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JP Morgan call on Freescale adds confusion

By Natalie Harrison and Lynn Adler

NEW YORK, Feb 28 (IFR/RLPC) - JP Morgan CEO Jamie Dimon delivered a confident message at the bank's global high-yield conference this week, telling attendees it would be no more cautious than any other Wall Street bank when it comes to lending, according to investors present at the event.

But the bank's decision not to extend a revolving credit facility for Freescale Semiconductor earlier this month, a move confirmed by two market sources, appeared to send a very different message to the market.

It was deemed an unusual decision mainly because revolvers are usually private deals with relationship banks. By not extending the maturity of the revolver, JP Morgan passed up fees, which some bankers said did not make sense as it still had to honor the existing facility.

JP Morgan declined to comment.

The revolver got done - and at a larger size. Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Barclays and Morgan Stanley all committed to the deal, which was increased by up to USD50m to a total of up to USD450m.

The decision demonstrates how carefully banks are scrutinizing which loans, and how many, they will commit to - and there is clearly a ripple effect from the leveraged lending guidance issued about a year ago by regulators.

Some reckon JP Morgan made the correct bet on Freescale, which was taken private by sponsors Blackstone, Carlyle, TPG and Permira in 2006 in one of the biggest leveraged buyouts of all time.

Although the company listed five years later, its leverage remains high.

"You could say JP Morgan has been smart," said one senior banker at a rival bank. "Maybe it made a judgment and thought the company was not a big client, and therefore, not worth doing. The bank's the largest underwriter of leveraged loans in the market, so this is only natural."

Freescale and its private equity owners were either not immediately available or declined to comment.


The rationale behind JP Morgan's decision, the sources said, was that the loan could have been considered "substandard" - one of the definitions that regulators have applied to "criticized" or "non-pass" loans under their guidelines.

Another category - "special mention" - is more common. Considered less risky, those loans are also less likely to rile regulators, bankers said.

"It's a bit like a report card. If you're going to have bad marks, you'd rather have more Bs than Cs," said the banker. "The Freescale revolver, a C grade, was substandard already."

A loan may be criticized if companies are not able to amortize or repay all of their senior debt from free cashflow or half of their total debt in five to seven years. Leverage levels exceeding six times debt to Ebitda after asset sales are also viewed as problematic.

According to Moody's latest report on Freescale, even after it pays down debt with proceeds of a recent share offering, adjusted debt to Ebitda will still remain in the low seven times range.

The guidelines aim to prevent a return to reckless underwriting practices, but until recently the market believed regulators would be more focused on new leveraged buyouts. In fact, the implications of the greater scrutiny are far wider than that.

"The guidance does capture refinancing, though not necessarily an amendment," said Tess Virmani, assistant general counsel at the Loan Syndications and Trading Association.

The Federal Reserve, the FDIC and the Office of the Comptroller were either not immediately available or declined to comment.


Even so, some argued JP Morgan was being too conservative, and said its decision was more about the bank wanting to be seen to be toeing the line, and a desire to keep out of the headlines after paying a USD13bn fine last year to settle multiple government claims over dealings in mortgage securities.

"When he was asked at the conference whether JP Morgan would react differently because of its recent issues, Dimon said he expected all banks to behave the same," said one investor who attended the leveraged finance gathering in Miami.

There is, nonetheless, growing annoyance among bankers who are convinced that regulators have not thought through the whole process.

"They have said that they don't want us to stop lending to companies that are in trouble and need financing. But there are lots of grey areas, and it's very frustrating," said the banker.

How this will all play out remains to be seen. The regulators publish report cards on banks' loans in what is known as a Shared National Credits Program to help communicate what are, and what are not, quality loans.

The SNC last year showed criticized and classified assets remained at elevated levels at 10% and 6.2% respectively in 2013. The volume of criticized assets increased 2.4% to USD302bn, but as a percentage of total commitments, the criticized asset rate fell from the year before.

One banker said it would be interesting to see the reaction to fines doled out if banks are too reckless. Others said that fines were unlikely.

"I don't think the punishment will be fines. There are lots of ways for regulators to turn up the heat. Just coming into the bank to meet the risk people, and telling them they are unhappy would be enough to get banks to stop," said a banker.