JPMorgan has sought to maintain hard-won expertise even during the near closure of European equity capital markets in late 2011 and early 2012. Its regional co-head of equity capital markets explains how continuity has set it up well to capture a nascent revival of new issues.

During the second half of 2011 and even into the first half of 2012, equity capital markets (ECM) became virtually inaccessible for European issuers. Many banks began to cut their equity capital markets franchises heavily as revenues fell, and some started to exit altogether. At JPMorgan, there was some natural attrition, but the structure of its ECM franchise in Europe, the Middle East and Africa (EMEA) remained constant.

“Our client base is not shrinking, and, if anything, client needs have become more complicated since the start of the financial crisis. We have a strong balance sheet that we commit wisely, making us the bank that can provide solutions for clients. We are very mindful that we do not want to lose the institutional know-how our people have built up, so we try very hard to maintain it,” says Ina De, co-head of EMEA ECM at JPMorgan.

Her own career is a prime example of that consistency, having joined JPMorgan in 1987 in the derivatives business, subsequently working in debt capital markets before moving into ECM. She has worked with her co-head Klaus Hessberger since 2000, as well as having a longstanding partnership with David Marks, head of financial institutions group (FIG) debt capital markets since 2002, thanks to her eight years as head of EMEA FIG ECM, prior to assuming her current role in 2008.

“Our team has developed together and we have country coverage heads, most of whom have at least 10 years' experience at JPMorgan behind them. That said, JPMorgan management has the confidence to move people around within the bank so people don’t get stuck in a product silo. It can bring out the best in people to give them fresh challenges. The market changes over time and the mobility enables us to build personal networks across the bank,” says Ms De.

Growing dominance

There are, at most, perhaps half a dozen global banks that have a sustainable business model for a full-service equities division across origination, sales and trading, with JPMorgan firmly established among them. Even the idea that second-tier national or regional champion banks will always be given a place on the ticket by their relationship banking clients appears to be under pressure. JPMorgan was global coordinator, along with Switzerland's UBS, for the €1.5bn initial public offering (IPO) of Telefonica Deutschland in October 2012 – German bookrunners were notable by their absence. And the US giant was initially sole bookrunner on the €1.25bn rights offering by Belgium’s KBC in December 2012, before Nomura requested bookrunner status from the client at a late stage.

Financial sponsors, in particular, tend to feel they should reward their leveraged lenders with bookrunner status on any ECM deals. But the Telefonica Deutschland IPO showed that there is not necessarily any practical need for a large syndicate.

JPMorgan’s dominant position is confirmed by 2012 data from business intelligence firm Thomson Reuters, which showed the bank had the largest market share in ECM deals by number – 11.6% – more than a percentage point ahead of Deutsche Bank in second. However, with the shake-out of investment banking far from over, competition to win ECM mandates remains intense. Consequently, Ms De says there is a need every day for JPMorgan to prove itself to clients and maintain their trust.

“We can never predict the behaviour of competitors. We can only make sure that our bank always has good ideas that solve clients’ needs, that we have a sense of urgency in delivering to clients and that we never become complacent,” she says.

Unified structure

The KBC rights offering showed the value of good-quality advice and a strong sales network among investors. The bank’s share price had been one of the top performers of the year in Europe already, and there was a substantial question mark over whether institutional investors would want to increase their exposure so close to the end-year returns reporting for their funds. Other investment banks approached by KBC advised against the deal, but JPMorgan found investors to be receptive, and recommended going ahead. The deal was a success, allowing KBC to exit the crisis legacy of partial state ownership and plan for its future on purely commercial grounds. Equally, the depth of experience in the ECM team made JPMorgan a natural choice for the Telefonica Deutschland deal.

“Every situation is different, but there are very few situations that are totally new – most involve learning something from what has been done before. The idea of listing a subsidiary in one country to raise capital for the parent in another country dates back at least to the IPO of Bank Austria by HypoVereinsbank in 2004, on which JPMorgan was a bookrunner,” says Ms De.

In keeping with the ongoing trend among universal banks, JPMorgan reshuffled its structure during 2012 to formally create a combined corporate and investment banking model, with Viswas Raghavan becoming head of banking in the EMEA region. Ms De says this model is improving information flows around the bank, as the ECM teams develop even deeper client intelligence at the corporate treasurer level via the corporate relationship bankers. ECM bankers traditionally interact more at the chief executive and chief financial officer level, since equity offerings are less frequent and more strategic than the foreign exchange or financing transactions.

But she emphasises that she has always encouraged ECM bankers to adopt an origination mindset, and not to simply act as a product team waiting for a phone call from a coverage banker.

Return of growth stories

As equity markets gradually reopened during 2012, there were still some European banks looking to raise capital to reinforce balance sheets and avoid taking further government assistance. The importance of JPMorgan’s own strength is well demonstrated by its omnipresent bookrunner status on peripheral rights issues that required significant underwriting commitments. They included the mammoth UniCredit €7.5bn deal in January, Spain’s Banco Sabadell and Banco Popular in February and November, respectively, and Portugal’s Banco Espirito Santo in April.

Ms De is hopeful that KBC will signal a trend for a new set of financial institution issuers aiming to exit government assistance. But in the meantime, late 2012 and early 2013 have marked the moment for overly leveraged corporates to also consider raising equity, following the Telefonica Deutschland deal. Unlike financial institutions, corporates do not face regulatory requirements, but are often motivated by a desire to avoid credit ratings downgrades and loan covenant issues.

Corporate hybrids are finding favour as a non-dilutive means to strengthen balance sheets. JPMorgan was a bookrunner on hybrid bond issues in March by Dutch telecom company KPN and by Telecom Italia.

What is missing so far is the opportunity for investors to buy into genuine growth stories, either through equity raises to finance acquisitions or through listings of former private equity assets. But Ms De says there is already movement in the mid-cap segment, such as the April 2012 €1bn rights issue to finance Finnish steel company Outokumpu’s acquisition of German peer Inoxum, and the July 2012 £1.2bn (€1.4bn) offering for UK manufacturing holding company Melrose to acquire engineering firm Elster.

“Mid-sized corporates have actually been raising a lot of capital for transformative deals that enable investors to buy into growth. We should see more if share prices keep rising, as executives have more confidence to make acquisitions if their own stock is valuable,” says Ms De.

Investor confidence

The investor environment is also supportive. Ms De says US investors returned to European equity markets aggressively in the final quarter of 2012, after almost exiting entirely a year earlier. However, rather than subscribing to the 'great rotation' theory that investors are making a broad switch from bonds into equities, Ms De says she sees funds that held a high proportion of cash beginning to commit some of that back into equity markets. But if yields remain low, the credit/equity switch could yet happen, she adds.

There has also been increased activity from sovereign wealth funds and very large pension funds acting as anchor investors in equity offerings, such as China Investment Corporation’s participation in the Moscow Exchange IPO in February 2013. Their involvement sends a positive signal to the market, and Ms De says it pays to engage them early. But she adds that the depth of independent analytical ability among institutional investors generally is increasingly impressive. This means each fund will not participate in every deal, but they are more willing to look at a positive story, even from a challenged peripheral economy.

“The structural problems have certainly not all been resolved, but the resolve to deal with them does appear stronger, and that is making investors more optimistic. Of course, the rally in stocks since October 2012 has been remarkable, and we should not expect it to continue in a linear fashion. Issuers must pick their moments, and that is what marks out a top adviser, for example the ability to help a Melrose or a Banco Popular find the right window to raise sums that are similar to their current market capitalisation,” says Ms De.

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