JPMorgan Chase is facing the ire of some of the world’s biggest investors over the bank’s role in a complex multibillion-dollar refinancing at Patrick Drahi’s telecoms group Altice USA that threatens them with heavy losses.
After the Altice deal, and an antitrust lawsuit it filed against investment groups including Apollo Global Management, Ares Management, BlackRock and Oaktree, some investors told the Financial Times they were rethinking relationships with the US bank as well as with Kirkland & Ellis, the powerhouse law firm seen as the architect of the legal complaint.
Distressed debt investors are accustomed to aggressive manoeuvring but it is unusual to see the biggest bank in the US, with $4.6tn in assets, step into a messy confrontation between a billionaire entrepreneur and aggrieved Wall Street funds.
“This is wild . . . this is the craziest thing that has happened in the history of the distressed debt market,” said the head of one prominent multi-strategy private capital fund, referring to JPMorgan’s central role in a surprise $2bn capital raise.
Altice USA had been struggling under the weight of $26bn of debt and for months had been locked in tense negotiations with its creditors. Since Altice’s creditors were unusually united, the company lacked some of the leverage it could normally exert by playing one lender off another.
But the company had another gambit. Altice was desperate to pay off one of its borrowings, known as its B-6 term loan, because it contained restrictive covenants that prevented a broader refinancing. If it could pay off the B-6 term loan, it would no longer be bound by those terms, giving it far greater flexibility to raise new debt.
Paying off the B-6 loan would also give Altice the opportunity to move some collateral — previously pledged to other lenders — outside the reach of its existing creditors.
Such a manoeuvre would be controversial. Some investors believed Altice needed separate backing from its existing lenders, which it may have struggled to obtain given they were lined up against it.
Then JPMorgan stepped into the breach. It was the administrative agent on the B-6 term loan, meaning it was responsible for managing the payment of interest and principal to lenders — and for overseeing the collateral.
JPMorgan believed it was in its own bind, according to people familiar with the matter.
The bank had been told that Altice had competing offers from private capital firms to provide the cash to pay down the B-6 loan, people familiar with the matter said, with the understanding that the replacement financing would be provided to a different subsidiary not involved in the ongoing debt fight. Collateral previously pledged under the B-6 term loan could then be moved to this new structure, away from the rest of the creditors fighting with Altice.
Rather than have someone else provide the debt backed by the shifted collateral, JPMorgan decided to step in and make the loan itself to its long-term client, one of the people added.
On November 25 Altice announced it had borrowed $2bn from the bank, money that it then used to pay down the B-6 term loan, wiping away its onerous covenants.
The reaction in the market has been explosive.
“JPMorgan has crossed a line here that I don’t know has ever been crossed before,” said a top executive at a large investment group. “And if there was going to be a bank to do it, JPMorgan would have been last to do it.”
Although such a move was not uncommon, it would normally have been a lender with a greater risk appetite willing to take on such a deal — a specialist outfit such as Apollo, Angelo Gordon or Centerbridge, for example.
Banks like JPMorgan have significant businesses advising and trading with private investment firms. Large asset managers can often pay $100mn to $200mn in total fees each year to big banks, discouraging big banks from engaging in activities that could threaten those relationships.
As the distressed debt market has come to be dominated by so-called creditor-on-creditor violence, large banks have steered clear of picking sides. Rather than become entangled in such disputes, banks have often resigned as agents or trustees on loans or bonds when a creditor fight is about to break out.
It was JPMorgan’s decision not to do this that shocked the investors.
People familiar with the bank said it had attempted to structure the deal in a way that did the least harm to lenders, including the ability to refinance the loan without a premium in the event existing lenders wanted to pitch their own loan. They added that it had not seen any damage to its relationship with investment clients.
One investor said JPMorgan was too deep in leveraged finance markets for firms to blackball.
There was a further twist to come. Hours after the JPMorgan financing was announced, Altice USA filed a novel lawsuit in New York federal court that accused hundreds of creditors of forming an illegal cartel when they organised together to negotiate against the company.
Among the named defendants was JPMorgan’s own investment management division, which has a significant stake in Altice debt.
The antitrust lawsuit had its own fallout. Kirkland & Ellis, which did not formally bring the action but is Altice USA’s longtime restructuring adviser, has come in for criticism from the asset management community over its role.
“The Altice matter has been escalated to the top of the house,” said one top industry lawyer. Senior managers at the creditor firms have had to be drafted in to help deal teams handle the lawsuit — as well as to manage nervous limited partners.
Ares, a large Altice bondholder, has been reconsidering its long-standing relationship with Kirkland and the work it brings to the firm, according to people familiar with the matter.
“Kirkland represents Altice in transactional matters and not in the litigation,” the law firm said. The litigation strategy had been developed by another firm and the lawsuit drafted “before Kirkland was ever engaged by the company”, it added.
Altice USA, Apollo, Ares, BlackRock, JPMorgan and Oaktree declined to comment.