JPMorgan’s new TLAC-related issuing subsidiary prices its first deal with $5 million step-up

By Emma Trincal

New York, April 21 – It is now a trend. After Citigroup and Morgan Stanley, JPMorgan just priced its first offering through its new TLAC-compliant issuing subsidiary, according to a 424B2 filing with the Securities and Exchange Commission.

All three firms have put in place subsidiaries in order to issue structured notes, which are designed to comply with the Total Loss-Absorbing Capacity requirements also known as TLAC, as defined by the Federal Reserve Board’s proposed rules released in October.

Goldman Sachs had set the tone before everyone else through its GS Finance subsidiary, a vehicle that had been dormant since 2008 but began to actively issue structured notes since last summer.

JP Morgan Financial

JPMorgan Chase Financial Co. LLC, which the prospectus names “JP Morgan Financial,” began its issuing record with a simple and small plain-vanilla offering: $5 million of callable step-up fixed-rate notes due April 26, 2028 guaranteed by JPMorgan Chase & Co.

The guarantee by the parent company is necessary from a regulatory standpoint, lawyers said. The other banks’ subsidiaries share the same feature. The guarantee is clearly labeled as part of the name of the deal.

Step-up

JP Morgan Financial’s first deal features a 3% interest rate in year one through five, stepping up to 3.25% on April 27, 2021, to 3.5% on April 27, 2023, to 4% on April 27, 2025 and to 5% on April 27, 2027. Interest will be payable in arrears semiannually.

The payout at maturity will be par.

The notes will be callable at par after five years.

J.P. Morgan Securities LLC is the agent.

Third is a trend

JPMorgan created the new issuing subsidiary on Feb. 24 when filing an S-3 filing with the SEC.

A week before, Morgan Stanley filed an amendment setting in motion its own Morgan Stanley Finance subsidiary. The subsidiary priced its first deal on March 24.

Earlier last month, Citigroup was announcing its intention to issue notes through its Citigroup Global Markets Holdings Inc. subsidiary in a POSASR filing.

Citigroup Global Markets Holdings Inc. issued its first offering on March 24.

Subsidiaries

These new registration statements or amendments have a unique origin.

In October, the Federal Reserve Board proposed rules asking the 30 banks that pose systemic risk to hold a minimum amount of assets deemed to absorb losses – or “TLAC” – in case of insolvency.

The purpose of the rule, following Financial Stability Board’s recommendations, was to avoid another “too-big-to-fail” scenario.

Banks will be required in future years to hold least 18% of their risk-weighted assets in TLAC. Failure to do so would represent a violation of their capital requirements.

One issue for issuers though was the fact that structured notes do not count toward TLAC, which is an impediment for the market, lawyers said.

The way forward was to use subsidiaries as issuing vehicles as the Fed’s strict definition of TLAC only applies to bank holding companies and not to their subsidiaries.

This is why big issuing banks have decided to revive and amend existing subsidiaries or create new ones in order to pursue their structured note issuing business.

Waiting

While a consensus exists in that direction, as evidenced by the emergence of those new entities, banks may not be off the hook as of yet, a lawyer warned.

“People are using their subsidiaries and they’re looking at it,” he said.

“But we don’t have the final rules yet.

“Firms are looking down the road. They’re getting ready to comply.”

The compliance deadline is in January 2019.

“It takes time to put in place a new capital structure, which is why firms are starting the process now,” he explained.

“People are taking a little bit of risk since we don’t have the final rules yet. But most firms are confident that at least the subsidiaries will be viable vehicles.”

The comment period closed in February.

The final rules could be released in the summer, he predicted.

“We won’t see anything before mid-May. It could be June. My guess is three to four months from now.”

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