After leading two big issues in just two weeks, bankers in J.P. Morgan & Co.'s asset-backed securities unit are flush with success.
In late October, Morgan sold $510 million worth of securities backed by automobile loans for Daimler-Benz North America. In early November, Morgan sold $460.7 million worth of securities backed by farm equipment loans for J.1. Case, a subsidiary of Tenneco Corp.
For the executives who run Morgan's securities subsidiary, these two high-profile deals are proof that their firm -- a relative newcomer to the securities business -- is poised to emerge as one of the biggest underwriters in the $60 billion asset-backed market.
|Bulge Bracket' Aspirations
From their point of view, it is only a matter of time before they join the sector's "bulge bracket" -- the elite cadre of investment banks that underwrite the bulk of issues. Morgan's securities unit can one day expect to generate as much as 1% of the total value of the securities as fees from such deals.
"We no longer view ourselves as the new kid on the block," said Peter Atwater, the vice president in charge of J.P. Morgan Securities' asset-backed unit.
To be sure, J.P. Morgan Securities Inc. has a long way to go to earn bulge-bracket status. So far this year, it has led only $1.7 billion worth of asset-backed issues.
Long Way to Go
That's a far cry from the $14.5 billion worth of issues led by market leader CS First Boston in just the first three-quarters of 1993. In fact, First Boston, along with the No. 2 market leader, Merrill Lynch & Co., underwrote more than 50% of the $40 billion worth of asset-backed securities issued during the first nine months of the year.
But according to Mr. Atwater, those firms' virtual stranglehold on the industry can be loosened. "The feedback we get from our clients has all been consistently good," he said. "They view us as competitive in this sector as any member of the bulge bracket."
Observers agree that Morgan may have an opportunity to steal share. For one thing, some of the biggest firms have recently lost top members of their asset-backed staffs to their competitors, meaning some business may be up for grabs. And the Daimler-Benz and J.L. Case transactions are seen as evidence of Morgan's growing capabilities.
Feather in Their Cap
"As far as Daimler-Benz goes, it's a quality name," said Daniel Castro, director of asset-backed securities research at Merrill Lynch. "It's significant that they were able to do that."
The transaction was also the first asset-backed deal Morgan led for a firm in the automotive industry -- one of the market's most active sectors. It followed that with the J.1. Case issue, which was backed by farm equipment receivables, another new area for Morgan's underwriters.
Daimier-Benz "was their stepping out into the corporate market," said one banking industry client of the Morgan unit. "What might be imparted here is that they are looking at these transactions from an investment banking perspective, with an eye on structuring and distribution."
The First Try
The Daimler-Benz issue was that company's first foray into the market, adding to its significance, this banker said.
"For someone new in the marketplace, you've got to do a lot of premarketing education. It's a step forward" for Morgan.
J.P. Morgan Securities began working on asset-backed deals in 1989 -- the year it gained regulatory permission to underwrite corporate debt. Since then, it has been steadily building its business, participating in the selling group or acting as comanager or co-lead on 139 issues.
To date, Morgan has only landed the coveted, and lucrative, role of lead manager on seven asset-backed issues, or $3.8 billion worth.
Gaining Momentum
But Mr. Atwater said Morgan has been gaining momentum during the latter part of this year. He is predicting that Morgan in 1993 will lead close to $4 billion worth of issues. It has led $1.72 billion this year to date.
Securities backed by credit card, automobile, home equity, and other receivables represent just a small portion of corporate debt issuance. But according to Morgan officials, some of the company's oldest clients are active issuers. So Morgan needs to have sophisticated asset-backed capabilities to keep those customers happy.
It is that kind of relationship banking mentality that is helping Morgan win business, its competitors complain. J.P. Morgan's banking subsidiary, Morgan Guaranty Trust, for instance, is the lead bank on Tenneco's revolving credit.
Useful Connections
Did that influence Case's decision to grant Morgan's securities unit the lead role on its latest issue?
"It didn't hurt," said Robert Wegner, vice president and controller of Case Credit Corp. "We view it as part of the overall relationship we have with them."
Still, Mr. Wegner characterizes Case's choice of Morgan as a natural rotation of its investment banks. Case does business with several Wall Street firms and likes to give each the opportunity to lead one of its many issues. Morgan had comanaged Case issues earlier this year.
"They did a very good job on the transaction they just completed for us, and I would use them again," Mr. Wegner said.
|Relationships' Played Down
Mr. Atwater takes issue with the claim that Morgan's progress in the asset-backed market is due to the blue-chip firm's longstanding relationships.
"Relationship gets you access, but this is a sector that is so competitive," he said. "To say that Morgan is getting business just based on relationships is really unrealistic."
Instead, he credits Morgan's ability to place and distribute issues and the structuring advice it provides to its clients. He said Morgan is also willing to devote extra time to help issuers solve unique problems.
Praise from Issuers
Active issuers agree that the firm has a thorough approach. One treasurer said that when Morgan leads a transaction, it works well with investment banks comanaging the deal, ensuring that all participants are well informed and involved.
Indeed, even issuers for which Morgan hasn't yet led a deal say the firm's work has been impressive.
"We have recognized their abilities for quite some time," said Christopher Rutkowski, director of U.S. borrowings at General Motors Acceptance Corp., a regular and high-volume issuer in the asset-backed market.
Morgan has comanaged several GMAC deals. According to Mr. Rutkowski, the Daimler-Benz and J.L. Case issues could help Morgan land a lead role in an upcoming GMAC issue.
"Leading a transaction for another issuer is a positive factor," Mr. Rutkowski said. "That experience is valuable. Nothing says they wouldn't lead a deal for us."
Morgan's Roster
Asset-backed issues led by J.P. Morgan Securities ValueDate Issuer (Millions)Nov. '93 J.L. Case $460.7Oct. '93 Daimier-Benz 510.2 North AmericaAug. '93 MBNA Corp. 750.0Dec. '92 Citicorp 180.0 Choice Credit CardMay '91 MBNA Corp. 750.0March '91 MBNA Corp. 500Sept. '90 Valley 300.0 National Corp.
Source: J.P. Morgan Securities Inc.
