Capital Markets

“A year of surprises”: Global capital markets recap and 2025 outlook

[Music]

Amaury Guzman: Hello, you're listening to What's The Deal? on our investment banking series on J.P. Morgan's Making Sense podcast. I'm your host, Amaury Guzman from J.P. Morgan's Leveraged Finance desk in New York. Today, I am joined by returning guest Kevin Foley, our global head of Capital Markets, to discuss market development since our mid-year conversation in July, as well as to explore the outlook for global capital markets in 2025. Kevin, welcome back to the podcast. Great to have you.

Kevin Foley: Amaury, great to be back. Thank you for having me.

Amaury Guzman: Alright, why don't we dive right in. Kevin, almost 12 months have gone by in what seems, at least to me, the blink of an eye. But in reality, a lot has happened this year. How would you characterize market developments almost twelve months in?

Kevin Foley: I'd say it's been a year of, I'd call surprises. The economy's been more resilient than we would've thought. The expectations around rate cuts coming into the year were much higher. We got them less of and later in the year than what was expected, obviously, because that ties back to where the economy has been and the resiliency around it. And we obviously got through an election season as well and in a lot of ways, people would refer to as a Goldilocks environment right now. There is belief that you're gonna continue to have some tailwinds from the Fed easing. You've got a view of less regulation under the next administration. That's the belief. People are putting on rose-colored glasses  with regards to what tariffs or changes in immigration policies may be and the impact that may have on employment. And right now there's a very optimistic view about the resiliency of the economy and the ability to continue that and starting to see that in cross debt and equity markets. And I'd say the animal spirits right now are very much alive and strong.

Amaury Guzman: Markets have reacted accordingly, not only in terms of like asset prices where equities have rallied significantly on the credit side where spreads are tight, how would you characterize what the market activity has been on the primary side?

Kevin Foley: So we've been on record levels volumes when you particularly look at the leverage finance market, right in the leverage loan market, to be even more specific. Interestingly, 90% of that activity has been refinancing driven. So we've been very quiet on true new issuance coming to the market. So it's a lot of recycling of capital. It's created a very borrower friendly market because of the lack of new issues, fair amount of cash still on the sidelines. There's a natural inflows that happen from coupon clipping that happens every month with any fixed income product. All of those have created a very favorable environment of demand outstripping supply. And that is driven a heavy refinancing wave. Because we start to think forward to 2025, the question on top of everyone's mind is M&A gonna pick up. And we start to see actual new issuance coming to the market. You can have volumes come down next year, but if the mix shift happens towards more new issuance tied to M&A, that starts to bring that supply and demand a little bit more in balance which will create... It's not necessarily a bad thing, but it can create a little bit different dynamic than what we're seeing right now.

Amaury Guzman: No, that's a great take and I'm gonna come back to some of your references on M&A and the outlook. But before we do, I wanna go a little bit deeper in one of your references that you just had on the U.S. election, specifically, results are now behind us. They include a sweep of Congress. As you mentioned, as the prices have been on the move, equities rallying, rates higher as the market tries to, if you may, anticipate the impact of the policies. How would you assess the balance of risks and opportunities from what you may call the expected policy shift?

Kevin Foley: It's not an easy proposition right now because I think we do have a market that feels like it's priced for perfection. And while there's a lot of reasons to be optimistic and the economic results are supporting that, and there's certainly the optimism with the election behind this, what that may mean on a regulatory front, what that can do from M&A activity and other business activities. You could debate whether a lot of that has already been priced in. And when you look at the multiple expansion that we've seen in the equity markets, that is pricing in a fair amount of growth. You look from a rates perspective and more in the high yield market and the investment grade market, you look at a spreads basis, we are near record lows. The high grade market has taken out its historic lows on a spread levels. The high yield market is several hundred basis points inside its non-recessionary average. So you've got a market that in a lot of ways is priced for a perfect economy and a perfect world. But at the same time, we've got geopolitical concerns that are still out there. We are not entirely sure if inflation has been whipped. There are things that under this new administration that could be viewed as some headwinds for the economy. So while we're optimistic and you could feel good about the outlook, it's not a throw caution to the wind environment.

Amaury Guzman: Yeah, I mean, I just had you walk through the fiscal side of the puzzle, but for instance, if we were to look at it from the monetary side of things, for instance, the Fed has outlined that they will remain data dependent, right, in assessing near term policy decisions. The market itself is pricing additional cuts in December, maybe January, March, who knows? And potentially quarterly thereafter, as the market expects, bring the policy rate down maybe closer to the 300 quarter, 3.5% range. Do you think, these kind of fiscal policy plans throw a wrench in those plans?

Kevin Foley: I think it's... When I started this talking about 2024 being a year of surprises, we obviously saw a lot less cuts than what the market was expecting. And the market was comfortable with that, right? They focus on the fact that here, the market got comfortable with less rate cuts during the course of 2024 because the economic picture continued to be strong. You can definitely have a debate about here, the stimulus that's happening from less regulation, some of its positive sentiment too around the anticipation of that. Is that going to then prevent the Fed from doing some of those policy tightening that is expected, and are they even gonna have the luxury to even debate it? We're still not at that 2% inflation target. There are still things out there that are, by definition inflationary. Take for example, the fact that as we're shifting towards more sustainable energy, that by definition is inflationary. When you look at the investment that's needed on the defense front because of the geopolitical picture, that is inflationary by definition as well. So whether they're gonna have the luxury even easing policy further, is it going to be the challenge that they're facing now, is that gonna increase because of the stimulus that's coming in from other aspects? Yeah, that's gonna be a something we're all gonna be watching in 2025.

