Debt Capital Markets

30 years of growth: Insights from J.P. Morgan's Global Leveraged Finance Conference

[Music]

Amaury Guzman: Hello, and welcome to What's The Deal? on J.P. Morgan's Making Sense podcast. I'm your host, Amaury Guzman from the Leveraged Finance desk. I am joined today by returning guest, Kevin Foley, our global head of Capital Markets, and we're both fresh off the plane from Miami where we hosted our annual Global Leveraged Finance Conference. Kevin, welcome back.

Kevin Foley: Thank you. A little cooler in New York than Miami, but always good to get back to New York.

Amaury Guzman: (laughs) Certainly, certainly, Kevin, and we're still reeling with all the excitement that we lived down in Miami. We hosted over 3,000 attendees, had over 131 companies presenting to investors and lenders alike, received over 14,000 requests for one-on-one meetings. After three days of talking to clients, investors, colleagues, and alumni, what do you feel the sentiment to have been like down in Miami?

Kevin Foley: Well, it was a great event and what was exciting about this year, we celebrated our 30th anniversary of the Global Leveraged Finance Conference, and when you look back 30 years ago, it was a hundred-person event. We probably had less than 30 companies. As you mentioned, 131 presenting, and then we had another 120, 130 others that were additionally doing one-on-ones. So it's tremendous to see the growth that this event has had over the years and the investment that's gone into it from our standpoint. One of the stats that I also like to throw out there is about the market growth itself. So in 1995, you had a $350-billion market across high-yield bond and leveraged loans. Today, they're each a $2-trillion market, and then you add on the direct lending market at 2-trillion, you've got a combined 6-trillion credit market from what was at 350-billion 30 years ago. So not only does it show up in the attendees and the ecosystem that is created in Miami with our event, but also just seeing the massive growth in the market.

Amaury Guzman: Now, Kevin, just digging into subject matter of what was discussed down at the conference, what's your take on where the thoughts of the market are at the moment?

Kevin Foley: So in speaking with investors and lenders, I'd put it in the category of cautiously optimistic. There is definitely bullishness around the pro-business agenda that's coming outta Washington, continue to see a robust economy in North America, earnings from the fourth quarter came in well. I think what they were hearing outta generally from management teams there of business trends continuing. Where the caution will come in is a lot of the discussions around tariffs. We continue to wake up each day with a bit of news around what's on the tariff front. And I think the biggest challenge that, and even you hear this from management teams too, is you don't know where, you don't know how much, you don't know what industries, and while everyone is optimistic that it's gonna end up in a good spot, there's a lack of clarity around it. And so investors and lenders are assuming we end up in a good spot because perhaps it's negotiating tactics, perhaps they'll be used wisely if they are used, and that the economy can be resilient with whatever that may create. Because there is concern they could be inflationary. Does it trigger a trade war when you also still have inflation hanging in the balance, right? It continues to be sticky around 3%. We haven't got down to the Fed's target, 2%. That is gonna still hang in the balance for some time here. Market mostly is taking a optimistic view on that stuff. I'd say a large part of that has to do with the technical picture. You still have a lot of liquidity moving around the system and that is kinda driving and carrying the day. And in fact, you've got a lessening of regulation expected outta Washington as viewed as a positive development and that it's gonna be able to drive and overcome some of these other challenges.

Amaury Guzman: Thank you for that. It feels like investors and lenders are giving the benefit of the doubt, at least for the time being, expecting a benign outcome for now. I would like to pivot to M&A activity. It feels like animal spirits are certainly alive and that the art of the possible is certainly back on the table. How do you feel about the market's ability to price new risk to finance the upcoming M&A pipeline?

Kevin Foley: Yeah, I definitely subscribe to the animal spirits being very much alive. When you look back to post-election, the chatter picked up very quickly, and I think if I look back to 2024, one of probably the more positive surprises was the momentum that came out of post-the-election in November of activity and dialogue around potential M&A that we saw into the end of the year. As it came into January, it felt like it, those talks had, were not quite the same momentum when we started the year, but I'd say over the past five weeks, the dialogue around that has really picked up. And what we're seeing in terms of financing requests related to M&A is some of the busier levels we've seen in several years. There was nothing that I heard in Miami that would change that view, and in fact, a number of situations I always said, "Okay, yeah, it continues to be a driving factor for 2025." I do have caution around some of the uncertainties that we've talked about and where tariffs and other things may come into play. Does that slow down that trend? So far, we're not seeing it. We see the confidence still being there, certainly the financing markets are there, but it's something we're watching very closely to see if the trends continue.

