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JPMorgan profit sinks to lowest since 2013 on virus fallout

JPMorgan Chase & Co. said first-quarter profit tumbled 69% to the lowest in more than six years as credit costs surged, giving investors a first glimpse at the extent of the damage Covid-19 is wreaking on bank results.

The company set aside $8.29 billion for bad loans, the biggest provision in at least a decade and more than double what some analysts expected, as it grappled with the effects of the coronavirus pandemic on the economy. That prompted JPMorgan’s first drop in profit since the fourth quarter of 2017.

Chief Executive Officer Jamie Dimon warned earlier this month that the bank wouldn’t be immune to fallout from the pandemic, predicting in his annual letter to shareholders that the economy would suffer a “bad recession” and financial stress mirroring the 2008 financial crisis.

“Given the likelihood of a fairly severe recession, it was necessary to build credit reserves,” Dimon said in a statement Tuesday. “The first quarter delivered some unprecedented challenges and required us to focus on what we as a bank could do — outside of our ordinary course of business — to remain strong, resilient and well-positioned to support all of our stakeholders.”

The damage at JPMorgan hints at what’s to come when the rest of Wall Street reports results this week. Wells Fargo & Co., which also disclosed a surge in credit costs Tuesday, will be followed Wednesday by Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. Morgan Stanley is scheduled for Thursday.

Some of the declines at JPMorgan were offset by gains in the bank’s trading operation, which benefited from record volatility during the quarter as investors moved in and out of positions in response to the unfolding crisis. The bank generated $7.23 billion from trading stocks and bonds, the most on record, according to data compiled by Bloomberg.

The trading gains came off a wild three months for the markets, with stocks reaching record highs in January only to suffer the biggest decline since the 1987 crash as the extent of the pandemic started to become clear.

Equities traders generated a record $2.24 billion in the quarter, 28% more than a year earlier, driven by derivatives. Bond-trading revenue rose 34% to $4.99 billion, the highest in nine years.

Revenue and profit fell in all but one of the bank’s four major business lines, driven by a 95% drop in net income in the massive consumer unit as the division set aside $5.77 billion of provisions for credit losses. The unit generated $191 million in profit.

The corporate and investment bank, which houses the trading and banking businesses, was the most profitable unit, earning $1.99 billion, or 39% less than last year. The asset and wealth management unit was the only division to see revenue rise, up 3% from last year’s first quarter.

The bank on Tuesday lowered its full-year outlook for net interest income — revenue from customers’ loan payments minus what the bank pays depositors — by $1.5 billion to $55.5 billion. The revenue source accounted for about half the company’s total last year, and in the past has helped counter more volatile results in the trading and investment-banking divisions.

The crisis is still relatively new, and net charge-offs actually fell from the fourth quarter. But the bank increased its loan-loss reserve by more than $11 billion as it braced for higher credit-card defaults and saw corporate borrowers tap $50 billion worth of existing credit lines. The total allowance for possible loan losses rose to $25.4 billion, the highest since 2012, boosted by a $4.3 billion increase from new rules the bank had previously announced and a $6.8 billion reserve build.

JPMorgan and other banks adopted a new accounting standard this year known as CECL, which aims to push banks to set aside provisions earlier in a cycle.

The Federal Reserve had two emergency rate cuts, bringing the central bank’s benchmark to virtually zero. The action came as more evidence emerged that the U.S. economy was being hit hard by the virus and the global economic shutdown.

For its part, JPMorgan has been waiving fees for some loans, allowing customers to defer payments on mortgages and auto loans, and removing minimum payment requirements on credit cards. It’s planning to lend an additional $150 billion to clients across the world.

The bank got caught with $13 billion of loans in its bridge book in the first quarter, which resulted in an $896 million pretax markdown as credit spreads widened. That’s about a quarter the size of the book going into the last crisis. Dimon said he expects some of the deals to get syndicated by the end of the second or third quarters.

“We’re adults, we’re going to have quarters” with losses, Dimon said on a conference call with analysts. “We’re a leader in leveraged lending, we’re a leader in high yield, and we intend to maintain that position,” he said.

Dimon also said the bank is willing to sustain losses to help support the economy.

“If we can help the country get through this, everybody’s better off,” he said. “If we lose a little more money in the meantime then so be it.”

Dimon, speaking less than six weeks after undergoing an emergency heart procedure that forced him to temporarily relinquish control of the firm, said his views on retirement haven’t changed. “I was eager to get back to work,” Dimon said on a call with reporters. “Having purpose in life is a good thing.”