Amaury Guzman: Thank you for that, Kevin. I mentioned I was gonna go back to the M&A point. We recently had Alka Gupta and Matt Gell on our podcast discussing tech sectors IPO and M&A trends in EMEA. They were positive about the IPO market in '25 and '26, but they did note that companies are still cautious about M&A due to regulatory uncertainty. What are your thoughts on this outlook? And does this echo with what you're viewing at a global level?

Kevin Foley: So there's definitely a lot more enthusiasm about M&A activity in 2025. I think some of it has to do with a year ago we were sitting anticipating when were we gonna actually see an economic slowdown and anticipation of a recession. That recession never showed up. And so while the economy has slowed down, it's been more resilient. So I think there's an increased confidence in a lot of boardrooms to think about a backdrop that allows them to even think more strategically about what they wanna do. So I think that's a factor. The rates coming down, that's another positive factor. I do think the U.S. economy has been more robust than other parts of the world, in particular when you compare the U.S. with Europe, that you probably would expect to see the U.S. leading the way on the pickup and M&A activity. We've been at near historic lows for the level of activity for private equity shops exiting their investments. So we expect to pick up on that, which will be say the opportunity for strategics to add to their portfolio, to look at other sponsors who may be trying to expand the footprint in this particular industry. There's gonna be a lot of opportunities on that front. So yes, I think that the tailwinds are coming. We're expecting a lot more activity. Some of the concerns that we have, if any of them come to fruition, you can see them derailing that M&A pipeline pretty quickly.

Amaury Guzman: Now, Kevin, as we sit here today in December of 2024 and we look forward to 2025, what are you keeping an eye on for what could be a material risks to markets next year?

Kevin Foley: Well, I think a lot of the risks that we've seen in 2024 remain. I think you're gonna continue to look at the long end of the Treasury curve, where we're gonna continue to be running fiscal deficits. We are gonna have to increase borrowing. At the same time, the buyer base that's been buying Treasuries over the past 5 to 10 years, the banks, the Fed, foreign entities, foreign investors are all pulling back. So despite what the Fed may do in cutting rates on the short end, think of the long end, you continue to have pressure upward because of the supply demand and balance.

Amaury Guzman: Got it. Thank you for that assessment. I think that resonates a lot with what we're hearing from other market participants. Now, the last topic that I wanna review with you today for benefit of our listeners is our upcoming Global Leverage Unions conference, which is happening February of 2025. It is a special edition for all of us at J.P. Morgan as well as for market participants given it's our 30th anniversary of the conference. Why is this your conference particularly special for market veterans like yourself?

Kevin Foley: Well, I think you stare at that number of 30 years, and you look at what's happened in markets over the past 30 years. Pretty astounding when you start to look at a lot of things from dotcom to GFC, COVID, and that's just to name a few. So there's been so much history and development in the growth of the market. The conference in a way has grown alongside with the growth of the market. And so it's kind of watching both grow up and expand over time, and it's become a incredible ecosystem. And I think in a world. We've watched the evolution of road shows become shorter and less in person. The conference has taken on even more of importance because it is definitely a guaranteed couple days where investors and lenders are able to get with issuers and borrowers face to face and really get an update on where things stand in the economy, where things stand with those individual businesses and how they're performing. So we have the good fortune of J.P. Morgan and being a leader in the market and really nurturing that ecosystem. It is thrilling to be a part of that. It's just been fun to watch that grow over the years.

Amaury Guzman: Thank you for that. And what themes are you expecting to emerge from our 30th Global Leverage Finance Conference, upcoming in February?  

Kevin Foley: I think as you think about the themes for next year, I think it's a lot about what we've been talking about. We're gonna continue to gauge the economy. You'll have had the new administration in the office by that time for over a month, maybe we've had some progress on the geopolitical front. We're gonna be debating where Fed policy is. Feels like it's more of the same, but I feel like you take the best pulse when getting out there and hearing the management teams and the CEOs and CFOs of all these businesses and a lot of different industries from across the globe really give you a good insight. And it's a great pull-up at that to understand where we are in a lot of things we've been talking about today.

Amaury Guzman: Kevin, thank you so much for that. We really appreciate your time and you coming and spending your thoughts with us and our listeners and just kind of sharing your insights for what has been a lot of market activity in 2024, as well as your outlook for '25. A big thanks to Kevin Foley for joining me today.

Kevin Foley: Amaury, thank you. And I just say to all our partners out there, thank you for placing your trust in J.P. Morgan, and thank you for a terrific 2024. And we're looking forward to a great 2025 and hope you and all your families have a wonderful holiday season.

Amaury Guzman: And thank you to our listeners for tuning into another episode of What's the Deal. We hope you enjoyed this conversation. I'm your host, I'm Amaury Guzman. Until next time, goodbye.

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.

[End of episode]

Debt capital markets: A post-summer deep dive​

[Music]

Emma Zederfeldt: Hi, and welcome to What's The Deal? Our Investment Banking Series on J.P. Morgan's Making Sense podcast. I'm Emma Zederfeldt, your host today from the Investment Grade Finance team. In today's episode, we will take a deep dive into the state of the debt capital markets.