Amaury Guzman: I would absolutely agree with that, Kevin. Based on the discussions that you had with both lenders and investors and clients over the last couple of days, what do you think will be the items that they'll keep an eye on to drive forward their strategy for the rest of the year?

Kevin Foley: Tariff discussions, inflation data, health of the consumer, and then just overall earnings performance of companies. When you look at what are potential pressures that some are concerned about, potential labor pressures picking up, does some of the discussion around tariffs have some disruption, supply chains, and just the overall robustness, but really looking at those metrics to see where things will trend over time.

Amaury Guzman: That certainly makes a lot of sense and I'm sure that folks will keep an eye on that as well as they navigate their own strategies. Now, Kevin, at the conference, J.P. Morgan announced that it's increasing its commitment to direct lending and allocating $50-billion from our own balance sheet. We've already deployed north of $10-billion across more than a hundred deals, and we will continue to have our strategic co-lender partners accompany us on this next stage. As we take this next step forward in the market, it feels like increasing our commitment only highlights our approach to being solutions-based as well as product-agnostic in our advice. What can clients expect from J.P. Morgan on this front?

Kevin Foley: First, we are very excited about the announcement of the $50-billion commitment, but we also like to point out to our clients that we've been in the direct lending business since 1799 when the Bank of the Manhattan Company was founded. So while we have made this announcement, (laughs) we do think it's been a long time in making direct loans. But we are excited because the market has evolved, and as we've evolved our business over the years, this is just another turn on that evolution. So we recognize the competitive landscape has changed and the needs of our clients have changed and the way markets operate have changed. And so our goal is always to evolve with those changes over time, and I think that's just the latest in that evolution. Or as you said, our goal is to be product-agnostic. We wanna be able to give our clients the most objective advice and really be in the financing solutions business, as you point out. We wanna be able to walk into our clients and say, "Here's a broadly syndicated loan, here's a direct loan, here's a high-yield bond. Maybe even a convert could make sense." We, at the end of the day, don't care. What we do care about is that our clients get the most effective capital structure for their needs, and those are gonna change over time, over the life cycle of the company. So for example, we've got 80,000 global clients. 32,000 of those are middle market clients. Perhaps in an earlier stage of their life cycle, a direct loan's gonna make more sense given the size, but as that company grows, maybe it's gonna go into the broadly syndicated or high-yield market, maybe eventually it becomes a public company and then converts are gonna be an option. So we wanna be there at all stages of life for our clients and be able to fit all their needs. There's also what we're not talking about is the fact that why do our clients want us in the direct lending business? There's benefits to that market and we think that market's here to stay. But those clients also, what we've heard from them is saying they want us bigger in the direct lending business because there's so many other things, whether it's payments, cash management and treasury services, FX and hedging, those things that they get from us as well. They wanna be able to come to the biggest and broadest platform called J.P. Morgan and be able to get all of those solutions from us.

Amaury Guzman: No, that's certainly clear. I think that the value is really there and very visible, being a one-stop shop for our clients, for investors and lenders, the buy and the sell side alike, and being able to speak to the whole life cycle and accompany them across financing solutions as they grow and as they evaluate a strategic matters as well. Kevin, any final thoughts or actionable insights that you have as takeaways from the conference?

Kevin Foley: Well, first, thank you for all our clients that participated. We always like to remind you all that we don't take for granted the trust and partnership you place in J.P. Morgan and the franchise that we built every day that we're in the markets to, when we're celebrating a 30th anniversary, like the Global Leveraged Finance Conference this year, it's all because of that partnership and trust you place in us. So we're as only as good as our partners. So thank you for all that support. I also wanna thank the J.P. Morgan team who did an amazing job as always making the event a success. As we look forward, there's a lot to be watching, as we've talked about, from the tariff discussions to the resiliency of the economy. Does M&A pick up the way we expect it? I think 2025 is going to shape up to be a very interesting year. What we're telling our issuer and borrower clients is that there's a good backdrop right now to take advantage of issuing in the markets and something they should be looking at very closely because there's a lot of things out there could change, it could change quickly. So we look forward to continuing to work with all those clients, we look forward to continuing the partnership with the buy side, and again, we thank you for all of that.

