Leveraged finance trends: ‘Be ready to be nimble’  

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Daniel Rudnicki-Schlumberger: Hi, you're listening to What's the Deal?, our investment banking series here on J.P. Morgan's Making Sense podcast. I'm Daniel Rudnicki-Schlumberger, the head of leveraged finance for Europe, Middle East and Africa. And today I'm joined by my colleagues Ben Thompson, the head of EMEA leveraged funds capital markets, and Natalie Day Netter, the head of EMEA leveraged funds syndicate. Today, we'll delve in the latest developments in the EMEA leveraged debt market for 2025 so far and discuss what to watch for and what to expect in these troubled times for the rest of the year. Ben and Natalie, it's great to have you here.

Ben Thompson: Thanks, Daniel. It's good to be here.

Natalie Netter: It's good to be back, Daniel.

Daniel Rudnicki-Schlumberger: So, first of all, an important thing for our listeners. This podcast is taped on the 7th of April in the morning. And starting from there, Natalie, what's the state of the leveraged, the high yield and broadly syndicated loan secondary markets today?

Natalie Netter: Sure. So we're coming into the third day of very meaningful moves in terms of even putting it into a historical context, moves in the likes that we haven't seen since COVID, greater than the magnitudes of the moves we saw in the early days of Ukraine. So very meaningful deterioration in terms of secondary conditions. That said, it's generally been felt to be quite orderly in both markets. So we haven't seen too much for-selling. There's definitely the discussion now around, will there be outflows? What does that mean? And the accounts that are more subject to that type of flow-based trading, they are trying to get in front of that and access liquidity. But thus far, again, it's been seen as very orderly volumes while they're elevated or not outside called the normal range in Europe. Our U.S. colleagues have been seeing very meaningful volumes. But in Europe, again, while we've seen price action, yields widening in the high yield index and downward pressure in loans, it's maintained a relative sense of good order. To just put a little bit of it into context around the volatility crossover this morning, pre-9 a.m., has moved more than any other week year to date besides last week. So intraday volatility has picked up and it's a bit of a where do we go from here moment.

Daniel Rudnicki-Schlumberger: Give us a little bit of sense for how much the indices have moved last week.

Natalie Netter: Sure. So, well, year to date, the high yield index is now 85 basis points wider. But putting that into context, we're only back where we were in September of last year. So in a way right now, on an absolute basis, we're actually not that wide. If you look at crossover, crossover was still maintaining a three handle through all of last week, although it has now burst through 400. And as I mentioned, in terms of the intraday volatility, 30 wider today, it was 55 wider at one point this morning. What those absolute levels, so 675 on the high yield index, it doesn't bake in is then in terms of our clients and access to capital, what would a new issue premium if you were going to, not that we would recommend some on launch day, but if you were going to, what does that look like? And that's where we still need more time to ascertain where we are, because the 675 on the face of it really isn't that wide. And granted, it is still moving outward every day. So where does that settle out and what does that mean then for absolute cost of capital?

Daniel Rudnicki-Schlumberger: Yeah, so it's less the absolute level than the speed of the widening in the past three weeks and particularly the past five days.

Natalie Netter: That’s three days really.

Daniel Rudnicki-Schlumberger: Yeah.

Natalie Netter: I mean, if you look back at where we were even a week ago, we were pricing transactions last Tuesday. So, it's obviously moved quite quickly.

Daniel Rudnicki-Schlumberger: Okay. And how would you describe the sentiment?

Natalie Netter: So that's where it's gotten quite cautious. And you have, as I said, the high yield accounts that are more flow based, they're looking to access liquidity to make sure they're prepared to deal with any eventual outflows. On the loan side, we have seen CLOs opportunistically trying to pick up lower cash price names, which obviously is very accretive to those structured vehicles. So, we're seeing both sides of the trade. It has felt like as we move into this week, what was very two-way, i.e. we had buyers and we had sellers, this week is starting to feel much more seller oriented rather than buyer oriented. And there is a great deal of uncertainty around, you know, what happens from here, given that there was clearly an anticipation in the market that there would be actions over the weekend to mitigate some of this. And none of that came through. So there's a lot of uncertainty on the look forward. That said, we're getting inbounds. I got one at 6 p.m. on Friday night. I got one pre 7.30 this morning of accounts were saying we have capital and if you have opportunities we'd like to deploy. So it's definitely mixed. You have the regular way accounts who are perhaps very cautious, trying to figure out where things are going and the opportunistic accounts where this is an opportunity for them to hopefully put capital to work at return levels that haven't been achievable in the last 18 to 24 months.