I'll be joined by Todd Rothman, a managing director in our Leveraged Finance Capital Markets group to talk about the high yield in the leveraged loan markets. But before we hear from Todd, I'd like to welcome Bob LeBeau, head of Global Fixed Income Syndicate, and John Servidea, global co-Head of Investment Grade Finance to talk about the investment grade bond market. Bob and John, thank you for joining me today.

John Servidea: Great to be here.

Bob LoBue: Thanks for having us.

Emma Zederfeldt: So John, to kick things off, I think it would be helpful to give our listeners an overall picture of the market. How would you characterize raising capital in the investment grade bond market this year?

John Servidea: Well, Emma, if I had to describe this year in one word, it would be busy. And that's a global comment. So, both in Europe and the U.S., issuance activity is trending well ahead of last year's pace. In the U.S., we're up about 30% year over year and in Europe, about 15% year over year. Key driver is really plain refinancing. About 25% of supply year to date is refinancing activity. And the driver of that is that spreads have remained stable, despite all of the potential macro headwinds that we've all been talking about. We've seen supportive backdrop despite the heavy supply, which is great to see. Technicals remain incredibly strong as investors have cash to deploy. And even as we've continued to break some records with some record weeks and some record months, we continue to see investors with appetite to continue to buy. Inflows continue to be strong as well, so we feel really good about the backdrop for our clients.

Emma Zederfeldt: Thanks, John. Sounds like it's been an interesting year so far. Let's maybe shift our focus to today. Bob, what has the environment been like over the past couple of weeks?

Bob LoBue: Well, as John mentioned, activities been much larger than we've become accustomed to over the course of the year and August and the beginning of September have continued that trend. When we look at August, we raised approximately 110 billion over the course of the month, and that's compared to a four-year average of about 85 billion in a usual August. So tremendous supply for the market to digest. And the beginning of September, we did 70 billion in the first week. We'll probably approach about 40 billion going into the Fed. And so once again, we're testing demand for the market. The focus remains on spread premiums and the absolute rate cost for borrowers. And the good news is that despite the heavy calendar, over subscription rates have remained robust for the supply that we're raising for companies and new issue concessions were relatively minimal below five basis points. And so, from a issuing standpoint, we think it is quite opportunistic for borrowers. On the demand side of things, once again, we continue to like what we are seeing from the investor community. Demand remains robust across the curve, especially in terms of duration, where 10 to 40 year demand is showing the deepest pools of liquidity for borrowers. And when we think about trending into a fed easing environment over the balance of the year, we anticipate the front end demand will continue to deepen as investors look to capture that rate reduction in that part of the curve as well.

Emma Zederfeldt: That is very interesting, Bob. It certainly feels like we have kicked off the post-summer window with a bang. And John, knowing that we have the election looming in early November, how do we think about supply for the rest of the year?

John Servidea: Yeah, so as I mentioned, we expect it to be active, but it is very clear that a lot of our issuer clients have pulled forward transactions just given the strength of the market in the face of these variables around the election, around central banks, et cetera. So we expect it to remain busy, maybe not quite as busy as it has been. But to Bob's point, we feel very good that investor appetite will be there for whatever supply that we do have. Again, that's a global theme. I'd say, this year in Europe, we've seen a tremendous strength of the market there relative to the US market. So we'd continue to expect a lot of our U.S. based clients to look at opportunities borrowing in Europe, where the pricing is highly competitive, if not better than the dollar market. And here in the U.S., there's a slight uptick, wouldn't call it overwhelming, but a slight uptick in M&A a related financing, which is about 15% of the market so far this year.

Emma Zederfeldt: Shifting our focus from issuers to investors, Bob, you spent a lot of time with chief investment officers and portfolio managers on the buy side. What are you hearing from them? And how are they thinking about spreads and absolute yields?

Bob LoBue: When we look at the risk asset classes spreads continue to remain near the tights. And so that is the biggest struggle that investors are focused on is the direction of travel from a spread perspective. Our strategists are forecasting our US dollar spread index to end the year at around 110 basis points. We're currently trading around 113, so modest upside from today's levels. And while we're expecting a widening in Europe of approximately 20 basis points to an index level of about 150 basis points, it leaves us relatively optimistic when we think about the spread environment. Despite that, appetite, as I mentioned earlier, remains strong. Returns have turned positive over the course of the year with the rate rally and spread compression that we have seen. So we continue to see flows coming into the spread asset classes and that is assisting us in maintaining our levels. Despite the decline in all in yields, they're quite still attractive. And so when we look at investor demand, we think that they will continue to migrate toward the fixed income and spread asset classes. And especially once again, mentioning the trend of rates going lower over the course of the balance of '24 and into '25, we think that only exacerbates demand increasing for the fixed income asset classes. We do think that the pace of fed easing in curve shape as we move forward will likely have the greatest influence on investor relative value opinions. And so that's probably where our biggest focus is in terms of where we think value is and where we believe investors will begin to invest their cash available.

Emma Zederfeldt: And following up on that, what upcoming events would you say that investors will be focused on?

Bob LoBue: There's a number of events that investors have on their radar screen that can be quite important over the balance of '24. First and foremost is likely rate volatility, and we think that that is both general market moves that are causing volatility in the market, but also the amount of treasury supply we will get in the receptivity to those auctions. Secondly, the economic data that we'll get over the coming months will be quite informative about the forward trend of the economy and any recession risks. And we think that is one of the big indicators right now for how investors are trying to put money to work. We will get more information out of the central banks, we'll get the fed minutes on October 9th, that will be quite telling for how they were thinking about the beginning of their easing program. We also have two more fed meetings following September meetings. So we have a meeting in November and in December, and let's not forget we will get third quarter earnings as we trend into the next couple of months that we think will be really important in terms of the forecasting of what companies are seeing on trends around the economy.