Amaury Guzman: We also look forward to meeting with everyone again at our EMEA Leveraged Finance Conference in London. That'll be happening later this year from the 3rd to the 5th of September. So to all our listeners, please stay tuned for more updates on that front. And thank you for you, Kevin, for sharing your thoughts and your key takeaways from the conference as well as for leading such a successful event this year.

Kevin Foley: No, thank you, Amaury, and look forward to seeing everyone in London in September.

Amaury Guzman: And thank you to our listeners for tuning in. Stay tuned for more episodes of What's the Deal? on J.P. Morgan's Making Sense podcast.

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. © 2025 JPMorgan Chase & Company. All rights reserved.

[End of episode]

Debt restructuring: Recent trends, insights and market dynamics

[Music]

Amaury Guzman: Hello and welcome to What's The Deal?, our investment banking series on J.P. Morgan's Making Sense. I'm your host today, Amaury Guzman from J.P. Morgan's Leveraged Finance desk. With me today, I have Dan Pombo, a managing director and head of the Restructuring and Debt Advisory practice, in our Debt Capital Markets team. Today we're going to be reviewing an area of the market that we don't often talk about, and that is credit restructuring activity. Dan, glad to have you here with us today.

Dan Pombo: Pleasure to be here.

Amaury Guzman: Dan, before we get started, and for the benefit of our listeners, can you tell us a little bit about yourself and your career at J.P. Morgan?

Dan Pombo: Sure. So I started at J.P. Morgan 26 years ago, originally in Leveraged Finance Origination, and then I moved to the Leveraged Loan Capital Markets' desk for a few years. And then during the great recession, we were not very busy and restructuring was getting really busy, and the head of Restructuring asked me if I wanted to make a change, and join the restructuring team? And I thought that was a great idea. And I've been there ever since.

Amaury Guzman: Oh, wow. Some may say that it worked out.

Dan Pombo: It worked. (Laughs).

Amaury Guzman: (Laughs). No pun intended.

Dan Pombo: Pu dum bum.

Amaury Guzman: (Laughs). Thank you for that. Why don't we dive right in. For the better part of last year, we've had guest speakers come into the podcast and speak of how strong the market has been by various measures, fundamentals, technicals, primary market activity has been at record levels, particularly on the leverage loan side and specifically to the refinancing of debt coming due. However, there is an area of the market that hasn't been able to refinance near-term maturities as easily. Can you give us an overview of the restructuring activity we've seen in the market over the last 12 to 18 months?

Dan Pombo: Sure. Yeah, so just to level set some quick stats. There's $2.8B outstandings, across the leverage loan in high-yield bond markets, and that excludes direct loans. And in 2024, there were $84B of defaults in that universe, resulting in a 3.1% default rate. And for context, that's roughly in line with 2023, but it's high relative to historic norms, which in non-recessionary years typically is below 2%, so we're in an elevated default context here. A few drivers of that elevated default activity, despite the wide open capital markets that you mentioned over the last couple of years, not every company has been able to refinance. The most speculative credits have struggled to refinance over levered capital structures. Now that interest rates have reset higher, these companies can no longer afford their capital structures if their cost of capital was completely reset to current interest rates. And so as they approach maturities, they find the regular way capital markets very challenging to access and often these companies are facing changes and challenges in their industries that has impacted their profitability as well. For example, industry dynamics are changing rapidly in healthcare, media, telecom, and technology.

Amaury Guzman: Thank you for that. That's really comprehensive at a broad level, but if you were to try to dive a little deeper here, any specific trends that you could pick apart, within restructuring specifically?

Dan Pombo: Yeah, sure. A couple jump out. First, we're seeing much more activity in the loan market relative to the bond market, as it relates to defaults. It used to be the, the loan market experienced a lower default rate than the high-yield market, because it's typically secured, higher in the capital structure, et cetera. But in the last couple of years that's flipped, and in 2024, over three quarters of the defaults happened in the loan market. The second trend that I'd point out, and this one's really interesting, we include in our default stats, both in-court restructurings, which are chapter 11 filings and out-of-court restructurings. The latter are liability management transactions for distressed companies. We can it as a default if loan and bondholders are exchanging below par or taking a haircut. And before COVID, the volume of these haircut transactions was negligible, but since 2021, their share of total default volume has been growing. And in 2024 for the first time, the volume of out-of-court restructurings was greater than in-court, and it wasn't even close, 70% of all restructurings last year were done out-of-court.