Daniel Rudnicki-Schlumberger: And at an emotional, personal level, how would you compare the mood in the market, the emotions to what we saw, say, during COVID or at the time of the Ukraine invasion?

Natalie Netter: These first few days feel a lot like COVID, where it's been very rapid and a lot of uncertainty. The difference between this, both the Ukraine invasion and COVID, is we now have the benefit of knowing how they played out, whereas we're currently sitting in the seat where we don't know how they played out. And when you think about the benefits of hindsight, you oftentimes smooth things over. So one of the things during COVID is there's the general recollection of, OK, there was the March to April widening, then the market stabilized. There was a lot of government intervention and liquidity injected into the system. The primary markets reopened. Businesses were impacted. But, you know, things moved on. We oftentimes forget that when the vaccine news came out in early November, I think it was only a week before that, maybe two weeks before that, there was the, quote, worst week in U.S. equity since March 2020. And so these things tend to be nonlinear. So when we think back to them, we remember them being, OK, we widened and then we rallied. Similarly, in 22, we were in a bad place going into Ukraine. Rates were negative in January 2022. Then they moved up very dramatically over the course of that year. The high yield market was fixed rate was basically shut pre-Ukraine. We then did have this window where come back in September, you know, you had issuers who had perhaps recalibrated an investor base who wanted to be more constructive at the new levels. And then we had the LDI crisis. And it was only in December of that year where we got a really constructive primary market. But I think when people think back, it's a bit more. We widened and then we tightened.

Ben Thompson: Yeah, that's a very interesting point.

Natalie Netter: So what we know from here is that it's not going to be linear. So there's going to be ups and downs. So there will be windows. What the government does will have a huge impact, which, you know, right now the market's pricing in several rates cuts across different markets, which TBD, if that happens, and that could have a large impact. So there's definitely takeaways. But what we don't have now is the conclusion. Whereas on those two, we do. One thing is the fundamental businesses that were impacted by Ukraine through inflation, energy costs, et cetera. And then on COVID, the actual demand side, that fundamental damage lasted much longer than the markets were closed. So the markets reopened very well for primary, well before we actually saw that performance. So again, to the extent that issuers and borrowers are prepared, the markets oftentimes become more constructive than before the fundamentals actually clean up on the other side. And then interesting on that one, Ben, just thinking about some of our recent transactions and what we did see, you and I were both looking through, obviously, all of those over the last couple of weeks. How would you view the trajectory and the trend of what we saw over the last few weeks? And what does that then mean, hopefully, when we come out the other side of this?

Ben Thompson: Yeah, unfortunately, we went into this period with a fairly bespoke data set. And there's one transaction in particular I think we'll call out where I think there are some takeaways. But if you look back to where we were in the first quarter, in a very functional market where we were having consistently positive responses to new issue across a huge spectrum of different types of credits from the very tight double B fixed rate high yield deals through the leveraged loan space to some fairly bespoke outcomes with high single digit coupons and lower rated high yield, everything was going down fairly well. And for the most part, we were seeing fairly positive response in terms of secondary where trading levels were. If you look at probably the best data point that we've got from the last couple of weeks, a transaction that priced at the start of last week, which feels like a lifetime ago. If you look at the fixed rate bonds on that transaction, which priced at 5.5%, clearly that was a result even in the pre-tariff world, very strong result to get the 5.5%. But where you look at those bonds are today, they've now gapped down six points really in the last three days to yield 6.5%. So you've seen 100 basis points of widening there, which is an interesting takeaway. But clearly that was well placed at the time, as were the loans that came with that transaction. The other recent deal, which probably has some data attached to it, we priced also just the day before the announcement, which was also able to achieve for a weak single B-rated name, 7% on the fixed rate Euro component of that transaction, and 9 and an eighth on the fixed rate sterling component of that transaction. If you look at the Euro bonds there, those have widened out 100 basis points in the last several days. So the market is definitely adjusted much wider. And I think if we look at the investor behavior in those recent deals, I would argue that the data set there isn't as relevant. But certainly there was a strong buying bias through that first quarter of the year, which is now going to clearly reverse. And you were talking about some of the people contacting us trying to get ahead of potential outflows and liquidity needs in the fixed rate market. And it also feels as if we're going to see a slowing in the formation of floating rate money, which is the CLO market broadly in Europe. So even though that won't lead to outflows, it will lead to a reduction in inflows. Offsetting that, of course, we're going to have a very quiet new issue calendar until there's some sort of progress made on the tariff front and how long that takes is anyone's guess. But even if we do have an open window, it's going to feel like a much less liquid market. I'm probably getting too far forward here and talking about what's coming in the future. But for now, as we led into this correction, it was a very functional, very positive market. And I think for now, everything is on hold.