Emma Zederfeldt: And John, turning back over to you. Out of these events, which ones do you think are the most important for issuers to look out for?

John Servidea: It's really the fed, as Bob talked about it, it's the trade-off of inflation versus growth. The election clearly people love to talk about it and makes a good discussion topic. Historically, though, we've found that it has a, a limited or at least very short term impact on the investment grade credit market. So it's really about what is the path of the fed as we, as we look towards the balance of the year here.

Emma Zederfeldt: Last question for you, John, before we bring in Todd. Based on your interactions with issuers, what would you say are the most consistent themes that they are focused on?

John Servidea: Yeah, Emma, it's really just a, an approach of risk management. So a lot of our clients are saying, "I, I don't have the market crystal ball," and, and neither do we. But if you look at the various issues to navigate out there, and the fact that spreads have remained as resilient as they are and you look ahead to a maturity dollar amount in 2025, that's about 25% higher than this year's. There's a lot of refinancing activity for our clients to do. And so the question becomes why wait? So it's really, again, a risk management perspective of what are the trade-offs of going now versus waiting thinking through issuance, hedging, or just sitting tight. And so it's really a, a very pragmatic approach is how I would describe it.

Emma Zederfeldt: Bob and John, thank you so much for being here and for sharing your thoughts on the market today. I'm sure this all will be very helpful for our issuing clients as we move throughout the year.

John Servidea: Thanks, Emma.

Bob LoBue: Thank you.

Emma Zederfeldt: And now switching focus from the investment grade bond market to the leveraged loan and high yield markets, let's now bring in Todd Rothman, a managing director in our Leveraged Finance Capital Markets group. Todd, welcome back to the podcast.

Todd Rothman: Thanks for having me. It's great to be back.

Emma Zederfeldt: So Todd, as John and Bob just recapped, a lot has happened in the investment grade bond market so far this year. How would you characterize performance year to date on your side of the market?

Todd Rothman: So if we start on the leveraged loan market, so far, we've had just over $800 billion of supply this year. It's actually higher than the combined 2022 and 2023. And to put that in further context, if you think about the size of the overall US leveraged loan market at roughly a trillion and a half dollars, that means that we've turned over more than half of the market, and we're only two thirds of the way through the year, and new supply continues to emerge. Now, as we look at the composition of the money that we've raised in the loan market this year, I'd say 80% to 85% of that has been used towards refinancing. At the same time last year by comparison, that was only 40%. So we had a lot more M&A and net new money supply coming through the market last year. So borrowers have been able to take advantage of that this year. This technical imbalance where lenders have had a lot of money they want to put to work, but there's been very little in the way of net new supply to put it to work. And that's part of what's allowed companies to come back to market to reprice their loans lower, not even once, but for a number of companies, sometimes twice.

Emma Zederfeldt: So what's been driving that opportunity set for our clients?

Todd Rothman: Well, there's two things really happening there. One is what I just mentioned in terms of the lack of net new supply. But the other thing is the CLO market. CLOs make up roughly two thirds of the buyer base for leveraged loans. And if you look at 2024, we've had roughly $130 billion of issuance so far this year, and our strategists are calling for that number to end the year at roughly 140 to $150 billion. And those are record levels that we haven't seen in quite some time. The final element that's really helped create this dynamic for our borrower clients has been the portion of the market that's trading above par. So typically, when we get above 20 or 30% of the loan market trading above par, we've tended to see a repricing opportunity emerge. This summer we peaked up at actually 65% of the market trading above par. Now, when we have the August volatility, that number dipped down to 13%, but as we've gotten back to school here in September, we've gotten back above 40% again. And so we've seen the beginning of a repricing wave to kick off the autumn period.

Emma Zederfeldt: And what about the high yield bond market?

Todd Rothman: So again, very similar to what Bob touched on the IG side as well as everything I ran through on the loan side. The themes remain really consistent here. Thus far, we've had about $200 billion of issuance year to date. Last year, that was 170 billion. So we're already exceeding last year's pace. If we look at primary volume on the high yield bond side this year, on a gross basis, we're actually running close to two X the amount that we issued in all of 2023. Yet, the amount of net new supply, similar to what I talked about in the loan side is actually same as last year. So a lot more people are coming through the market, but the, only the same amount of opportunity for investors to, to put money to work. The same story holds true there, where roughly 80% of the proceeds thus far have been for refinancing and not for M&A or dividends. One of the results of that trend has been as investors haven't had an opportunity to put money to work in primary, that's forced investors to look at the secondary market to deploy their cash balances. So if we look back at how the year has played out, this summer we peaked with spreads as tight as around 350 basis points. If you compare that to post-financial crisis period, the all-time tight was 335. So we've been bouncing around the tight levels for the bulk of the year. When you look at the volatility that we saw in August, that actually took us well above 400 basis points. We've since retreated to 374. So still really tight levels, but it's now offering a little bit of spread cushion for investors, which has helped make the market even more attractive for both issuers and for borrowers.

Emma Zederfeldt: So we've talked about supply, we've talked about spreads. Could you maybe touch on how rates also play into this?

