In the wake of continued earnings volatility and investment-banking layoffs at J.P. Morgan Chase (Aa2/AA-), analysts expect spreads on the firm's bonds to remain under pressure anywhere from six weeks to four months. Earnings volatility could easily lead to a downgrade, according to David Hendler, an analyst at CreditSights, an independent fixed-income research vendor. Hendler believes a downgrade would cause spreads to widen by 10 basis points by year-end, or the first quarter of next year. J.P. Morgan 6 3/4% notes of '11 were bid at 139 basis points over Treasuries last week.
Hendler also notes that J.P. Morgan has not yet marked down losses from its auto-leasing business, though it has significant exposure in that area. Last month, Bank of America took a charge due to significant losses in that business.
Robert Smalley, an analyst at HSBC Securities, believes J.P. Morgan paper should trade closer to broker-dealer paper than it does now, because it has demonstrated the kind of earnings volatility consistent with these firms. Smalley also observes the merger with Chase is still costing: the company has been forced to keep information-technology staff to integrate the two equity operations, but it's laying off revenue-producing executives and front office staff to cut costs. "It's hard for me to construct a near-term spread tightening case for J.P. Morgan," says Smalley. Morgan Stanley Dean Witter 6 3/4% notes of '11 (Aa3/AA-) were bid at 150 basis points over the curve last week, while Goldman Sachs 6 7/8% of '11 (A1/A+) were bid at 157 over.