Amaury Guzman: Oh, wow. That flip in outcomes is really interesting. Primarily as you pointed out, that loans are, for the most part, secured, so them having a higher portion of vote rates versus bonds in this case is surprising, as well as the higher amount of processes that are getting resolved out-of-court. In your view, what explains this flip or this trend?

Dan Pombo: Well, two things. First, the cost of filing for chapter 11 has become prohibitive. Professional fees have risen dramatically in recent years, to the point that they're now materially reducing creditors recovery in court, as professional expenses are paid before creditors. And second, covenants in today's documents are very permissive. Companies have a lot of flexibility to move assets away from their creditors and use them to raise new money and extend their maturity runways, which effectively primes the existing creditors. This has given rise to the so-called creditor-on-creditor violence theme that has been written about extensively in the last few years.

Amaury Guzman: Got it. And how has this changing landscape impacted your business?

Dan Pombo: Yeah, sure. So if we were to go back, say 10 years when restructurings were done primarily through a Chapter 11, J.P. Morgan's role was limited to raising capital to fund their restructurings, through dip financings typically, and to recapitalize the capital structures upon emergence from bankruptcy through exit financings. And we still do that activity, but now that the majority of restructuring processes are getting resolved out of court, the conflict regime of chapter 11 that precludes us from advising clients that pursue an in-court Chapter 11 filing, no longer applies as often. So historically, directors and officers have viewed traditional banks as conflicted in distressed situations due to their credit exposure, and for restructurings in Chapter 11 that precluded banks from advising companies in restructurings. This led to the rise of boutique firms in the restructuring space to handle those advisory assignments. But that's not really the right way to look at out of court restructurings or liability management exercises. In our view, it's generally not beneficial for a client to impair their revolver bank exposure. Companies spend decades building those banking relationships and in addition to low cost working capital, banks offer numerous other services that are tremendously valuable. It's almost never the objective to impair those lending relationships. Consequently, if the objective is to renegotiate with their institutional lenders and investors that hold their term loans and bonds, there's no conflict to be managed using a bank such as J.P. Morgan.

Amaury Guzman: I see. Well, I think that's very clear. So as a segway, if a company is looking for a bank or an advisor to accompany them in one of these restructuring processes, what value can they extract from our broad platform in this space?

Dan Pombo: Sure. Well, the skill set that's needed to negotiate with creditors aligns with the expertise that J.P. Morgan exhibits every day, in serving as an arranger for syndicated financings, we are the perennial market leader in originating, leveraged finance and allocates more high yield bonds and leverage loans than anyone else. In our view, no one has the relationships with high yield bond investors and institutional lenders that we have, it's a differentiated relationship. When an outreach comes from a boutique advisor without the sales platform that we command, that message is received differently. And what I find really interesting is that boutiques also represent creditors. J.P. Morgan never represents creditors or investors. We are always hired by the company, so we are never in a position where we are representing company A in negotiations with creditor X, while at the same time pitching creditor X to represent that creditor in their negotiations with company B, for example. Also, our sales and trading operation gives us unparalleled market color. We know exactly what's happening in the market, and the ability to talk to a company's investors and lenders simultaneously through our sales desk. We don't have to rely on bilateral negotiations with an advisor. Such a dynamic could result in a lowest common denominator approach, as opposed to a market clearing result. Because of our market making activity, we have a better idea of where a deal could or should clear, rather than relying on bilateral negotiations with an advisor to a group of creditors that can suffer from group think, and are often driven by the least constructive creditor in that group. Also, keep in mind that hiring J.P. Morgan is not by itself a signal to the market that the company is contemplating a restructuring because of the breadth of what J.P. Morgan can provide. The market's rightly associate the hiring of a boutique with a restructuring, whereas the hiring of J.P. Morgan is a much more benign signal to the market. J.P. Morgan can be associated with capital raising, M&A, strategic advice, etc. And when it comes to the nuts and bolts of liability management, no one is better. J.P. Morgan has led the liability management league tables for years.

