing and settling these equity trades. ITS’ solution has already attracted business from Bayerishe Landesbank (BayernLB) and Hessische Landesbank (Helaba), which subsequently merged to form Transaction Bank, or TXB. The platform provides banks that sign up to the service with access to equities clearance and settlement in 55 international markets, but unlike ITS’ competitors, Mr Lighte says, this is through a single global service window in London. “I believe the old buy and hold strategy is no longer appropriate for the type of activity being undertaken in today’s markets,” he says. This is the kind of innovation, along with the Bank One trust book acquisition, that Mr Lighte wants to see more of in the future. It is the proactive approach that comes with having an in-house M&A team that will continue to distinguish ITS and enable it to grow in many directions, both organically, and inorganically – for more acquisitions are almost certainly on the cards. ITS, it seems, will not slow, until it has become an integral part of how finance is structured, and as much the creative enabler as the firm’s investment banking division.