April 17 (Bloomberg) -- JPMorgan Chase & Co. raised $6 billion of hybrid bonds in the bank's biggest sale of the securities, after reporting a 50 percent drop in first-quarter profit.
JPMorgan is paying annual interest of 7.9 percent, or 4.19 percentage points more than U.S. Treasuries, for 10 years on the perpetual preferred shares it sold yesterday, according to data compiled by Bloomberg. After that, the securities, which combine elements of equity and debt, will pay a floating rate of interest.
The offering by the third-biggest U.S. bank comes a month after it agreed to buy Bear Stearns Cos., keeping the investment bank from going bankrupt. Even though JPMorgan's profit declined, the bank's capital ratios remain higher than some of its competitors.
``We'll see more of these transactions and we'll see more mergers and acquisitions, which is what JPMorgan is positioning for,'' said Antony Gifford, a fund manager who oversees $4 billion in North American equities at Henderson Global Investors in London. He doesn't own JPMorgan stock.
JPMorgan has posted about $10 billion of writedowns and losses since the beginning of last year, reducing the Tier 1 capital ratio that regulators monitor to assess a bank's ability to absorb loan losses to 8.3 percent from 8.4 percent. That compares with 7.5 percent at Wachovia Corp. and 7.1 percent at Citigroup Inc. as of Dec. 31.
Capital Reserves
Hybrid securities count toward capital reserves, helping banks shore up their finances after writedowns. They typically allow issuers to defer interest payments without defaulting, and credit-rating companies usually consider the bulk of the money raised as equity, meaning only a portion is counted as debt on an issuer's balance sheet.
Lehman Brothers Holdings Inc., the fourth-largest securities firm, sold $4 billion of preferred shares on April 1 that pay annual interest at 7.25 percent and are convertible to stock. JPMorgan's securities aren't convertible.
At 7.9 percent, JPMorgan is paying less than New York-based Citigroup and Charlotte, North Carolina-based Bank of America Corp. for its hybrid debt.
Citigroup, which has reported subprime losses of $24 billion and raised more than $30 billion in capital since November, is paying 8.13 percent for preferred stock it sold in January. Bank of America, the second-largest U.S. bank behind Citigroup, is paying 8 percent on perpetual preferred shares sold the same month.
Joseph Evangelisti, spokesman for JPMorgan, declined to comment.
Fixed to Floating
JPMorgan's securities have no fixed maturity. If the bank decides not to call the debt after 10 years, the interest payments will switch to a floating rate at 347 basis points more than the three-month London interbank offered rate, a borrowing benchmark that's currently 2.82 percent.
The securities are expected to be rated A1, the fifth level of investment grade, by Moody's Investors Service, and a step lower at A by Standard & Poor's, according to Bloomberg data. The ratings are each two steps lower than the grades of the holding company.
JPMorgan, which got financial support from the Federal Reserve for its takeover of New York-based Bear Stearns, raised its offer price last month to $10 a share from $2 a share initially.
``You've got a string of consolidation going on and banks have to meet the additional capital the acquisitions require,'' said Tobias Grun, who helps manage $28 billion of debt as a credit analyst at Gartmore Investment Management Plc in London.
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