Amaury Guzman: That's very compelling, particularly the argument around finding market clearing results as opposed to a lowest common denominator for our clients. If we were to try to exemplify or illustrate a case study or a recent example where they've delivered that, anyone you would point to?

Dan Pombo: Yeah, we just actually priced a deal a couple of weeks ago that was emblematic of this new regime. I'll keep the name of the company out of it to protect the innocent, but we just recently worked with a company that had a near-term maturity, sizable, billion-billion and a half, and had ample flexibility in their credit documents. As creditors organized into an ad hoc group and then signed a cooperation agreement with each other, they then presented the company with a self-serving transaction, that would've driven their cost of capital materially higher and eliminated much of the company's flexibility. Companies facing that situation typically would hire a boutique firm to negotiate with the advisors to the ad hoc group, but in this case, we came up with a market-based approach that was materially more attractive, and J.P. Morgan was brought into the fold to lead the negotiations for the company. And so leveraging our insight into the markets and our relationship with the investor base, we were able to come up with a differentiated transaction structure that was much better than what the group proposed, and we found an investor outside the group that was willing to support our alternative structure. So we leveraged that proposal to re-engage the existing creditor group on much more competitive terms. That structure allowed us to refinance their near-term maturity in a market at a yield that was roughly 400 basis points tighter than what the ad hoc group originally proposed. So it was a win-win for the company who got a very competitive refinancing done at market terms, as well as for the creditors who avoided a transaction where assets were moved out of their reach.

Amaury Guzman: Dan, thank you so much for that. I think that's an example, as I'm sure that's one of many, that clearly speaks to the value that we deliver for our clients, particularly in this segment of the market. Before we finish, I'd be remiss not to bring up our upcoming Leveraged Finance and High Yield conference in Miami in the next couple of weeks. This year is our 30th anniversary, for a J.P. Morgan debt veteran like yourself, what are you looking for the most this year, other than the warm Florida weather?

Dan Pombo: Yeah, it's always a great event. The High Yield Conference has become a big event in the restructuring community as well. I'm chairing a panel discussion on current trends in the liability management space, which should be really interesting given how quickly the space is evolving. It's always an opportunity to reconnect with colleagues past and present, and I always pick up a few insights and ideas just from talking to the attendees and participating in all the discussions. It's always a highly rewarding couple of days.

Amaury Guzman: That's great. I'll plan on attending that panel, and I personally look forward to meeting with all of our clients in Miami in a couple of weeks. I think we're towards the end of our allotted time here, so thank you so much to Dan Pombo for his time today, and thank you to our listeners for tuning in to another episode of What's the Deal. We hope you enjoyed this conversation, I am 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.

[End of episode]

“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]

Private credit in focus: A deep dive into direct lending

[Music]

Amaury Guzman: Hello, and welcome to What's The Deal?, our investment banking series on J.P. Morgan's Making Sense podcast. I'm your host today, Amaury Guzman from our Leveraged Finance Desk. Today, I am joined by managing director and co-head of our Direct Lending Team, Jeff Bracchitta. And we're here to explore the recent evolution of the direct lending market, the trends driving its changes, as well as our take on the outlook going forward. Jeff, thank you so much for joining me today.

Jeff Bracchitta: Thank you for having me.

Amaury Guzman: Before we get started, Jeff, can you tell us a little bit about yourself and your career at J.P. Morgan?

Jeff Bracchitta: Certainly. I joined the firm in 2001 around the time of the J.P. Morgan and Chase merger. My first role was a combination of credit and coverage analyst. After about two or three years, I joined the Leveraged Finance team. And for nearly 20 years, I covered a variety of sectors, arranging traditional bank loans and institutional term loans and underwriting high yield bonds for both corporate and sponsor backed borrowers. In 2022, my colleague Marco Prono and I came together to formalize our direct lending team.

Amaury Guzman: Great. So to jump right in, direct lending is a part of the market that is driving a lot of focus these days for market participants. Can you walk our listeners through the history of the direct lending market and the size of the product class today?

