Anthony McCann: I am Tony McCann. I run Global Leveraged Finance Sales at J.P. Morgan. I'm with Jake Pollack, who runs Global Credit Financing.

Jake Pollack: Good to see you, Tony.

Anthony McCann: Jake, how long have we known each other?

Jake Pollack: I think we've known each other for about 20 years. I joined in 2004. I think you were there in 2004.

Anthony McCann: I was. And in credit talk we call that two distress cycles, I think.

Jake Pollack: Yes, yes, yes. It's been a good run. Everyone who was working pre '08 through '08 and then through the 2010 to I'd say 2024 period, which had its fair share of interesting mini cycles, has certainly earned their stripes.

Anthony McCann: Can you describe what credit financing and what your team does?

Jake Pollack: Yeah, so within the global credit financing business, we have a few verticals. One is our private credit financing business. It's our back leverage business. This is a business that we started really right after the crisis so this is sort of 15 years ago. This is basically, we provide financing to the private credit industry where the underlying collateral for our facilities is private credit. Another sleeve is our CLO business. CLO stands for collateralized loan obligations. So this is the business that finances primarily broadly syndicated loans. Increasingly we're doing PCLOs, which are private credit CLOs. That's something we branded. And basically, what that means is you're creating financing packages, securitizations, for the loan market, and that's both the public market and the private loan market. So it's a business that really complements each other. And I think there's a very good flywheel where a lot of the clients that we trade with also need financing. They also need CLOs, and a lot of the business reinforces each other, really.

Anthony McCann: Jake, you and I grew up in the liquid credit trading business. Tell us how you grew that into the private credit financing business that you run today.

Jake Pollack: So I started in credit trading as a desk analyst. And desk analysts on the desk are responsible for looking at underlying credit. When we started this business, sometimes this is kind of a consistent theme with J.P. Morgan, where we grow a lot of businesses that start from one transaction. And we had basically, and you remember this well, we sort of had one transaction with one client that wanted basically, let's call it a back leveraged structure. And it worked well. We said, "Well, we should do it again. We should it again. We should do it again." And the team that we had looking at the underlying collateral was fantastic. And what we did was we basically said, "Look, why don't we take that same talent pool and create a team that focuses exclusively on this back leverage product?" We take the core of what we do every day, which is understand credit. What does the business do? Are revenues growing or shrinking? What are the margins? What's the leverage look like? All of that stuff. And we basically apply it to a new bespoke product, which is providing back leverage to the private credit industry. So I would say, and you asked this in the question, it really spawned out of our understanding of credit from the liquid trading business. And as our clients began to morph into private credit, we were there with them to provide this financing. And that's how we've basically grown this with them into such a market-leading franchise.

Anthony McCann: Can you describe today, because so many people talk about private credit, what is the opportunity set? What is the landscape? What is the of what's out there now?

Jake Pollack: Yeah. So private credit, it's funny, it's a topic that gets people very excited. What we like to say is private credit is really, it's oftentimes it's the same borrowers, but it's a different delivery mechanism. So basically, a borrower can say, "I want to borrow in the public credit market from a deal that happens off of the debt capital markets asking, we have the market-leading franchise there." There have also been transactions, and a huge growth in this has been where a direct lender will lend basically directly to a corporate. And what we have done there is we've basically said, "Look, we can provide back leverage to that corporate via this relationship with the client." I think, look, it's interesting because when you look at the market today, so I'll give you some interesting stats, and I think you know these well. But if you go back 25 years, if we go back to 2000, the total sub-investment grade, so we're talking below Triple B Minus credit market was about $850 billion. Today, it's about $5.2 trillion. So credit generally, sub-investment grade credit generally has grown over five times, five and a half times in the last 25 years. Today, if you look at that 5.2, what is it? Well, it's about, let's call it 1.6 trillion of broadly syndicated loans. It's about 1.7 or so trillion of high-yield bonds, and then it's another 1.5 or so trillion of private credit, and there's some rounding in there. So a lot of times people talk about, "Well, is there a robbing Peter to pay Paul? Is the market shifting?" I'd say the market's evolving. But all three of those sleeves, loans, high-yield bonds, and private credit have grown dramatically over the last, again, 25 years. And we expect them to grow, to continue to grow pretty dramatically over the next 10 years, all three formats.

Anthony McCann: What kind of bootstraps, when you realize, go back to 2010 during the first facility, when you realized you had something, what are the key credit-enhancing and business structure you put around the team?

