House of the year, credit - JP Morgan

JP Morgan has implemented a global platform dedicated to servicing the needs of its client base by taking a cross-asset approach that mimics investors' own investment strategies. The idea allows the bank to provide more efficient, customised solutions so that clients can meet their portfolio strategy or investment objectives, the bank says.

The cross-asset approach does not mean the bank is a generalist, however. Rather, it provides product expertise by having dedicated country teams of specialists in credit and rates, equity and commodities, and alternative investments.

During the past year, JP Morgan has markedly upped its leadership in the structured credit and derivatives markets - a prime example of its innovative tendencies being the development of synthetic portfolio insurance (SPI) technology. SPI is the bank's synthetic version of constant proportion portfolio insurance, structured as a zero-coupon bond plus a call option.

SPI aligns the interests of investors and managers, explains Stephen Birkwood, country head of the Netherlands, equity and hybrid, at JPMorgan in London. Its principal-protected leverage convex return profile emphasises returns and minimises losses, while the manager has the flexibility of taking long and short positions and active management of the portfolio.

"Adding value in structured credit comes from a partnership that allows us to target the best risk/return profile for clients' needs. They want capital protection, and SPI is an attractive product with no downside risk. It makes money regardless of spread direction, has 100% exposure at maturity and no fees," he says.

JP Morgan's first SPI transaction, the $550 million Cheyne Credit SPI for Cheyne Capital Management, was widely held up as a key innovation of last year. And JP Morgan has raised the bar in 2006 with three new managed SPI structures that enable mixed credit portfolio strategies.

For example, JP Morgan's solution for M&G, one of the UK's largest retail fund managers and part of the Prudential Group, allowed the asset manager to leverage returns on a mezzanine collateralised synthetic obligation while limiting the downside of equity risk with a short credit default swap portfolio. Meanwhile, JP Morgan helped develop the EUR100 million Rozavel deal - the first ever SPI based on the performance of a European high-yield strategy - managed by Credit Agricole Asset Management. JP Morgan has also worked with Elgin Capital to provide investors with synthetic exposure to Elgin's Corporate Credit Strategy fund.

Accolades have come thick and fast, with Stuart Fiertz, chief operating officer at Cheyne in London extolling the virtues of JP Morgan's client servicing, praising the team's swift execution of flow products, innovative structuring, distribution, infrastructure and legal co-operation. "JPMorgan strives to provide innovative products, leveraging the strength of both their and our organisation," he says.

Dagmar Kent Kershaw, head of structured credit products at Prudential M&G in London, also applauds the bank's proficiency in providing a unique solution. "We collaborated with JP Morgan because the bank is a highly sophisticated leader in structured credit. Its SPI technology is groundbreaking and no other house has been able to replicate it," she says.

JP Morgan's influence is also felt in mezzanine funding, and its EUR1.859 billion Preferred Pooled Shares programme, which securitises loans from medium-sized enterprises, has been particularly well received. Developed by Capital Efficiency Group from Zug, Switzerland in 2004 for the German Mittelstand, this year's fifth launch - a EUR321 million collateralised loan obligation - means the programme now provides pan-European financing for 275 German, Austrian, Swiss, Italy, Belgium and Luxembourg firms. JP Morgan repackaged the EUR33 million junior note - distributed to German high-net-worth clients by HypoVereinsbank and Credit Suisse - to achieve favourable tax treatment and potential returns in excess of 20%.

"It's the first time the equity tranche has been structured into certificate format and delivers a brand new asset class for investors, who had no prior way to make a strategic portfolio allocation into this sector of the economy," says Eric Wragge, head of corporate and middle-market securitisation at JP Morgan in London.

WHY JP MORGAN WON

JP Morgan has always been a force to be reckoned with in credit derivatives. And its commitment to innovative structuring techniques such as SPI has placed the bank head and shoulders above the competition this year.