Jeff Bracchitta: Sure thing. Historically, Direct lending was known as a funding source for middle market leveraged buyouts or providing junior debt structures such as mezzanine financing. Circa 2010, the asset class totaled about $310 billion. Post-financial crisis, leveraged middle market lending done by Direct lending funds expanded in the wake of leveraged lending guidelines applied to the banks. To create efficiency and increase attractiveness of the product, Participants in the direct lending market created a structure that collapsed traditional senior junior tranching into a simplified unitranch structure. Over time, those same funds began providing revolving credit facilities, further increasing efficiency for borrowers. As a convenient, committed source of capital, this became a significant portion of financings for middle market borrowers with under 50 to $75 million of EBITDA and total loan packages generally sub $500 million. Fast forward to today, third party estimates frame the Direct lending market at approximately $1.7 trillion, with about half of that as performing unitranch lending or what people are calling direct lending today. Rounding out the rest of the market is mezzanine, distressed lending, asset based lending, etc. In total, this is similar size to the broadly syndicated loan and high yield bond markets, which sit at roughly 1.9 and $1.8 trillion, respectively, framing the relevance of Direct lending as a financing alternative.

Amaury Guzman: It's really interesting. And how has second-lien played into all of this?

Jeff Bracchitta: Good question. Growth in second-lien lending is an alternative to high yield and leveraged buyouts accelerated over the past, call it, ten years or so. Many of these second-lien facilities were privately placed, which created sponsor relationships with lenders and arranging capabilities away from banks. Over time, private equity capital markets teams tapped those relationships to directly arrange first-lien financings as well.

Amaury Guzman: And are there any other factors that you would highlight that have also played a role?

Jeff Bracchitta: Yes. In addition to filling a void for leveraged middle market borrowers, direct lenders provided financing in other areas such as venture, tech, health care and ARR lending, which helped proliferate the market. The concept of jumbo financings or deals north of a billion dollars came about for high EV tech and health care companies seeking leverage outside of historical norms. Direct lenders also offered unfunded capacity in the form of delayed draw term loans, which helped many private equity firms roll up entire industries, most notably in residential and professional services. This form of growth capital was very appealing in buy and build strategies and helped grow the market.

Amaury Guzman: I see. And more recently, say when M&A was red hot in 2021 and 2022, how did that play out in the direct lending realm of the market?

Jeff Bracchitta: So that period is really when direct lending entered a new level of scale and penetration, but we need to split the timeframe slightly. 2021 was robust all around with $3 trillion of the U.S. M&A volume, nearly double the average of the prior 15 years. All markets were firing and direct lending was going through an explosive growth phase, financing middle market and upper middle market LBOs, as well as certain large cap tech and health care deals. The trend continued into 2022. However, the music stopped in the syndicated loan and high yield markets around the timeframe of the Russia Ukraine conflict, creating dislocation and pause in the public markets. Direct lenders, who similar to private equity, were not as impacted by market volatility stepped in as the main financing source for companies of all sizes in what was a challenging market. On the back of rate increases, which began mid 2022, the market recalibrated on credit spreads and risk tolerance, meaning higher cost of debt and lower leverage, but deal activity continued. M&A volumes were approximately $1.6 trillion in each of 2022 and 2023. During this period, direct lenders made an even larger name for themselves with fund managers able to generate double-digit returns for senior secured positions, resulting in a surge in fundraising. These converging factors created the so-called golden age of Direct lending when 90 plus percentage of LBOs during the 12 months from Q2 22 to Q2 23 were financed by direct lenders.

Amaury Guzman: It's interesting to recount the evolution of the class, starting with the mezzanine structures with relatively low volumes to a much more efficient product with lending volumes that compare to the more traditional syndicated markets. On that point, what's your take on the balance or the dynamic between the direct lending and the syndicated markets?

Jeff Bracchitta: So both markets are very much open and receptive to both new money and refinancing activity. It feels like the two markets have found a balance following a wave of cross market refinancings in both directions through early 24. The dance between the syndicated and the direct markets has resulted in more than $45 billion of volume moving between the two markets via refinancing. As mentioned earlier, in late 2022 into 2023, when direct lending was essentially the only game in town, we saw private addons to existing syndicated structures at then market rates. Naturally, with the syndicated market back, many of these tranches are being refinanced at today's lower rates, some in the syndicated market and some repriced with the existing direct lenders. On the flip side, CLO appetite for B3, B-minus paper and below has diminished, and some of the B3 or CCC names have refinanced with direct lenders, even with scaled capital structures. Much of this activity falls into the special situations portion of the market, but it's worth noting. A significant plus for the JPMorgan platform has been our ability to toggle between these markets to help borrowers find the best solution for a particular capital need at that particular time.