Jake Pollack: So I mean, one, the partnership with your team has been fantastic because I think, look, there's three things in this business in particular that you need. One, you need to have good clients. And I'm blessed to have fantastic sales partners that understand their clients are our clients in and out. So you need fantastic clients. You need really protective structure. So the structure of the facilities. Are you lending at a conservative advance rate? Do you have the appropriate covenants in the facility? Are there the right buckets for the right industry concentrations? Certain of those things that we do very well. So you need the right clients, you need the right structure, and then you need the right collateral. You can talk your way around it, but there's no substitute for knowing and knowing really well what those underlying assets are, what they're worth, and what you would lend against them, where you would buy them if you had to, where a third party would buy them if they had to. And so we always say, "There's no substitute for knowing that yourself." And again, that gets back to the last question. So in 2010, what did we do? I mentioned before, we started with an analyst team that was looking both at secondary and was looking at these financing opportunities. And that worked for one facility, two facilities, three facilities. We have 86 facilities today. It's a huge number. There's 1600 underlying assets in that pool. So what we did then is, and this was shortly after 2010, but what we did is we said, "Let's build this team. Let's have it stand on its own. Let's have this team focus explicitly on the private credit opportunity set." And so we have a structuring team. We've got a credit underwriting team that underwrites each of those assets. And obviously, as I said, we've got fantastic sales partners, obviously your fantastic team. And we've also got a sales structuring team that's just top-notch, knowing the underlying clients inside out.

Anthony McCann: Because our clients are not private credit only. They have broadly syndicated loans. They've got CLOs, they've got liquid businesses. Tell us about how you've structured your business now and this flywheel that you refer to. Why does it exist? Why is it the best model to go forward?

Jake Pollack: Yeah, so the beauty of, we call it the credit financing flywheel, is that a client has different needs at different points of its life cycle. So we can provide capital at inception. Oftentimes, that's in a hybrid format where it's a sub-line, where you can basically leverage their capital commitments and we can basically be very early to provide them capital to launch the fund. We then have our core asset-based financing facility, so that's our private credit financing business. They then have some need sometimes to, if they want to monetize closer to the end of the life of the fund, we've got our CLO business. And that can securitize assets. That also allows them to potentially take a dividend if they've had good credit performance in the underlying portfolio. And it also doesn't always happen in a straight line. Sometimes you have the CLO discussion first. Sometimes it's a secondary trading counterparty that says, "You know what? We've got this sleeve that really wants to take back leverage. So we thank you for all of the CLO business you've given us. Can you also give us this?" Or it's one of our secondary clients that says, "I'd love to basically take leverage in the form of a CLO." The interoperability, I'll call it, between all three of those points, and then that doesn't even include secondary trading and all the other things, obviously, that we do on the desk, they really interact well together.

Anthony McCann: Jake, let me ask you the technology question that everybody wants me to. But does technology actually have a purpose in private credit or your financing business?

Jake Pollack: Yeah. Well, I mean, the answer is it does. We've been very proactive on the tech front. So we've got a system, it's called Financing Connect. We've talked a lot about it, and our clients really love it. What does Financing Connect do? In some ways it does some of the very basic blocking and tackling, but it's the basic blocking and tackling that the clients love. It shows our borrowers how much we've lent them. What is the loan to value today? Where are the covenants set? How much could they draw? So all of these things that, and this might sound crazy, but when our competitors lend them money, they have to go to call someone in Delaware to send them a fax to confirm all this stuff, or they got to call some trustee somewhere. By showing the end user all of the stuff, and I'll tell you that the digital markets team who put this together deserves a ton of credit, it looks so professional that it has a lot of buy-in just because it looks so good and it's so precise. Then, it has functionality that allows the client to basically say, "I want to draw more, can I?" You can click, and if there's more capacity in the facility, you can click to draw right there. The button's there. You can take a distribution. So let's say they're over collateralized. They can click the button. They can get the money out. This doesn't sound like it's Web 3.0 or whatever, but it's a basic blocking and tackling function that the clients absolutely love. And one of the secrets of the business, we've got some senior-level relationships. We win business. We talk to the senior folks. The people that really drive the relationship are often the people that are, it's the operations folks that are running the facility. And if they're not happy, they make sure that the senior folks know. If they are happy, our senior folks say, "You know what? I just talked to my operations guys. You guys are great." And so we've gotten a lot of that, and that's a direct result, I think, of this amazing Financing Connect platform.

Anthony McCann: And then for your team, you and I like to joke that if you lend a dollar or a billion dollars at J.P. Morgan, you better have a framework on how you do it. Tell about your framework, your technology framework.

