- NEW YORK (Reuters) - Moody's
Investors Service on Wednesday cut J.P. Morgan Chase & Co.'s JPM.N
long-term debt ratings, reflecting concern about the No. 2 U.S. bank's
near-term ability to maintain "acceptable profitability" as investment
banking revenue falls and loan losses mount.
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- The downgrade, affecting about $42 billion of debt, follows
a similar downgrade on Sept. 17 by Standard & Poor's Ratings Services.
J.P. Morgan shares fell nearly 7 percent on Wednesday, suffering most of
that decline after Moody's early afternoon downgrade.
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- Moody's cut J.P. Morgan's senior unsecured debt one notch
to "A1," its fifth highest grade, from "Aa3," and also
cut several other ratings. Its rating outlook is now stable.
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- Jim Shallcross, who helps invest $6 billion for Independence
Fixed Income Associates in McLean, Virginia, said the syndicated loan market,
which J.P. Morgan leads, "has headed south, and many securities underwriting
markets are nonexistent right now. In this environment, you have to get
rid of employees." Shallcross owns J.P. Morgan bonds.
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- The downgrade might make it more costly for J.P. Morgan
to borrow as Chief Executive William Harrison tries to cut costs. These
cuts may eliminate thousands of jobs, including as many as 15 percent of
its 20,000 investment banking jobs, people familiar with the company said
this week.
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- J.P. Morgan shares closed Wednesday on the New York Stock
Exchange at $15.45, down $1.15. They have fallen more than 57 percent this
year. Volume topped 21.7 million shares, making the company the fourth
most active Big Board stock.
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- Its 6.625 percent notes maturing in 2012 yield about
5.82 percent, or 2.25 percentage points more than 10-year U.S. Treasuries,
according to TRACE, the NASD's bond pricing service. The spread was roughly
unchanged on Wednesday.
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- J.P. Morgan Chase was formed in December 2000 from the
merger of Chase Manhattan and J.P. Morgan. Spokesman Michael Dorfsman declined
to discuss the downgrade.
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- FALLING EARNINGS
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- J.P. Morgan said last month that third-quarter earnings
would be "well below" the prior quarter's 58 cents per share
because of weak trading results and bad loans to cable and telecommunications
companies. Analysts polled by Thomson First Call expect third quarter earnings
of 7 cents per share.
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- In a press statement, Peter Nerby, a Moody's senior vice
president, said J.P. Morgan's financial performance "has lagged behind
similarly rated peers during this cycle. Moody's is concerned that (the
bank's) recent problems may further complicate its ability to execute its
capital market strategy, which has so far met with only partial success."
He said J.P. Morgan's liquidity is "strong" and capital ratios
are "good."
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- Nerby said the downgrade incorporated expected losses
tied to bankrupt energy trader Enron Corp. ENRNQ.PK . He said the stable
outlook assumed the bank could successfully defend itself in litigation
tied to its relationships with Enron and bankrupt phone company WorldCom
Inc. WCOEQ.PK .
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- S&P on Sept. 17 cut J.P. Morgan's long-term debt
rating one notch to "A-plus," equal to Moody's new rating.
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