Todd Rothman: So the loan market being a floating-rate asset class, the fact that we've been living with really high rates has been one of the things that's made that market very attractive for the buy side. When we look at things now from the issuer perspective, one of the reason we haven't seen as much supply in the bond market as the loan market is a bit of a, a mentality of, "Why would I issue at a coupon of X today, when surely that rate is going to be lower later this year and certainly into 2025 once the Fed starts cutting rates?"

Emma Zederfeldt: With all of that in mind, what is one message you would leave our clients with?

Todd Rothman: I think one of the things that we need to remind our issuer-side clients around though is back to that spread story, where do we sit in the world. So today, we sit at roughly 375 basis points. If you look back to the COVID period, we were sitting around 440 basis points there, for comparison. I mentioned the tight levels that we've achieved before. We haven't had a recession yet in this economic cycle. But if you look back over the course of the past few decades, high-yield spreads have actually averaged around 975 basis points over that period. And so while we're not expecting a recession any time soon, while we're not expecting spreads to balloon out to those types of levels any time soon, I think the punchline message that we look to give our issuer clients is that, "Yeah, the Fed is probably gonna start cutting rates soon. We don't know the pace at which that's going to happen. That's a big wild card. But if we do start to get some economic downturn, some data that makes the market feel a little bit uneasy about growth and, and future-earnings prospects, the direction of travel on all-in coupons could actually go higher as spreads widen out more than the Fed will actually cut rates." So, the punchline advice is, "Go grab the money today while it's there at what we think are still relatively attractive rates."

Emma Zederfeldt: Thank you so much for that overview, Todd. I know that we also recently held our AMIA High Yield and Leveraged Finance Conference in London. What was your key takeaway from the conference?

Todd Rothman: The conference was, was fantastic. It was one of the largest ones we've had yet. On the bond side, one of the key themes coming out of the conference for sure was that rate cuts are coming. There seems to exist broad consensus that rate cuts from global banks are imminent in the last few months of the year. The pace that that's going to happen and, and how deep those cuts go into next year is what really remains the, the moving target. How the market reacts to these rate cuts I think is really going to be a function of, "Why are we seeing the cuts happen?" Is it more about normalization of policy, or is more because we're actually seeing a real economic downturn, we're seeing a real shift in employment data and things that are worrying from a growth perspective? In that kind of scenario, we could certainly see spreads widen out a fair bit more. If it's the more benign pure normalization, we actually could continue to have very attractive conditions for issuers in the year ahead. But again, we encourage people to get out in front of that, not knowing how that's all going to play out over the course of 2025.

Emma Zederfeldt: And how are things looking from an investor perspective?

Todd Rothman: If we think about things now from the investor, the fixed-income asset class remains a really attractive one to invest in. So despite the expectations for lower rates in the near terms, credit funds continue to attract sustained inflows thanks to the overall appealing yield backdrop and what remains a really benign default rate. So corporate earnings continue to be strong. The high-yield issuer base continues to have strong liquidity. And from a credit standpoint, it feels like a safe place to put money to work while still achieving an attractive return. One of the things we also talked about at the conference was what the outlook for supply looks like, because as I mentioned, both in the loan side as well as the high-yield bond side, it's been a very refinancing-heavy market. And so the natural question we get is, "What's the outlook for M&A activity as well?" The underwritten pipeline for deals is at a two-year high right now, and that's been supported in what's taken a while to emerge, but a bit more of a convergence in valuation gaps between private-equity buyers and sellers, as well on the corporate side. While the numbers are still small by historical comparison, so to give you a sense, coming out of the summer, the underwritten pipeline in the US for M&A, for LBOs is around $25 to $35 billion. In Europe, it's about half of that. If you put that in context historically, pre-financial crisis between the US and Europe, we had nearly half-a-trillion dollars of underwritten capital. So, it's better than it's been throughout the balance of 2024. It is at a two-year high, as I mentioned, but there's certainly a lot more room to grow there. We're definitely encouraged by what we're seeing on the investment-grade side. We've had some large cap M&A deals emerge, and typically what you see is, first you get the large deals get announced on the IG side, and then it trickles its way down into the high-yield side. So as we look into 2025, we feel good that we're going to see an uptick in M&A supply versus the past couple of years.

Emma Zederfeldt: So maybe pivoting to the outlook. Bob and John referenced some key catalysts that may impact risk appetite in the near term. In the context of the high yield and leveraged loan markets, what are you keeping an eye on?