KBW analysts led by Brian Kleinhanzl said in an April 8 report they expect provisions to peak in the second quarter as banks build reserves in advance of expected charge-offs under the newly adopted CECL accounting rules.

Investors and analysts are taking comfort in the fact that banks are entering the uncertain period with higher capital levels than they had during the 2008 financial crisis.

“The company entered this crisis in a position of strength, and we remain well capitalized and highly liquid – with a CET1 ratio of 11.5% and total liquidity resources of over $1 trillion,” Dimon said in the statement.

While the results offer a look at the impact of the virus, the picture is somewhat muddled because they include January and February, before government lockdown measures began in earnest. Analysts are expecting future quarters to show even more damage to consumer businesses, as near-zero interest rates and rising unemployment take a toll.

Analysts at Jefferies Financial Group warned before earnings were released that traditional credit metrics would be thrown off by “forbearance programs aimed at limiting long-term effects on the economy,” such as the payment deferrals JPMorgan has offered on consumer loans.

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Coronavirus forces triage on private equity-backed healthcare deals

The impact of the Covid-19 pandemic on the healthcare sector is immense and varied, with nuances by subsector and geographic region. A significant aspect of the emergency and acute care delivery system has mobilized to address the virus while healthcare services focused on non-essential and elective care have been delayed. …

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Deliveroo, Graphcore and other big UK startups say they’re being cut out of COVID-19 lending relief

The UK government, like a number of other countries around the world such as the US, has stepped up its pace in providing relief in the form of loans for businesses being impacted by the coronavirus health crisis and the related shutdown that we’ve seen across the economy and life as we knew it. But startups in the UK are increasingly getting worried that they are being left behind.
An open letter to the Chancellor published today and signed by the UK’s biggest “scale-ups” — later-stage, highly valued, but still venture-backed (and often loss-making) startups such as Deliveroo, Benevolent …

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5 years of M&A Mid-Market Award winners: Piper Jaffray, Robert F. Smith, Audax and Twin Brook among this year’s honorees

Honors an individual who made a significant impact on M&A. The award goes to an individual. All dealmakers are eligible.

2019: Robert F. Smith 2018: Hollie Haynes, Luminate Capital Partners2017: Randy Jacops, Idera2016: Greg Sandfort, Tractor Supply2015: David Brackett, John Martin, Anatares

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Delphi draws down credit facility, gets warning from BorgWarner about pending deal

BorgWarner Inc. may back away from its $1.5 billion deal for Delphi Technologies Plc after the latter auto-parts supplier tapped out its credit line without receiving permission from its acquirer.Delphi drew down its full $500 million revolving credit facility to position for the downturn related to the coronavirus pandemic, the Gillingham, …

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BDCs that got funding prior to crisis ready for revolver rush

Private credit firms that are flush with funds after raising money in debt markets just weeks ago may soon be asked to lend that cash to their middle-market borrowers.Business development companies, which make up a $112 billion corner of the private credit universe, hit the high-grade bond market in droves …

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Private equity deals will slow down, as global economy stalls amid coronavirus pandemic

“As we enter the most significant market drawdown and economic shock since the global financial crisis, private equity and venture capital will undoubtedly be challenged,” according to a recent report from PitchBook.“The asset classes are equipped to alleviate pressures.”Here are some of the highlights of PitchBook’s report, …

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M&A wrap: Aflac, Varagon, AIG, Apax, L Catterton, IOP, Rockwell, Most Influential Women, Call for Nominations


Aflac Global Investments, a subsidiary of insurer Aflac Inc. (NYSE: AFL) is forming a partnership with middle-market lender Varagon Capital Partners. Varagon is also extending its partnership with American International Group. Aflac is committing up to $3 billion for Varagon to invest in mid-market loans, and is also buying the minority stake in Varagon held by former and current Oak Hill Capital partners and affiliates. Aflac and AIG will own equal stakes in Varagon, and the deal does not reduce Varagon’s ownership. “Middle market credit is a strategically important asset class for Aflac and we are excited to partner with Varagon,” says Aflac global chief investment officer Eric Kirsch. Varagon made about $14.5 billion in financing commitments to around 180 companies, as of Dec. 31. “These long-term commitments from two world-class insurers provide access to substantial capital, enhance Varagon’s capabilities to serve investors and borrowers, and accelerate the execution of our strategic growth objectives,” says Varagon CEO Walter Owens. Wells Fargo Securities and Davis Polk & Wardwell LLP are advising Varagon. Rothschild and Debevoise & Plimpton are advising Aflac. Cadwalader, Wickersham & Taft LLP is representing AIG.

