JP Morgan Cazenove profits from cash calls

Investment bank helped by slew of rights issues
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The investment bank JPMorgan Cazenove, since 2004 half-owned by the US banking giant JP Morgan, yesterday said the recent slew of rights issues has helped it in 2009 as it reported a fall in earnings for last year.

The blue-blood broker and investment bank, which JP Morgan has the option to buy out completely from next February, posted a 15 per cent fall in pre-tax profit for 2008.

"In the first quarter of 2009 there has been a significant volume of capital issuance both in equity and debt, and JP Morgan Cazenove has raised capital for a wide range of clients," the bank said, adding that it was well-positioned "to maintain profitability despite the current difficult market environment".

The firm, however, kept a tight control on costs in what remains a challenging market, the chief executive, Naguib Kheraj, said.

The bank has sold its Asian operations to Standard Chartered and exited its activities in France and Germany. Excluding such sales, JP Morgan Cazenove's number of employees fell by 8 per cent, as it shed about 70 workers. Revenues fell 10 per cent to £395m, but operating profits from its UK operations was up 7 per cent to £144m.

In a year's time, Cazenove could require JPMorgan to buy the other 50 per cent share in the joint venture or JPMorgan could choose to do so, but the firms have held no conclusive talks on the future of the business yet, Mr Kheraj said.

JPMorgan Cazenove has a foot in the door for a lot of deals, as it is broker to 35 FTSE 100 companies and has 78 clients in the FTSE 250 as well as 119 smaller companies.

A major current source of revenue for the bank is the recent rash of rights issues. Unlike the virtually non-existent initial public offering market, listed companies are turning to stock markets for discounted rights issues in their droves. Banks are reacting to this and often raising their fees for such deals.

While emergency cash calls last year were the preserve of distressed banks, in 2009 just as the credit crunch has advanced through the economy so has the prevalence of rights issues. Companies from real-estate investors to insurers and miners have all come to market. And even banks have continued to seek cash, with the UK's biggest-ever rights issue announced this week, as HSBC surprised the market with a £12.8bn cash call.

As economies around the world have slowed and entered recession, a variety of different factors have come into play that have prompted companies to turn to rights issues. First and foremost is the lack of availability of debt, and the reluctance of banks to merely roll over outstanding company loans in refinancings. They are routinely refusing to extend loans, or asking for much higher rates of interest or tighter covenants. So companies are turning to equity markets instead for money.

Banks are still trying to offset writedowns, and with the alternative often being part state-ownership, are trying to get cash from existing investors if they can. Both HSBC and Standard Chartered, which has raised £1.8bn, have brought in business for JP Morgan Cazenove.

Among miners, high debt and tumbling commodity prices are stretching balance sheets, prompting some to sell assets or even stakes to bring in enough cash to keep their lending banks happy. Others are tapping investors in rights issues, and Cazenove worked on a £4.1bn effort by Xstrata.

Insurers on the Lloyd's of London market, meanwhile, need cash to expand and take advantage of troubles at their bigger rivals such as AIG of the US, and also to counter the effect of the rising US dollar, which is forcing them to set more cash aside to cover claims by US policyholders. Beazley, Chaucer and Catlin, which used Cazenove, have all tapped the market in recent weeks.

Finally, property companies with assets tumbling in value, stretching their loan covenant ratios, are turning to rights issues, Hammerson, British Land and Land Securities – which used Cazenove – are among them.