Natalie Netter: If you think last Monday felt like a lifetime ago, the Wednesday before that, which is only eight business days ago, really felt like a lifetime. At that point in time, that's a single B issuer where we were able to offer them 725. They could have done all fixed. They could have done all floating. They could have done a mix. They chose to do all fixed at five and three quarters, which, of course, now looks a brilliant decision. But that was only eight business days ago when we saw that level of demand. So the real question is coming out of this, how much of that demand will be fundamentally gone or how much will be sitting on the sidelines and ready to deploy when it does feel like there's stability? So it really comes down to that flows question.

Ben Thompson: But I do think like when we talked about this a bit before, I think in the aftermath of an event like this, and it's particularly a situation that we find ourselves in now where so much of this is reliant on the views of a very small number of people globally, where we're really sort of at their whim. I think you're going to see much more cautious behavior as and when we get back on our feet and start to see new issue come again. I think you're just going to see people very defensively positioned, not wanting to go into any deal in full size, looking for bigger discounts to protect them from the downward motion in pricing. So, I think we're going to see very different flavor when we come out of this.

Daniel Rudnicki-Schlumberger: How are cash balances these days? With foreign investors…

Ben Thompson: Evolving

Natalie Netter: Currently elevated and looking to increase, as I mentioned. There was an interesting case study in outflows that we all got in 2022, which was the LDI crisis, which is where you had this major repricing of gilts. And then all the pension funds and other large institutions had to look at their portfolio and say, OK, I need to rebalance now. And I look at my alternatives. And the only thing that I can sell is European high yield because everything else is private. It's private equities, private debt. And so it's the only thing not nailed down and I'll sell it. And obviously, this time is different. It's global equities. But similarly speaking, do you end up where you have a broad portfolio rebalancing driven by the fact that now alternatives look too big? And so that's what we don't know yet, whether or not those outflows will materialize. If they don't, you could end up with a very strong technical swing at some point, which is what we've seen historically when there's anticipation of outflows and they don't materialize. But it's difficult to know right now where we'll go from a flows perspective, frankly, in both markets, because in the loan market, you have the CLO pricing dynamic, which if those warehouses and vehicles don't keep printing, that capacity dries up. But if they're able to all of a sudden print, all of a sudden you could have a strong technical swing. So it's difficult to read from here.

Ben Thompson: One thing that I do think will be very interesting, though, is if assuming we do come out of this, you know, again, pick your time horizon, two weeks, two months. I do think the fact that there's been so much erosion in cash prices will really change the feel of the new issue market. Because if you think about what we had been experiencing through the fourth quarter of last year and the first quarter of this year, it was every transaction prices. And unless there was something that was just off about it, the vast majority of those traded up in secondary. And we had times when the loan market was trading 70 percent of loans were trading above par. What we're going to see now in this adjusted, you know, new world where whenever we get back to doing new issue is there's going to be a lot of recent issue. And call that Q4, Q1 new issue that's trading well below par. And we'll get into that somewhat painful dynamic. I think when we're dealing with people buying new issue, they're going to say, well, look, I can buy this at a discount in secondary and I've got a pull to par opportunity. And that would not have been the story in Q4 or Q1. So I think we're going to have to contend with that to some degree. Now, obviously, if we get to a good resolution or some kind of positive resolution or trajectory on tariffs, some of that erosion in value will come back to us in secondary. But we're going to be dealing it's not going to be a market where you can point to everything that's gotten done in the last three months and say, well, look, it's trading above par, so you should probably something on the screws. I think people are going to ask on the loan side, you'd expect people to be asking for more OID. And on the high yield side, people will want to protect themselves from that by just having a higher coupon to prevent…

Natalie Netter: Definitely still have the decompression we're talking about, where you have the impacted names versus the unimpacted names, which, Daniel, you know, that leads into that will be very much driven by who do we think is fundamentally impacted? You know, how are you and J.P. Morgan looking in terms of recession and economic forecasts? And what are you hearing from issuers and borrowers around their outlook?

Daniel Rudnicki-Schlumberger: So our economists came up with revised forecasts for the year. We're now pricing in seeing U.S. recession as our base case, 60% chance of a U.S. recession in 2025. As far as the global economic outlook is concerned, we're seeing a 40% chance of recession. So still on the fence, but that's moving very quickly. Issuers and borrowers have been taking stock. We already have seen a number of issuers and borrowers to postpone their immediate fundraising. Now, what I'm starting to see is the smart money saying, well, actually, on the contrary, if I've got something, if I need to do something, if I've got a maturity in 2026 or 2027, maybe I should take care of it now. Because things could get worse before they could get better. In a very uncertain volatile environment, we could have some decent windows and it may be an opportunity to do what needs to be done. Clearly, for an opportunistic issuer, now is not the time to go.

