JP Morgan Chase 2006 Annual Report Download - page 65

JPMorgan Chase & Co. / 2006 Annual Report 63
Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries, as of December 31, 2006, were as follows:
Short-term debt Senior long-term debt
Moody’s S&P Fitch Moody’s S&P Fitch
JPMorgan Chase & Co. P-1 A-1 F1 Aa3 A+ A+
JPMorgan Chase Bank, N.A. P-1 A-1+ F1+ Aa2 AA- A+
Chase Bank USA, N.A. P-1 A-1+ F1+ Aa2 AA- A+
Issuance
Continued strong foreign investor participation in the global corporate
markets allowed JPMorgan Chase to identify attractive opportunities globally to
further diversify its funding and capital sources. During 2006, JPMorgan
Chase issued approximately $56.7 billion of long-term debt and trust pre-
ferred capital debt securities. These issuances were offset partially by $34.3
billion of long-term debt and trust preferred capital debt securities that
matured or were redeemed, and by the Firm’s redemption of $139 million of
preferred stock. In addition, in 2006 the Firm securitized approximately $16.8
billion of residential mortgage loans and $9.7 billion of credit card loans,
resulting in pretax gains on securitizations of $85 million and $67 million,
respectively. In addition, the Firm securitized approximately $2.4 billion of
automobile loans resulting in an insignificant gain. For a further discussion of
loan securitizations, see Note 14 on pages 114–118 of this Annual Report.
In connection with the issuance of certain of its trust preferred capital debt
securities, the Firm has entered into Replacement Capital Covenants (“RCCs”)
granting certain rights to the holder of “covered debt,” as defined in the
RCCs, that prohibit the repayment, redemption or purchase of the trust pre-
ferred capital debt securities except, with limited exceptions, to the extent that
JPMorgan Chase has received specified amounts of proceeds from the sale of
certain qualifying securities. Currently the Firm’s covered debt is its 5.875%
Junior Subordinated Deferrable Interest Debentures, Series O, due 2035. For
more information regarding these covenants, see the Forms 8-K filed by the
Firm on August 17, 2006, September 28, 2006 and February 2, 2007.
Cash Flows
Cash Flows from Operating Activities
For the years ended December 31, 2006 and 2005, net cash used in operating
activities was $49.6 billion and $30.2 billion, respectively. Net cash was used
to support the Firm’s lending and capital markets activities, as well as to sup-
port loans originated or purchased with an initial intent to sell. JPMorgan
Chase’s operating assets and liabilities vary significantly in the normal course of
business due to the amount and timing of cash flows. Management believes
cash flows from operations, available cash balances and short- and long-term
borrowings will be sufficient to fund the Firm’s operating liquidity needs.
Cash Flows from Investing Activities
The Firm’s investing activities primarily include originating loans to be held to
maturity, other receivables, and the available-for-sale investment portfolio. For
the year ended December 31, 2006, net cash of $99.6 billion was used in
investing activities, primarily due to increased loans in the wholesale portfolio,
mainly in the IB, reflecting an increase in capital markets activity, as well as
organic growth in CB. On the consumer side, increases in CS loans reflected
strong organic growth, the acquisitions of private-label credit card portfolios
and the 2006 first-quarter acquisition of Collegiate Funding Services, offset
partially by credit card securitization activity and a decline in auto loans and
leases. Cash also was used to fund the increase in the Treasury investment
securities portfolio, primarily in connection with repositioning of the Firm’s
portfolio to manage exposure to interest rates.
For the year ended December 31, 2005, net cash of $12.9 billion was used in
investing activities, primarily attributable to growth in consumer loans, prima-
rily home equity and in CS, reflecting growth in new account originations and
the acquisition of the Sears Canada credit card business, offset partially by
securitization activity and a decline in auto loans reflecting a difficult auto
lending market. Net cash was generated by the Treasury investment securities
portfolio primarily from maturities of securities, as purchases and sales of
securities essentially offset each other.
Cash Flows from Financing Activities
The Firm’s financing activities primarily include the issuance of debt and
receipt of customer deposits. JPMorgan Chase pays quarterly dividends on its
common stock and has an ongoing stock repurchase program. In 2006, net
cash provided by financing activities was $152.7 billion due to growth in
deposits, reflecting the ongoing expansion of the retail branch distribution
network and higher wholesale business volumes; and net new issuances of
Long-term debt and trust preferred capital debt securities, offset partially by
the payment of cash dividends and stock repurchases.
In 2005, net cash provided by financing activities was $45.1 billion due to
growth in deposits, reflecting, on the retail side, new account acquisitions and
the ongoing expansion of the branch distribution network, and higher whole-
sale business volumes; and net new issuances of Long-term debt and trust
preferred capital debt securities, offset partially by the payment of cash divi-
dends and stock repurchases.
On February 14, 2007, S&P raised the senior long-term debt ratings on
JPMorgan Chase & Co. and the operating bank subsidiaries to AA- and AA,
respectively. Additionally, S&P raised the short-term debt rating of JPMorgan
Chase & Co. to A-1+. Similarly, on February 16, 2007, Fitch raised the senior
long-term debt rating on JPMorgan Chase & Co. and operating bank sub-
sidiaries to AA-. Fitch also raised the short-term debt rating of JPMorgan Chase
& Co. to F1+. The cost and availability of unsecured financing are influenced by
credit ratings. A reduction in these ratings could have an adverse affect on the
Firm’s access to liquidity sources, increase the cost of funds, trigger additional
collateral requirements and decrease the number of investors and counterpar-
ties willing to lend. Critical factors in maintaining high credit ratings include a
stable and diverse earnings stream, strong capital ratios, strong credit quality
and risk management controls, diverse funding sources and disciplined liquidity
monitoring procedures.
If the Firm’s ratings were downgraded by one notch, the Firm estimates the
incremental cost of funds and the potential loss of funding to be negligible.
Additionally, the Firm estimates the additional funding requirements for
VIEs and other third-party commitments would not be material. In the
current environment, the Firm believes a downgrade is unlikely. For additional
information on the impact of a credit ratings downgrade on the funding
requirements for VIEs, and on derivatives and collateral agreements, see
Special-purpose entities on page 59 and Ratings profile of derivative receiv-
ables mark-to-market (“MTM”) on page 71, of this Annual Report.