J.P. Morgan recently announced that it would be redeploying its corporate finance team, responsible for whole business transactions, into the more profitable areas of securitization business. Sources at the bank said the move does not mean the bank plans to cease its corporate securitization activity; instead it aims to provide more efficient coverage of the market.
"The message out there is that if this can be done successfully - if J.P. Morgan can combine its corporate finance focus with other core areas of the team and it works out to be more efficient, then other teams are likely to follow," said one market source.
But have whole business deals lost their appeal? According to a Fitch Ratings report, although the sector has experienced some volatility with one downgrade, one affirmation and no upgrades, the sector is poised to experience an increase in the number of transactions executed from over approximately $11.4 billion recorded last year.
Already this year there has been at least one U.K. deal - a $336 million deal, led by the old J.P. Morgan corporate team that securitized the fees charged for burial and cremation services in Dignity Finance plc.
"We feel certain that a number of inquiries we have received have reached sufficient clarity to close by the end of this year," said one source at Fitch. He added the agency is increasingly comfortable with the German legal structure, which executed the Tenovis deal last year and expected utility type deals to be forthcoming. Spain has spawned a buzz in recent months with a possible utility sector deal and Italy has executed a whole business type deal as well with its Aeroporti di Roma.
Sources added, however, that for the most part the increase in transactions would likely be supported by the already established names within sectors that have seen deals emerge - like the pub sector, for example.
It's important to remember that whole business activity is a direct hit off of corporate activity, such as mergers and acquisitions, and the low levels of corporate activity this year is likely to affect the volume of new entrants to whole business transactions.
The weakened economic environment could extend to operating companies suffering from a loss of revenue and deterioration in margins this year, said analysts. The Welcome Break Finance PLC notes were all downgraded by one notch this year following the review of the company's financial performance throughout last year. "It's not reflective of the structure specifically but more indicative of the general problems experienced within the motorway service universe," said one source.
But there's still a case to be made for these deals, sources said, highlighting that the assets generally are relatively unique, and the companies benefit from high barriers of competitive entry. At the Geneva ABS Summit earlier this year, panelists emphasized that through a whole business deal, corporates could benefit from reduced event risks.
Structural features embedded in these transactions minimize default probability for the most part as well as ratings volatility within a transaction. And the best candidates remain corporates with stable predictable cash flows.
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