Todd Rothman: Sure. So on a macro front, what's interesting is we've spent the better part of the last couple of years staring at CPI, PPI, and anything and everything having to do with inflation. We seem to have reached a place in the market where everyone's gotten complacent that the inflation job is done. I think that's a risk. There's certainly a number of inflationary pressures that remain out there, but the market is pricing in right now that that is a non-event. So we'll have to keep an eye on that. Jobs and employment data has really become the new CPI, the new PPI, where everyone's really focused in terms of getting a sense as to what the pace will be of rate cuts to come. Geopolitical risk is still out there. It's been out there. But the reality is that as we've seen a variety of flareups around the world, markets have remained incredibly resilient. A lot of that is all down to the strong market technicals that we've had, and by that, I mean the lack of net-need supply, the strong cash balances that investors have. Does that dynamic change, in particular if we get a little bit more M&A supply out there? For international companies, but even for purely US domestic companies, Chinese economic growth is gonna be a really important factor. You've already seen a couple of forecasters out there lower their GDP forecast for this year and questioning whether or not they're going to hit their 5% target because of how intertwined the world still is. As China goes, that'll impact corporate earnings a lot. Clearly, in a couple of months, we have a US election as well. We get asked the question all the time, "Do I need to avoid the markets during October? Does that become a really volatile period?" And what's really interesting, we went back and looked at data going as far back as the, the early 2000s. And when you look at the data, and I'll just use the recent ones as, as an example, in 2012, 2016, and 2020 respectively, we only saw high-yield spreads rise one basis points, fell 14 basis points, and fell 40 basis points, respectively. So actually, you could argue that the election period hasn't been volatile. It's almost been a market catalyst. The other thing that has been interesting is that sort of one month leading up to the election, if you look back over the last three decades as well, on average, 90 days post-election, high-yield spreads have actually tightened 50 basis points. So you're certainly gonna see some election volatility in and around the date. But overall, we, we don't think who wins is as important as the other factors I've talked about here. I'd also argue in terms of development of more M&A volumes in the market, it's less about who wins the House and Capitol Hill, and it's almost more about what is the new regulatory regime, who's running the various agencies that approve mergers, and does that provide a catalyst or a further hindrance to C-suites and boards feeling more comfortable announcing deals. The final thing I'd mention is just how much markets are pricing in the way of rate cuts for the balance of this year and next year and I think that's a real wild card in terms of, like I've talked about already, how much actually gets cut, what is the pace of it and why. And so, it's less about what the outcomes are at the meetings and more so, I think, about what the narrative from the various fed governors is, coming out of each of those decisions.

Emma Zederfeldt: Thank you so much, Todd. A very interesting update to say the least. To recap, it's been a busy year so far, but the investment grade bond market is in very good shape. Similarly, high yield and leveraged loan markets continue to perform strongly and with plenty of capacity for issuers and borrowers looking to tap the market. John, Bob, and Todd, thank you for taking the time to sit with us and give your views on the market today. Also, thank you to our listeners for tuning in to another What's The Deal? episode. We hope you enjoyed this conversation.

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 JP 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. Copyright 2024, J.P. Morgan Chase & Company, all rights reserved.

[End of episode]

IPO comeback: What’s driving the uptick?

[Music]

David Rawlings: Hi. You're listening to What's The Deal?, our investment banking series here on J.P. Morgan's Making Sense podcast channel. I'm your host, David Rawlings, country head of J.P. Morgan in Canada. Today, we're exploring the current state of the IPO market. Joining me is my friend and colleague, Keith Canton, who leads Americas Equities Capital Markets. Keith, welcome.

Keith Canton: Thanks, David. Really appreciate you having me today. 

David Rawlings: Listen, before we dive in, why don't you just spend a minute to tell our listeners a little more about you and your role here at J.P. Morgan?

Keith Canton: Yeah, absolutely. I've now been in banking for over 20 years, but I actually started my career in publishing at Sports Illustrated Magazine. Currently, I run the Americas Equity Capital Markets practice, so really responsible for all of our IPOs, public equity, but also our private equity placement business as well. When I joined J.P. Morgan nine years ago, I was hired to actually found and build out that private capital markets platform.

David Rawlings: So we get lots of questions from the 20-year-olds who say, "How do we get into banking?" How did you make that shift?

Keith Canton: Well, coming out of Sports Illustrated, I was not quite qualified to make the leaps specifically into banking, so for me my route was going into business school, and I ended up joining Lehman Brothers as a summer associate in 2001, and a full time associate in 2002. 

David Rawlings: And where did you go to school?

Keith Canton: I went to Fuqua School of Business at Duke University.

David Rawlings: Go Blue Devils.

Keith Canton: Yes, sir.

David Rawlings: Awesome. Listen, I had Lorenzo Soler, who is our global head of Equity Syndicate and a very good partner of yours, and we talked about IPOs. Let's just play a clip from last year's discussion with Lorenzo.

Lorenzo Soler: In terms of what our investor's looking for, what types of quality businesses are they prepared to buy, I would say there's massive focus now on structural growth stories with profitability. The days of 30 to 40% top-line with less of a focus on bottom-line are behind us for now.

David Rawlings: What he said was there was this shift away from high growth unprofitable to more disciplined and profitable. We'll get into this in a second, but when you think about your day, volume is about 15 billion up materially from last year. So I shift to you, is the current activity consistent with that approach?

Keith Canton: Yeah, I think Lorenzo was spot-on. When you take a step back, you know, on the face the market looks quite positive. The Nasdaq, S&P are both effectively at all-time highs and really equity capital markets are up across all products. Follow-ons and blocks are up a combined 65%, converts up about 65%. And I know we're gonna focus here on the IPO market, but the IPO market right now is running about 2X what it ran last year. And you're spot-on, $15 billion raised year to date. First is just under 20 billion for all of last year. So we feel quite good about where things are.

David Rawlings: Now, I would say 2023 that's not your bench-mark years because that was still a tougher year, '22 and '23, but 15 billion, if you put that into the context over a longer period of time, it feels pretty healthy?

Keith Canton: Yeah, I mean, the way we think about it is pre-COVID we were running in the mid-40s from an IPO volume standpoint. That clearly jumped up to a peak of well north of a hundred in 2021, then we dropped to seven. And so we're coming off of all-time lows, 7, 20. And based on what we're seeing, we would expect the IPO market to end up in the 30s from a volume standpoint.

