One seeming casualty of the recent merger between J.P. Morgan and Chase Securities has been its collateralized debt obligation group, which has tumbled out of the top five CDO underwriters this year after having led the market in early 2000.
The combined CDO desks of J.P. Morgan and Chase generated the most global CDO issuance of any Street underwriter in the first quarter of 2000, with $1.7 billion in new deals underwritten, according to Thomson Financial. Yet little more than a year later, despite a surge in popularity for CDOs in general, J.P. Morgan Chase has fallen to sixth in the sector with $1.2 billion in deals underwritten. Its market share, too, has taken a beating, falling all the way to roughly 7% from a combined 23.2% at this time last year.
Market sources said a prime culprit for the drop in performance was the messy merger of J.P. Morgan and Chase's CDO desks late last year, which resulted in the departure of a number of well-regarded Chase pros. Market sources said the friction was sufficient to cause some CDO issuers to bypass the new entity altogether.
J.P. Morgan Chase officials take issue with that version of events, contending that it has integrated the Chase and J.P. Morgan groups fairly equally and retained a number of officials from both firms on its current desk. The company recently realigned its CDO business groups into structured credit products groups that cover insurance companies, hedge funds, and asset managers, among other companies. There are 30 to 40 people now in its CDO origination group.
However, the group has taken an undeniable swoon in the league tables, and the timing couldn't be worse. The CDO market has been booming so far in 2001, and has become the centerpiece of many underwriters' strategies in structured finance. CDOs are seen as being more innovative and profitable in an era when many asset-backed securities types are becoming more commoditized.
Already this year, there have been $17.4 billion in new CDOs issued, compared with $7.3 billion in first-quarter 2000, and a number of underwriters have greatly increased their market share, especially Credit Suisse First Boston and Lehman Brothers. Lehman in particular has come on like gangbusters in CDOs, with a roughly 16% market share last week compared with 2.6% a year ago.
Beyond the norm
A temporary decline in performance is often a natural occurrence for any underwriter undergoing a major consolidation, thus many Street pros were not surprised that J.P. Morgan Chase took a tumble in CDOs in recent months. Yet the apparent severity of the drop had many rival banks wondering just what has happened in the newly merged group.
After all, J.P. Morgan Chase has held firm in other areas of the debt markets despite last fall's merger. It was the third-ranked underwriter of global ABS and U.S. commercial mortgage-backed securities in the first quarter, and has kept pace in other markets like investment-grade debt.
For its part, J.P. Morgan Chase argues that its first-quarter performance was merely an anomaly, and that the CDO desk will be back up to snuff in the next two quarters it has a number of major deals in its pipeline. Indeed, the company is so confident in its CDO unit that it recently trumpeted an on-line CDO product designed to appeal to Internet investors.
Its longer-term arguments may well prove correct, but in the meantime, there is still the fallout from the heavy-handed consolidation last year. The Chase staff included a number of highly regarded pros who had long tenures in the CDO market-former Merrill Lynch pro Frank Ronin and Moody's Investor's Services Eileen Murphy, for example, both lost their jobs to J.P. Morgan's CDO desk.
That particular move seemed wrong-headed, sources said, because it was Chase that had been publicly ramping up its structured finance operation in the last year, snagging key officials and making strong moves to establish a beachhead in CDOs. Sources at J.P. Morgan Chase said that most of the departures happened on the senior-most level, and that much of the core Chase business has remained.
There have been other structured finance departures from J.P. Morgan Chase in recent weeks. For example, John Rhinelander, who had been appointed head of domestic ABS at the company following the merger, resigned in late March. Rhinelander had come from the J.P. Morgan side of the business. Other recent losses include Steve McGarvey, Richard Lawrence and Peter Todd.