State of the high yield debt capital markets​

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Amaury Guzman: Hello, and welcome to What's The Deal? our investment banking series on J.P. Morgan's Making Sense podcast channel. I'm your host today, Amaury Guzman from J.P. Morgan's Leveraged Finance Desk. I am thrilled to welcome back Brian Tramontozzi, J.P. Morgan's North American Head of Leverage Finance Capital Markets. Brian, welcome back.

Brian Tramontozzi: It's great to be here.

Amaury Guzman: Brian, let's dive right in. A lot has happened six months into the year. We've seen rate cutting expectations adjust significantly from around six for 2024 at the beginning of the year, to maybe two, towards the end of 2024. We've seen inflation continue to run slightly harder than what the Fed would want, as well as a strong and tight labor market which has kept growth mostly on track with market expectations. On the back of this, we've also seen primary debt markets roar back to life. How do you view market activity for high yield bonds and leverage loans versus 2023?

Brian Tramontozzi: Well Amuary, it's been a fantastic year so far for leverage finance. In high -yield primary, we've seen roughly 150 billion of issuance so far in 2024. Roughly double the period volumes from last year. The asset class has seen positive mutual fund flows versus outflows last year. Secondary performance has been strong. The J.P. Morgan High Yield Index currently sits at 7.96, versus the average in 2023, of 8.71. So we've got about 75 basis points of yield tightening, versus the average of last year. Most notably however, high yield spreads are at 15 years tights.

Amaury Guzman: Right, that's very interesting. Now talk to our listeners about the leverage loan market.

Brian Tramontozzi: For primary activity and leverage loans, we've seen 640 billion of borrowing year-to-date, versus 125 billion same time last year. Over a 400% increase. Another way to punctuate the froth of the loan calendar, almost 40% of the entire outstanding loan market has an effective date in 2024. CLO creation in 2024 has been stellar, with 90 billion issued, double that of the same period last year. We've seen 12 billion of inflows into leverage loan funds in 2024, versus outflows, same period last year, of 14 billion. In secondaries, about 57% of loans are still trading above par, that compares with 39% at the end of 2023. And at that time, we were saying 39% is still a healthy level. It is important to note that of the 640 billion of leverage loan primary volume so far this year, over half of it has been for repricing purposes, reflective of borrowers taking advantage of the strong secondary performance of leverage loans to reduce interest expense.

Amaury Guzman: So it's clear that activity in the leveraged Loan and high yield bond market has had a strong pickup so far this year. What do you view as the catalyst driving primary and secondary market action?

Brian Tramontozzi: I'd point to a couple of factors. From a fundamental perspective, the economy remains really healthy and inflation is moderated, but I think the real strength of the leveraged loans and high yield bond markets is the technicals. Investor and lender cash balances are very healthy, on the back of the strong cash inflow into high yield bonds and leveraged loan funds we've mentioned earlier, 85% of the primary volume of high yield bonds and leverage loans has been for refinancing purposes, including repricings. Effectively, just recycling investor and lender exposure, and not eating into investor and lender dry powder. Lastly, while we've seen some green shoots in M&A, activity remains subdued, versus normal volumes. The supply-demand imbalance is reflected in that 15 year high yield interest spread low of 350 basis points, versus the 15 year average, which is 550 basis points. We're trading 200 basis points inside of the norm.

Amaury Guzman: So pivoting away from the recent performance and focusing on the outlook, there is approximately $1 trillion in leverage credit scheduled to mature through the end of 2027. What will your message be for those issuers and borrowers currently on the sidelines or monitoring the markets for a window of opportunity?

Brian Tramontozzi: Market conditions are very supportive for companies looking to re-finance near-term maturities. At some point, M&A activity will rebound, however at the moment, the forward M&A pipeline remains light. Only 38 billion, split about two thirds loans, one third bond. When more new money financing comes, it's not unreasonable to expect spreads to widen. Maybe not fully, to the long-term mean, but it's certainly a risk.

Amaury Guzman: Brian, as we sit here today and look to close the first half of the year, what are you keeping an eye on, and its potential risks to the outlook?

Brian Tramontozzi: I am focused on a wide variety of factors. First is healthy economy. Spreads reflect default risk. Any meaningful negative change in economic outlook will weigh on loan and bond spreads. Second, I'm looking at inflation data. Benchmark interest rates are taking a lot of direction from CPI, PPI, PCE, employment and other data. Third, I'm also looking at M&A calendar growth. Spreads are a reflection of supply-demand balance. If M&A volumes surge, then spreads are likely to widen. Next, I'm focused on funds flows. CLO creation has been incredible so far this year in the loan market. Any change to that activity will weigh on demand. And then finally, geopolitics can swing sentiment dramatically.

Amaury Guzman: Thank you, Brian. Interestingly enough, in Jamie Dimon's annual shareholder letter, he also voiced concerns about the wider range of potentially adverse economic outcomes that could come from sustained periods of higher inflation, and governments having to address a combination of geopolitical conflicts, higher debt balances, loose fiscal conditions, and the impact from unwinding QE programs. So there are a lot of factors that you and Jamie are looking at, setting the stage for what will likely be an interesting back half of the year, but I think we're towards the end of our allotted time here, so thanks again for taking the opportunity to sit with us to get your views on the leverage loan and high yield bond markets and we look forward to having you back with us again soon.

Brian Tramontozzi: Thank you for having me, and great job on your first podcast.

Amaury Guzman: Thank you to our listeners for tuning in to another episode of What's the Deal? I'm your host, Amaury Guzman, until next time.

Voiceover: Thanks for listening to What's The Deal? If you've enjoyed this conversation, we hope you'll review, rate and subscribe to J.P. Morgan's Making Sense, to stay on top of the latest industry news and trends, available on Apple Podcasts, Spotify, and YouTube. To stay ahead of the curve, sign up for J.P. Morgan's In Context Newsletter, packed full of market views and expert insights, delivered straight to you. To subscribe, just visit jpmorgan.com/in-context. This material was prepared by the Investment Banking Group of J.P. Morgan Securities LLC, and not the firm's Research Department. It is for informational purposes only, and is not intended as an offer or solicitation for the purchase, sale or tender of any financial instrument.

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