David Rawlings: Good, so almost back to normal. But you know, it's been dominated by some big deals, and you might wanna highlight a couple of those particular transactions for our audience.

Keith Canton: You're absolutely right. I mean, when we think about where we are in the market, maybe just taking a step back, deals are getting done and they're getting done well. The deals are working, they're getting done across all sectors. And to your point, they're actually getting done in size. This year, the average deal, the median deal when you take out biotech is close to $700 million. We're seeing quite sizeable deals and this year we've already had four or five billion dollar plus transaction, which is really showing the investor sentiment to get transactions over the finish line.

David Rawlings: And when you say investor sentiment, take that one step further. Is it a different type of investor that's showing up today versus last year? Like what's the composition and how's that changing?

Keith Canton: You know, I think the biggest positive we've seen this year is really much broader participation across the landscape. So the mutual funds have actually started to come back in a very big way. And you're also starting to see generalist portfolio managers come back into the market. And what that does is it really allows for more larger IPOs, particularly those IPOs placed with really fundamental investors. So we're reducing the reliance on sector-focused portfolio managers who might be size-constrained and hedge funds who might be more likely to churn in the after-market. And so the marginal IPO dollar, we can actually place that now into stickier hands. So it's really good to see the mutual funds and the generalist PMs come back into the market in a really material way.

David Rawlings: And then what about across sectors, is it consistently strong across sectors?

Keith Canton: Historically, technology is the dominate sector within the IPO market. We're not really there. In this market we've seen five tech IPOs this year out of about 30. So we're seeing broad-spread participation, consumer, industrials, financial services. Insurance has been a big part of the market so far. And in healthcare. Healthcare services meets Lorenzo's threshold of big scale profitable businesses, but you're also seeing biotech as well. We are seeing deals get done across all sectors. But interestingly, deals are also working, which I think is also leading investors to wanna get back into the IPO class. This year, if you strip out biotech, 80% of the IPOs in 2024 are above issue price and the median IPO is up about 20%. So the deals are working and that's really leading people to view the IPO product as really a source of alpha once again.

David Rawlings: All right, so let's strip that down in a few different ways. So you mentioned scale and profitability. I've also heard you talk about durability. So just go a little deeper on kinda what that means.

Keith Canton: When we think about what is an attractive IPO candidate, we always come back to scalability, profitability, and durability. So, are the companies really sizeable? If not, can they become sizeable companies? Are they profitable today or are they on a very clear path to profitability in the near term with a high degree of visibility? And are these durable business models? Are they providing a service or a product or solving something that is really gonna be around if the company decides to remain independent for the next 5, 10, 15-plus years? Do the business model really have durability to them? And what you're seeing in the class of '23 as well as the class of '24 IPOs, companies are checking really all three of those boxes. And if you're doing that, you're gonna get rewarded with an appropriate valuation but also the right types of investors. And if you can only check two of those boxes, and we've seen a couple of examples of big companies real business models but not yet tipping into profitability, those companies are pricing and seeing much more muted after-market performance.

David Rawlings: And then when you talked about after-market performance, why is that important?

Keith Canton: I thnk it’s important for a couple of reasons. First and foremost, people tend to think of the IPO as the event, but it's really only the first step in a journey to being a public company. On average, most of the IPOs are selling anywhere from 10 to 20% of the company, which means you get 80, 90% plus that still needs to be potentially monetized over time. And so if you show some early gains to investors and you perform quarter after quarter, you're gonna have a far bit of investors who are gonna be there to help you monetize your stake over time and really get you the maximum value for that residual 80% stake versus trying to maximize out that first 10 or 20% stake.

David Rawlings: Okay. When you think about the potential headwinds, there's geopolitical tensions and other things going on, what are you hearing in terms of pushback from the investors? And can you put some numbers around that?

Keith Canton: I think investors want to deploy capital but they're mindful that we are still facing headwinds. Inflation and labor cost are still up. And that has a big impact in the consumer sector. We do have geopolitical risk, which is incredibly hard for an investor to handicap, and to price in the right amount of risk premium there. And so when you think about all that, investors wanna make sure that they're coming in at the right price. And so what we've experienced is the traditional IPO discount has widened out pretty materially. Historically, we would’ve thought about a traditional IPO discount of plus or minus 15% when measured against what the market perceives to be the closest comparables. In this market, we're seeing IPO discounts of 20, 25, in some cases just north of 30% on that same basis. So investors are incredibly disciplined to make sure that they're getting in at the right entry price. And part of this goes back to the lessons that they learned from the class of '21 IPOs, where 3/4 of those IPOs are still underwater today. So investors, I think, are showing a heightened degree of discipline in today's market.

David Rawlings: Well, to your point, it seems to be working, as long as the company has appropriate scale and that business model is durable, there's interest. It's just you have to figure out at what price, and I think finding that intersection is what we do really well.

Keith Canton: I think that's spot on. We're very fortunate. We get to see a lot of high quality companies, and we have the opportunity to tell those stories into the public markets. And so, for us, it's really making sure we get that balance of scaled business that's showing real growth but is also very focused on profitability. And when you take a step back and think about what the market is telling us about profitability, we've seen almost a 5X change in the relative importance of profitability to growth, when we measure those in an analytical way. So the market is very much focused on profitability, but I always come back to the fact that the IPO market is really predicated on growth. It is a growth market.

