Rating Agencies Warm to JPMorgan/Bear Stearns Deal
Credit rating agencies have given a cautious nod of approval to JPMorgan Chase’s pending purchase of Bear Stearns.
Standard & Poor’s placed its ‘BBB’ long- and ‘A-3′ short-term counterparty credit ratings on The Bear Stearns Cos. Inc. (NYSE: BSC) on CreditWatch with developing implications. The ratings had been placed on CreditWatch with negative implications on March 14, 2008. At the same time, Standard & Poor’s affirmed its ‘AA-’ long- and ‘A-1+’ short-term counterparty credit ratings on JPMorgan Chase & Co. (NYSE: JPM).
We consider the acquisition of Bear by JPMC as positive, as it will
permit Bear to meet its obligations through funding sources obtained directly from its new parent.
“The ratings on JPMC reflect our expectation that the bank’s
post-acquisition capital and leverage metrics will remain satisfactory. JPMC is acquiring some valuable businesses, such as Bear’s prime brokerage and clearing operations, which we do not expect will add much risk to its balance sheet. We assume that the integration of these businesses will be smooth, given JPMC’s great familiarity with these activities, and our expectation that the bank will have free rein to act quickly in assuming management oversight.
In the longer term, we expect that JPMC will benefit from the incremental income that the acquisition of Bear’s activities will provide.
Moody’s Investors Service affirmed its rating on JPMorgan Chase & Co (senior at Aa2), and its subsidiaries, including its lead bank, JPMorgan Chase Bank N.A. (financial strength at B+, and long-term deposits at Aaa).
Moody’s said that the affirmation was based on its view that 1) JPM will be able to effectively oversee BSC’s trading activities which it is guaranteeing; 2) the terms of the transaction provide good protection for its investment in and guarantees of BSC against potential future write-downs of BSC’s assets; 3) JPM’s currently strong capital ratios will fall only marginally in the near term, and 4) JPM has the ability to integrate BSC’s businesses into its operations.
“Going forward, the maintenance of strong capital ratios is important because JPM’s ability to generate capital will be challenged in 2008 by its need to take heightened credit costs in its own businesses.” said Moody’s Senior Vice President Sean Jones.
Despite a challenging environment, JPM’s effort to consolidate its numerous business platforms in recent years gives it the flexibility to absorb this acquisition.
Fitch Ratings affirmed the ratings of JPMorgan Chase and also upgraded the Long-term Issuer Default Ratings (IDRs) for Bear Stearns and its subsidiaries to ‘A-’ (A minus) from ‘BBB’ and placed Bear’s Long-term and Short-term IDRs on Rating Watch Positive (RWP).
The affirmation of JPMC’s ratings reflects Fitch’s belief that the transaction as structured does not significantly increase JPMC’s risk profile nor materially dilute its capital structure or liquidity position.
A number of BSC’s core businesses are complimentary to JPMC’s existing investment banking business, particularly its large, profitable clearing and prime brokerage operations. The transaction is expected to be immediately accretive to JPMC’s earnings.
CreditSights says “this was the best deal on the table from the regulatory viewpoint in order to stabilize and guarantee trading obligations of counterparty exposures immediately with JPMorgan as the resulting counterparty.”
“In hindsight,” CreditSights says Bear Stearns should have sought a stronger merger partner much earlier on in the credit crunch or sometime in the late summer through the fall to winter.” CreditSights notes that the “distraction” of the Bear deal makes a JPMorgan bid for Washington Mutual (NYSE: WM) less likely even though “the low price paid for Bear Stearns could leave JPMorgan with sufficient financial resources to make a bid for WaMu.”
So, we think the Bear acquisition lessens the likelihood that JPMorgan would make a bid for WaMu, although we cannot rule it out entirely.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.