Amaury Guzman: That's a great point. Jeff. I know that sometimes market participants point to some differences between the market, including sometimes cost. Can you speak to what was the cause differential between the two and what drives it?

Jeff Bracchitta: Yes, there are two main drivers when you compare cost of capital between direct lending and broadly syndicated markets. First, the unitranch spreads reflect a combined first-lien, second-lien structure. So there is incremental risk that needs to be compensated for. Second is the illiquidity of private loans. The difference is often 100 to 150 basis points on average when comparing unitranch spreads to that of the term loan B market. There's less deviation when comparing unitranch to term loan B plus second-lien spreads on a weighted average basis.

Amaury Guzman: That's very helpful context for our listeners. As we look today, and through the balance of the year, can you touch on current market conditions?

Jeff Bracchitta: Sure thing. With M&A activities still light, though picking up, many borrowers have taken advantage of a strong market and repriced or refinanced their debt. 38% of direct lending and 86% of broadly syndicated transaction volume has been refinancing activity for the first half of this year. Loans backing buyouts have gained significant momentum in the second quarter helping to drive volumes, which is good, but still light on a relative basis. So far this year, direct lending LBO volume is roughly $40 billion. That's up 55% from the same period last year and accounts for approximately 30% of all activity. In the syndicated loan market, LBO volumes are up year over year, but it remains a much smaller percentage of the total market volume. Both loan markets are sitting on ample liquidity. Direct lending fundraising momentum has continued and CLO formation is in very good shape. While new money transactions have increased, the levels are still light relative to market liquidity, creating a supply demand imbalance. Absent any shock type events, the market should continue to coexist and offer borrowers attractive options.

Amaury Guzman: Okay, you highlighted volume changes year and year, but how should market participants think about terms today compared to, say, 21, 22 timeframe or even from last year?

Jeff Bracchitta: So credit spreads in all markets have compressed with direct lending following the lead of the syndicated market. As noted, strong liquidity and muted M&A creates an imbalance benefiting borrowers. A best in class LBO today is pricing nearly 200 basis points inside where deals were getting done through late 2022 and early 2023 and have crossed inside the lows we saw in 2021 and early 2022. Direct lenders are also offering cashflow flexibility features like pick interest to increase attractiveness. With less cash interest, leverage levels are ticking up. Documents move tighter in the lender friendly 2022-2023 period. We've seen some loosening of terms back to the 2021 levels, but there remains a strong focus on preventing leakage and priming transactions.

Amaury Guzman: It sounds like this part of the market remains very dynamic in a specific reference to terms interacting to market demand. Okay, so changing course here for a little bit. If I'm corporate or a sponsor trying to assess the merits of raising financing in the direct lending or syndicated market, how would I think about one versus the other?

Jeff Bracchitta: There are a handful of reasons borrowers consider the option of direct lending versus syndicated. The first thing people talk about is speed and certainty of funds. In both markets, the borrower is going to a select group of partners. For broadly syndicated loans, it's banks who later distribute to CLOs, hedge funds, et cetera. For direct lending, well, it's the lenders directly. While both provide speed and certainty of commitment, the direct loan also provides certainty of cost. Said another way, the direct loan is priced at the time of commitment while syndicated loans are subject to market movement, up to a cap in the case of M&A, creating potential upside or downside to the borrower when they take the deal to market. For transactions with a long lead time to close, locking in the rate with direct lenders can be more appealing. Second, direct lenders offer the full debt stack, including the revolver and the term loan. Collapsing tranches creates one lender group as opposed to as many as three in the syndicated market, meaning the revolver, term loan, second-lien are all provided by the direct lenders. Third, direct lenders can offer more tailored financing solutions for borrowers. The most common example is unfunded capital in the form of a delayed draw term loan to support future M&A needs. Rollups are a great example of that. Another use case would be carve outs where accounting is complicated. Fourth, confidentiality of process. Not terribly dissimilar to banks, but direct lending allows a borrower to work with fewer counterparties to maintain confidentiality And there is no need for a ratings process. These loans are also generally not traded, which further enhances confidentiality. Lastly, borrowers generally have constructive and smaller lender groups, which can be helpful when amendments are needed. The first analysis almost always is quantitative, i.e. cost, but there are also a number of qualitative reasons we've discussed as well.