Mergers & Acquisitions has opened up the nomination process for the 13th Annual M&A Mid-Market Awards, which will honor leading dealmakers and deals that set the standard for transactions in the middle market in 2019. Nominations are accepted only through our electronic forms. The deadline is Friday, Feb. 7, 2020. There is no fee. For more information on the nomination process and what we seek in winning candidates, see Call for nominations: Submissions for the M&A Mid-Market Awards due Feb. 7.

CLICK HERE TO SUBMIT A NOMINATION.

DEAL NEWS
Apax Partners and L Catterton have invested $285 million in ClassPass, which gives people access to gyms and fitness studios and allows them to make reservations online. Apax and L Catterton join existing investor Temasek. Kirkland & Ellis represented L Catterton

Industrial Opportunity Partners has acquired acquired Midwest Recycled and Coated Containerboard Mill. The latter manufactures recycled containerboard, for packaging, recycled bag products and white paper for book publishing and printing materials. McDermott Will & Emery represented IOP. JP Morgan Chase Bank and Yukon Partners provided financing.

Human behavior and data analytics firm Escalent has purchased Javelin Strategy & Research from Greenwich Associates. The deal expands Escalent’s presence in retail and small business banking. Marlin & Associates advised Javelin.

Entrepreneurial Equity Partners-backed Daniele International has merged with Creminelli Fine Meats. The target is a producer of charcuterie and protein snacks. BofA Securities advised the Creminelli.

Rockwell Automation (NYSE: ROK) is buying cybsecurity company Avnet Data Security.

PEOPLE MOVES
Mark Satran has joined aerospace and defense-focused private equity firm AE Industrial Partners as a senior managing director. He was previously with Alterna Capital Partners.

Ian Read, a former Pfizer (NYSE: PFE) CEO, was hired by the Carlyle Group (Nasdaq: CG) as an operating executive in the firm’s healthcare group. Read will help Carlyle find healthcare investments. Separately, Carlyle partner Bryan Corbett was hired by the Managed Funds Association, the hedge fund’s industry main trade association, as its new president. The group lobbies on tax and financial regulation issues.

WIlliam Perlstein has joined FTI Consulting Inc. (NYSE: FCN) as a senior managing director and vice chair, client services. He was most recently with BNY Mellon.

Brian Brownschidle, Roger Gill and David Lloyd have been promoted to managing directors at financial services firm XMS Capital Partners.

FEATURED CONTENT
If there’s anything M&A professionals dislike, it’s uncertainty. And heading into 2020, there’s more than enough uncertainty to go around, including questions about the economy, international trade, impeachment, domestic politics and more. The funny thing is, the lack of clarity may actually make the first half of the year a great time for M&A, as dealmakers push to close transactions before the looming uncertainty of Election Day and its outcome. We conducted interviews with 8 investment bankers and other M&A advisors. Some said the first half of the year will be robust, while others said the uncertainty may have a negative impact throughout 2020. Read the full story, What’s ahead for M&A in 2020? We ask 8 advisors.

Mergers & Acquisitions has named the 2020 Most Influential Women in Mid-Market M&A. This marks the fifth year we have produced the list, which recognizes female leaders with significant influence inside their companies and in the wider dealmaking world. It’s been gratifying to watch the project evolve over the years – and become more influential itself. This year, we received more nominations than ever before. As a result, we expanded the number honored to 42 in 2020, up from 36 in 2019. Many dealmakers are new to our list, including Rockwood Equity Partners’ Kate Faust, William Blair’s Shay Brokemond and Avante Capital Partners’ Ivelisse Simon. Read our full coverage of all the champions of change on our list, including Q&As with each individual.

Mergers & Acquisitions examines the impact of 7 technologies on M&A in the retail sector. Read the whole series:

Overview: Retail Tech M&A: 7 Technologies Driving Change
Retail Tech M&A #1: Nike, McDonald’s, PayPal, add customization, IoT
Retail Tech M&A #2: Why Walmart and other retailers are buying artificial intelligence startups
Retail Tech M&A #3: Amazon leads race to build fulfillment centers
Retail Tech M&A #4: Do robots fill orders faster?
Retail Tech M&A #5: Voice recognition gives retailers more ways to communicate
Retail Tech M&A #6: Data improves customer service
Retail Tech M&A #7: Demand for convenience drives growth in mobile ordering

Albertsons, Kroger Co. (NYSE: KR), Stop & Shop and Walmart (NYSE: WMT) are building automated mini-warehouses and “dark stores” to make deliveries and prepare pickup orders. Mini-warehouses are usually attached to existing stores, and in most cases, “dark stores” are completely separate. Both formats are closed off to customers, and are mostly automated. They use the assistance of robots for speed, save on labor, and get orders out faster. Kroger bought a five percent stake in robotics firm Ocado. Read our full coverage: Smart supermarkets become popular, as Kroger, Walmart add them.