David Rawlings: You had mentioned your structured equity background. I know you spend a lot of time with private equity and structured investors, and private equity's become a much bigger part of our market over the course of the last several years, across credit and equity. But if you're in this environment where companies need to be more mature, how does that impact them, and what are you seeing as it relates to your market?

Keith Canton: I think the cuurrent setup of large or in profitable companies actually plays quite well to where sponsors historically have invested their capital. When I think about the IPOs we did this year for Viking and UL Solutions, those, I think, provided quite a good readthrough to how sponsors might think about their portfolio companies. Those were both billion dollar plus IPOs. Those were both very profitable businesses with fairly low leverage on a relative basis. But importantly, over 80% of the proceeds in both of those transactions was secondary, back to the existing shareholders. And so if you're a financial sponsor that is really focused on how do I return capital to my limited partners, those two deals in particular, and there's been a few others, really, I think, provide some positive signs of life. And so when we're having our conversations with the sponsor community, we've absolutely seen a pickup in the preparedness of financial sponsors to wanna get their portfolio companies out into the public markets.

David Rawlings: Is it uncommon to see that much secondary stock in an IPO?

Keith Canton: Historically, when you're in a growth market, that would be very uncommon, because the companies really needed to raise the capital to grow their businesses. But in a world where the companies that are going public are already profitable, you really only have a couple of use cases. You can repay debt, you can think about acquisition capital, or you can give the capital back to the selling shareholders. And so just with the shift in the size of the companies, the profitability of the companies that are accessing the public market today, we're actually not surprised to see secondary proceeds be a very accepted use of funds from the buy side community.

David Rawlings: Okay. So that covers more traditional private equity. And how does this impact the venture community?

Keith Canton: The venture community is clearly one of our important constituencies. And what they're experiencing is, they're waiting a little bit longer to access the IPO market because they want their companies to grow into a sufficient scale that they'll be attractive in the public markets. Historically, we would've thought about a company with $100 million of revenue being public company-ready. That was an IPO in '20 or '21. In the current environment, those same metrics are probably closer to $300 or $400 million dollars before you're of sufficient size and scale to really attract mutual fund or a public company investor.

David Rawlings: Got it.  So let's just shift for a minute, here we are, halfway through 2024, as we think about the back half of the year, obviously we got an election cycle which we won't spend a lot of time on, but what are you hearing from investors in terms of their appetite? Do you think this market will remain resilient as we get through the summer and the fall?

Keith Canton: I think the summer and the fall should be fine. When we look at the companies that we have in our backlog, and we take a look at what we believe is gonna come across the street, I think you'll see a pretty healthy issuing cycle for the balance of this quarter, Q2, which is really June. Then I think you'll see a pickup in July, the number of companies are shooting for that July window. And then ultimately, we're gonna get into the fall. And I think the bulk of the issuance will really come in September, October. Most of the clients that we're speaking to really wanna get ahead of the election to the extent possible. And once you get past the election, your windows with the year-end holidays tends to get fairly limited. So I think we'll see a fairly active next two months, and then I think we'll see a fairly active September, October, and then it might be a little quiet then we would historically think about for the balance of the year.

David Rawlings: And my guess is, just given the time it takes to be ready to go public, you've already got a pretty good lens on that.

Keith Canton: We do. I mean, we are having organizational calls and kickoff calls for companies that are looking to IPO in October. And, as we tell our clients, if you really haven't picked your banks, picked your law firm, and are well down the path of the IPO process, you're really looking at 25 at this point.

David Rawlings: Okay. So listen, we've covered a lot of topics. Let's just bring it back home. We're in the advice business. You spend a lot of time giving advice to issuers, you also understand deeply what the investor wants. Can you just talk about what advice you are giving to corporates today?

Keith Canton: Yeah, I think two things really jump out at me when I think about what companies oftentimes don't think about when they're ready to go public. One is, how do you want the public markets to view your company once you're public? What are the KPIs that you wanna be able to tell quarter after quarter, that you wanna be judged on by the market? So start thinking about what those KPIs are today, start thinking about how you're tracking those KPIs today. And that's critically important. A lot of times companies get to the public market, and they haven't really thought about what narrative they wanna tell one, two, three quarters down the road. So I think that's particularly important. The other thing that we always focus on with companies is, make sure you can predict your business. The public markets reward consistency and predictability, and so, as you think about putting the financial model together, you wanna balance being aggressive with what can you actually deliver? And there is nothing that destroys credibility for a newly public company than missing the market's expectation in the first couple of quarters. So those would be the two things that, as we think about advice to our potential IPO clients, that we really try to hammer home.

David Rawlings: Yep. And then I think the third one you touched on earlier, which investors recognizing that this is a market you can get sized on, but you have to be less sensitive on discounts. Let's get a successful deal done, let's set ourselves up for multi quarters of performance, and then we can continue to monetize into the future.

Keith Canton: Spot on. There is a lot of equity to sell once you become a public company. The IPO is incredible, but it's just one step on the journey to being a public company.

David Rawlings: Well said. Okay, good. Listen, to recap, today we explored the IPO market, we discussed the recent uptick in activity, the changing landscape, and some notable trends across sectors and regions. Big thanks to you, Keith Canton, for joining me. Valuable insights as always. 

Keith Canton: Thanks for having me, David. 

David Rawlings: And thank you to our listeners for tuning into another episode of, What's The Deal? I'm David Rawlings, until next time, thanks for listening.

[End of episode]