Winner: JPMorgan

Project Appia, which JPMorgan closed on the final business day of 2023, represented perhaps the largest and most complex set of SRT transactions the market has yet seen. For its efforts in bringing this landmark deal to the market, JPMorgan is SCI’s North American Issuer of the Year.

The reference pool in Project Appia was huge, perhaps unprecedently so, totalling some US$22bn. The programme encompassed five separate transactions, each with different tranche thicknesses, attachment points and pricing.

It seems now that all the tranches came in south of 10%, rather than the typical North American 0%-12.5%, as was initially rumoured. Pricing was similarly idiosyncratic, but sources suggest all were “high single-digits.”

JPMorgan declined to comment for this piece.

The assets varied as well and were a mix of investment grade and high yield revolving loans, originally written from the revolver desk, not the loan desk. This meant every separate transaction had documentation that was entirely discrete and JPMorgan was obliged to negotiate with five different legal teams – one for each trade.

All trades emanated from a fully cash collateralised bankruptcy-remote SPV. The independence of the issuing entity was required to avoid the Volcker Rule and the regulatory purview as a commodity pool operator, but of course added to structuring complexity.

However, all were also entirely bilateral and customised to meet the individual needs of each buyer.

And yet all these pieces had to be put in place in an eight-week period beginning in early November, when the bank received notification that the US Federal Reserve would look kindly on the various transactions as legitimate synthetic regulatory capital trades and ending the deal when closed at the end of the following month.

These two months strained the capacity of the team at JPMorgan mightily, but it got the trades over the line. The effort was led by Charles Martino, global head of strategic and tactical structured solutions, reporting to Masi Yamada, head of global investor structuring.

Martino is responsible for the entire SRT initiative at JPMorgan, while Francois Belot, head of SRT execution, spearheaded the landmark Project Appia on the ground.

It is thought that five investors, taking one leg each, bought pieces of Project Appia, and the names of Ares, Blackstone, DE Shaw, LuminArx and PGGM were mentioned in press reports last year. However, the participation of only a couple of these shops has been confirmed.

Some of these buyers have been involved in the SRT market for a long time and have a longstanding relationship with the bank. Those who have worked with it before offered high praise of it.

“It’s a very high-quality issuer. It’s a serious organisation and willing to work with investors to achieve desired results. The bank thinks creatively about how to meet different needs of investors in a single transaction and dedicates a lot of resources to deals,” said one.

The bank had been looking at this kind of mega-deal for some seven or eight years, but it was the initial proposals in what became known as the Basel 3 Endgame (B3E) in July 2023 which concentrated minds at JPMorgan. In the original iteration of B3E, the bank was looking at an increase in capital requirements of at least 20%.

Only a very large deal – a US$22bn deal – could make any sort of meaningful dent in these obligations. For a bank with a vast balance sheet, smaller, more usual SRT deals would have no impact whatsoever; it had to go big.

Chief executive officer Jamie Dimon, who last year was outspoken in his criticism of the extra burden that was about to be placed on US banks, was fully involved in Project Appia from the outset. Indeed, it is suggested that the impetus for Project Appia emanated from the C-suite.

Since then, the Federal Reserve has rowed back from its original position and increased capital requirements will be closer to 9%. Consequently, it now seems possible that JPMorgan will not hit the market in such size again. It will, however, continue to make use of the mechanism and has several deals shaping up for 4Q24, say sources.

It sees SRT not merely as a means by which the burden of risk weighted assets can be reduced, but as a risk transfer as well. When there are multiple assets from unlisted private names on the balance sheet, the reg cap trade often represents the only hedge in the market.

It might have been thought that the market did not have the kind of capacity to absorb such a large trade. Many traditional SRT buyers have relatively limited books and, in this trade, the smallest ticket was around US$200m and the largest perhaps US$500m.

Yet JPMorgan was convinced that the demand was there. The hunger for SRT deals from private credit firms, particularly a year ago before spreads tightened so significantly, was yawning. Risk transfer deals not only offered above market returns, but private credit funds earn fees immediately rather than being obliged to wait for the ramp-up period.

Another buyer who worked with JPMorgan before also paid fulsome tribute to the skills on offer at 270 Park Avenue: “The bank has a high level of intelligence when it comes to how to use the tool. It doesn’t look at the tool as a static thing, and just roll out deals as it has always done; it looks at it dynamically to achieve what we and the bank needs.”

The belief that the demand was there, and that it possessed sufficient in-house capacity and expertise to get these deals into the market quickly and successfully, was triumphantly vindicated.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.