Amaury Guzman: I agree with you.  while cost of capital is an important factor for deciding to fund in one market versus the other, there are important considerations that also drive these decisions as well. I'm going to tack away from market conditions for a bit and want to touch on market participants. Many of the participants in direct lending space are not banks. Can you discuss how J.P. Morgan participates in the direct lending product class?

Jeff Bracchitta: Of course. First and foremost, our direct lending efforts to date have all been through our balance sheet. While direct lending is a buzzword today, it's what we've been doing as a bank since inception. J.P. Morgan has been an instrumental lender in many ways throughout the course of history and through many economic cycles. While this portion of the lending market has been the focus of asset managers as of late, it's very much core to what we do as a bank. The asset managers in the market today are primarily capital providers and they've done a very good job helping their clients. We can and do lend at market terms, but our goal is to be much more than a capital provider. We're a full service financial institution with many product offerings that are valuable to our clients. We believe lending is core to a bank and doing so provides an entry point that can be win-win for us and our clients. Being the only bank in a club of direct lenders provides us with a unique vantage point to offer other services while making it easy for the borrower. These services range from cash management and other traditional commercial banking products to advisory and capital market solutions. We aim to be one stop shop for all our clients' needs.

Amaury Guzman: This all makes sense. Thank you for this, Jeff. Can you spend a little bit more time about how the direct lending platform ties into the other J.P. Morgan platforms and products?

Jeff Bracchitta: Of course, and it's a very good question. We really are one firm, one team. It's well known that we have a world-class commercial banking platform, in particular in the middle market. As John Burns and John Richert recently mentioned on this podcast, over the past decade or so, we've been bolstering our investment banking product offering to this client base. We've added scale to the mid-cap investment banking group, which has now over a hundred bankers. JPM has added dedicated professionals in product areas like M&A. We continue to bolster our established mid-cap sponsor coverage team and so on. In short, we've been methodically bringing our investment banking offerings to commercial banking clients through continued investment in people and services for many, many years. Adding direct lending to what is already a best-in-class debt franchise is another step in that process and in many ways can act as the glue that binds the interconnectedness of our services and relationships together. I'll note that the direct lending offering is not unique to the middle market franchise. We've been offering this to all of our clients for the past few years and have had great success with small to large-cap sponsors and borrowers. As you hear on our earnings calls, JPMorgan takes a product-agnostic approach as a financing provider. With our direct lending offering as part of our broader capital markets business, we are able to provide the full suite of financing options from convertible and traditional bonds to all types of syndicated loans and direct loans. Earlier this year, we established a new global banking platform that combined our heritage investment and commercial banks. By doing so, we've solidified a holistic coverage model across the spectrum of clients.

Amaury Guzman: You mentioned our focus on delivering product-agnostic solutions for our clients as part of the strength of our platform. I know we also look to deliver at scale for a broad set of clients. Can you speak briefly about JPMorgan's plans to grow the direct lending offering?

Jeff Bracchitta: Today, we're operating using just our own balance sheet or, said another way, a single financing source. Now, that financing source has to be very large. We've publicly stated that we would put $10 billion of capital to work in this arena, and there's nothing stopping us from doing more. We've put a significant amount of that to use already. The asset managers in this market have multiple vehicles under their banners, closed-in funds, BDCs, SMAs, etc. In addition, many of their LPs have co-investment rights alongside the fund. It's logical for us to have Financing sources in addition to our balance sheet, just like the other market participants. In addition to our extensive borrower-side relationships, we also have many lender-side relationships who value our best-in-class origination platform. Some of those same clients are seeking access to this asset class, which we can provide. Combining our capabilities in new and innovative ways allows us to scale our presence in the market and deliver more for our clients. Overall, this is just another way we can support our clients, act as a great partner, and sit at the center of a growing ecosystem.

Amaury Guzman: Thank you for that, Jeff. This is a very comprehensive overview. I think that brings us to the end of our allotted time here, but thank you again for spending time with us today and walking us through the evolution of the direct lending space, its outlook, as well as the impact that JPMorgan has had in delivering product-agnostic solutions for our clients. And thank you to our listeners for tuning in to another episode of What's the Deal. We hope you enjoyed this conversation. I'm Amaury Guzman. Until next time, thanks again for listening.

Jeff Bracchitta: Thanks for having me.

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]