Ben Thompson: And if you think about that, then when you're talking to those issuers and borrowers and you're telling them what steps should they be taking right now as they think about how to approach the market?

Daniel Rudnicki-Schlumberger: So first, be ready to be nimble. The markets could reopen and there's likely to be a little bit of a traffic jam at that point in time. The other thing we're telling borrowers is think about diversifying your capital sources. We've spoken mostly about the broadly syndicated loan market and the high yield market, but there's also the vast direct lending private credit market, which is in great shape. There's it's vast, it's liquid. There's a lot of pent up demand that has not been satiated for the past year because there's been so little M&A. It's a market we're very much present in. J.P. Morgan has announced a $50 billion commitment to that market. And we are having right now very interesting discussions with a number of borrowers on alternatives for the transactions that need to get done. The private credit direct lending market is absolutely there and open. If you're a publicly listed company and you've got an unsecured capital structure or even secured one, the convertible bond market is also very much open. The volatility actually helps you in this sort of market. So there are alternatives and deals can get done.

Ben Thompson: Just out of curiosity, it was interesting last year in 2024, you saw a flow of direct lending deals being refinanced in the distributed markets. Do you think we could see that flow reverse, at least in the short term, if we stay in these kind of difficult conditions where some of these borrowers and issuers who need to refinance capital structures to end up turning to the direct lending market instead?

Daniel Rudnicki-Schlumberger: Yes, absolutely. I think we're going to see a lot of borrowers and issuers going back and forth between these different markets or even finding mixed solutions with lenders and investors from the broadly syndicated loan market and from the direct lending market. To find the best solutions in this sort of very fast-moving market, you need to be nimble and you need to diversify your sources of funding. It's very much the sense, the focus we had as we put all three products together in leverage finance at J.P. Morgan. So as we conclude, any final thoughts for our listeners, Ben?

Ben Thompson: Look, I think we've been through these periods of volatility. I mean, Nat was speaking very eloquently about the COVID challenges, the invasion challenges in a post-Ukraine and what happened with energy prices, inflation, supply chain disruption. I was talking to someone on the team and saying, you know, it's pretty remarkable if you think about all of the markets that we've had to contend with since the pre-COVID market 2019. I guess 2024 was probably the first normal year in inverted commas that we've seen in the last five. And here we go again. So I think, look, the takeaway is if you had sort of left the playing field in either of those or any of those prior periods, it would have been a mistake. Because prior to last week or certainly prior to this first quarter, if you looked at equities as a benchmark or other risk assets as a benchmark, you would have been very foolish to walk away from the markets at those points in time. And look, this feels particularly vexing at this point, but it also feels like there will, of course, be another side to this. And I think the right approach here is don't assume that the volatility is going to go away immediately. I think this could be a little more protracted than some of the prior sources of volatility. But that said, there will be plenty of windows where we'll be able to access the market. And over time, you know, slow and steady wins the race here. If we have a recession, we have a recession and there's usually growth on the other side of a recession. So we'll get through this. It just could be a pretty painful journey along the way.

Natalie Netter: I mean, I think going to your point around the multiple markets in terms of pointing to what Ben just mentioned around the uncertainty and you talked about being prepared to access the market. I think the key is if you have any liquidity need or refinancing need is to think about it way in advance because you can access high yield loans private. All three of those are somewhat similar, but take different amounts of time to access. There's no reason why you can't parallel path them if you have ample time. I think where we've historically seen issuers and borrowers get caught in a corner is when they haven't prepared. And then they have to rush into whatever is available at the time rather than having had advance notice to maybe spend, for example, a period of time, you know, working with us and a club of direct lenders when all of a sudden the syndicated market comes back and they can pivot to that or they're preparing a high yield OM at the same time as they're having discussions for another solution. And then they just determine at the execution point what to go down. You only lack options if you haven't prepared for the eventuality. So I do think that that's what we've seen historically is having all of the options available and being prepared is the key to not getting caught into a corner.

Daniel Rudnicki-Schlumberger: Be prepared. Be nimble. Ben, Natalie, thank you for joining me.

Ben Thompson: Thanks for having us on the podcast.

Natalie Netter: Thank you for having me, Daniel.

Daniel Rudnicki-Schlumberger: Thank you to our listeners for tuning in to another episode of What's the Deal on J.P. Morgan's Making Sense podcast. We hope you enjoyed the conversation. Until next time. Goodbye.

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