To celebrate deals, dealmakers and dealmaking firms, Mergers & Acquisitions produces three special reports every year: the M&A Mid-Market Awards; the Rising Stars of Private Equity; and the Most Influential Women in Mid-Market M&A. For more on the timeline and nomination process for each, see Special reports overview: M&A Mid-Market Awards, Rising Stars, Most Influential Women.

EVENTS
The Annual AM&AA Winter Conference is taking place in Scottsdale, Arizona Jan. 8-10.

Deal Wave is being hosted by ACG Orange Country at the Ritz-Carlton-Laguna Niguel in Dana Point, California on Jan. 9.

ACG New York is hosting the 12th annual healthcare conference and bourbon tasting at the Metropolitan Club in New York on Feb. 27.

Source: The Latest

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A $41 Billion pension fund is betting big on private credit


Arizona’s $41 billion State Retirement System is looking to dedicate one out of every six dollars it manages to direct lending — more than five times the industry average — in a move some see as a harbinger of what’s to come for the booming asset class.

Investors have plowed hundreds of billions of dollars into private-credit funds in recent years, lured by premiums that are more than five percentage points higher than competing public debt. Yet less than 3% of pension portfolios were dedicated to the sector as of December, according to London-based research firm Preqin. That may be about to change.

In a recent survey of firms managing nearly $400 billion in private-credit strategies, nearly 90% said they expect pension funds to up their allocations over the next three years. The Ohio Police & Fire Pension Fund said this month that it was cutting its high-yield exposure as it moves toward a 5% target for private debt. And in its most recent financial statement, the Teachers’ Retirement System of the State of Illinois said it “continues increasing exposures to private debt opportunities,” even as it retreats from fixed income broadly.

“We’ve been invested in private debt since early 2013,” said Al Alaimo, who oversees the Arizona fund’s credit investments and aims to boost direct lending, one of the most popular private-credit strategies, to 17% of the portfolio, from about 13.6% previously. “We were very conscious that we were an early adopter and we tried to lock up as much capacity as we could with managers we perceived as being the best.”

Now others funds are catching on, too.

The number of U.S. public pensions active in private credit climbed to 281 this year, with a median allocation of 2.9%, up from 186 and 2.1% in 2015, according to Preqin.

That may not seem like much, but with $4.57 trillion in assets, even incremental increases in exposure can mean billions of dollars in inflows for alternative credit managers.

The Arizona State Retirement System invests with some of the biggest players in the business, including Ares Management, HPS Investment Partners, Cerberus Capital Management, GSO Capital Partners, Oaktree Capital Management and Monroe Capital, according to fund documents.

With a growing scarcity of higher-paying assets to help pension managers meet their long-term obligations, the shift toward private debt appears poised to accelerate.

Yields on more than $11 trillion of debt around the world are still in negative territory. Blue-chip U.S. company bonds pay roughly 2.9%, near multi-year lows, while speculative-grade notes yield about 5.1%, the least since 2014.

Direct lending, in contrast, offers an average yield pickup of 5.14 and 5.3 percentage points versus the average rate on speculative-grade bonds and leveraged-loans, according to a Goldman Sachs Group Inc. analysis based on data through June 30.

That’s helped assets in private-credit strategies balloon to more than $800 billion.

Yet all that money pouring in is making the asset class more competitive, and thus less attractive, according to Neil Sheth, director of global research for NEPC. The influx of cash may fuel weakening lending standards, and the investment consultant, which counts public pensions like the Arizona fund as clients, is urging investors to be diligent committing significant capital to such an illiquid asset class amid a maturing credit cycle.

“If you’re just learning about and thinking of putting a lot of capital in the space right now, you’re too late,” Sheth said.

The Arizona retirement system — which oversees the benefits of nearly a quarter-million people — is already exploring alternatives strategies such as litigation finance and securities backed by aircraft leases to help boost returns going forward.

These more opaque corners of the market are part of its push to bring its investments in illiquid credit to nearly a quarter of its portfolio over a three-year period, according to Alaimo.

“We wish there were fewer people in the marketplace,” Alaimo said. “However, the reality is if you partner with the right managers, they can be discriminating in the deals that they do.”

Source: The Latest