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How to Think About JPMorgan's $20 Billion AT&T Loan

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The $20 billion loan JPMorgan Chase is providing to AT&T to finance the $39 billion acquisition of T-Mobile USA has raised a lot of eyebrows on Wall Street.

Assuming the deal gets the necessary regulatory approval, it will be the largest single-bank takeover financing in history. Although there have been bigger financings in the past, these are typically handled by a syndicate of banks operating together.

The primary reason JPMorgan is making the deal on its own is likely the hardcore break-up fee attached to the deal. AT&T will be required to pay Deutsche Telekom a sum of $3 billion if the deal is not completed. There is said to be no financing "out"—which means that if the financing isn’t available to close the deal, AT&T will have to pay the break-up fee.

The standard syndicated deal creates financing risk for the purchaser. If one member of the syndicate drops out, the purchaser must convince the other banks to make up the difference or seek a replacement lender.

But by getting JPMorgan to commit to the entire deal in a very public way, AT&T has probably made itself confident that it won’t run into financing problems when it is time to close the deal. It would be hard for JPMorgan to walk away from the deal without suffering some damage to its reputation.

There are, of course, many other ideas floating around about why JPMorgan was willing to make a loan of this size on its own.

Excess Reserves, Short-Term Loan

JPMorgan has a huge amount of reserves in excess of what regulations currently require. It doesn’t anticipate any need to raise new capital to meet the new capital requirements set to take effect over the next few years.

Doing a deal of this size allows JPMorgan to put billions of dollars to work all at once. And because the loan is set to be paid back in 18 months, that money won’t be tied up for too long if the mergers and acquisitions market heats up. By the time a new boom comes around, the thought goes, AT&T will have already repaid the loan.

Dominating the Next Deals

The bridge loan will likely be replaced by a combination of equity and bonds, according to one credit-market veteran. The issuance of new equity and bonds will create a fee bonanza for the banks involved—and JPMorgan has probably bought its way into a lead position in those deals by providing the financing now.

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Certainly, a deal of this size indicates that JPMorgan has money to lend. Some on Wall Street suspect that this is one reason JPMorgan wanted to go it alone—to “hang out a shingle” saying that it is open for business. Certainly, others seeking to finance acquisitions will now know that JPMorgan can do deals of almost any imaginable size, with or without support from other market players.

Flight to Safety, Too Big to Fail

Some rival bankers say take a more cynical view, saying that JPMorgan is essentially “parking” $20 billion in what they expect is a low-fee, low-interest rate, low-risk, short-term deal.

“This is a fear play. This paper is as good as Treasury paper,” a banker at a rival firm said. Of course, his bank has been left out of the deal, so he has every incentive to want to put down JPMorgan.

Credit Bubble?

Some say the deal raises concerns about a possible credit bubble. JPMorgan’s willingness to take on this much risk—and AT&T’s confidence that JPMorgan will come through with the loan—indicates a comfort level between dealmakers that was last seen at the height of the pre-crisis deal-making frenzy.

“Instead of being reassured that JPMorgan would go it alone, AT&T should be worried that it is so exposed to funding risk from one bank,” one bearish credit-market observer said.

A less pessimistic way of saying the same thing? Banks and corporate executives appear to have recovered confidence that was shattered during the financial crisis.

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