Jake Pollack: Yeah. So look, the technology in that regard is really a reflection of all the underlying stuff we do day in, day out. We have 1600 obligors in the pool. We've got a complexity with 86 different facilities, each with their own terms. So we've literally, we've got credit write-ups on every single underlying asset. But we don't just take those credit write-ups and store them on some hard drive. I mean, that would be highly difficult to review and certainly review at the senior management level. So what we've created is really some very good MIS. We've got some management information systems that allow us to look in the aggregate. Let's take all of those one-pagers, all those credit write-ups, let's input them into the system. Okay, what's the average leverage? What's the average LTV? What's the median? How much equity is in each underlying loan? And not just average, what's the worst case? One of the things we spend a lot of time thinking about, and you and I talk about this, you can be really, really good on average, but if you mess up one thing, you're only as good as your weakest link. We like to say that you could be a seven-foot giant can drown in a six-foot pool on average, because it was one foot, one foot, one foot, one foot, 20 feet. And so we don't want to make that mistake ever. So we basically have the technology system and it's a very robust system. We've got a lot of great tech folks and QR folks that work with us to manage it, to reflect all of the underlying work that our analysts are doing. And increasingly, we're using machine learning to basically suggest things to us. Sometimes it's basic, this name looks like it's got high leverage. What do you think about it? What does the analyst think about it? That's something for me to tap some of my people on the shoulder and say, "Can I see that again?" Sometimes it's even more robust. We've seen a trend here where leverage is taking up or average equity in the deals is going down or x, y, or Z. PIK interest is increasing in the portfolio. Any one of those things where we want to say, "well, hold on, let's take a deeper look." So I would say the tech enables us to have even more robust analysis, kind of top down and bottoms up. Look, the one thing I want to make sure that does not come across is there's no hubris here. We have to keep developing it. So if we rest on our laurels now, in 12 months, we'll be behind. So we are also constantly developing, and that's something we're very proud of, but we don't want to get too proud. Tony, I'm going to ask you one now. So you've got some fantastic relationships with all of the senior most folks at all of our clients. How do you maintain those relationships? And what are some of the things these guys are saying now?

Anthony McCann: Well, to know me like you do, there's a process behind everything. So quarterly, I make calls to each, what I think are each founder, CEO, CIO, senior portfolio manager that I know. And that can range up to 50 calls per quarter. And what I do is I'm absolutely and super lucky to sit on a floor with 400 sales traders, research, and capital markets people delivering liquid and non-liquid credit trading and origination to all of them, so I see it all. And from seven in the morning till six at night, it's buzzing all day long, and I'm able to create an opinion. And quarterly, I try to distill it down to three or four key tenants, and I imprint them on every client, senior client. I ask them, "what do you think?" And they give me their opinion back. At a different stage, we have all the salesmen doing that on a quarterly basis to get just mechanical where we are, how we're doing, what we're missing. And I combine that with what my view is, and I bring it back to the senior leaders. It's been a super effective process over the years, and I wouldn't be able to do it if I didn't have the seat that I have.

Jake Pollack: Is there a time that you remember where it was sort of the most impactful?

Anthony McCann: Yes. Over the years, without a doubt, the months of March and April of 2020. Because as the credit markets and all markets were generally in free fall, I began to receive calls from the largest clients that they had immediate access to capital to deploy into those markets. And the phones just started ringing and ringing and ringing, and then you realized there was at least a current bottom for what was going on. And we brought that to our debt capital markets, and we were able to do an immediate multi-sector, multi-issuer rescue financing at the time for basically most of the corporate credit markets. At points in time through May, we had a 60, 6-0% market share, and that was on the primary side. And that, I think, we were close to that on the secondary side on some days.

Jake Pollack: Yeah. I mean, this was a really unique time in the market. I mean, leveraged loans, which typically trade pretty close to par, were trading in the seventies, which implied, obviously, that the refinancing at par was not something that was going to happen in the near term, but these were clients that were telling you, "We've got capital and we're buying."

Anthony McCann: Yes. It was previously structured funds that were called kick-ins or drawdown funds that hit these marks. And not a lot of the street was aware of this, and we were keen to that. And telling that to the other clients who were selling, it was that mix of those calls in that quarter that probably was the most powerful, I'd say, in my career.

Jake Pollack: So what are they saying today?

Anthony McCann: So it's a mix. This is going to sound tired, but it's that mix of yield versus spread and a low default rate. So in the credit markets, they've got a lot of capital to deploy to satisfy those yields and are nervous about the spreads, but are all seeing a benign default rate and are okay investing in that because their clients are asking them to.

Jake Pollack: What are guys saying about the trade-off between public and private?

Anthony McCann: I think the good thing for most of our clients, they have their foot in both markets, the biggest clients. So to them, it's a matter of just which pocket of money is being deployed. But it seems like you and I are seeing the ball from our seat better than the rest of the market is.

Jake Pollack: Yeah, I mean, look, we obviously agree on that. I mean, I think it's interesting, our CLO business, which it does do some private credit transactions, we do some PCLOs, but we've got, I mean, our pipeline right now of broadly syndicated loan financings, which are financing, obviously, the public market, we have more deals than we know what to do with, which is a high-class problem. We're happy about that. But I do think it speaks to the ebb and flow of capital creation and credit. And I think sometimes the media likes to make it an either/or. And to some extent in 2022 when the broadly syndicated market was more challenged, it felt that way, but it's not that. Borrowers really do have options to look at both markets. And I think that's going to continue to be a theme as we go forward. What is the, let's call it the illiquidity premium for private credit versus what you can get in the public market and what are the trade-offs?

Anthony McCann: The one thing I did want to pick back up on is defaults. I think you and I, and certainly the way you run the credit book is we pick best clients with best structure and best credits. So with a average default rate around 2%, I always like to say, as you know, I always say, "That means 98% of the time things are going right." So that's a pretty good credit environment. Now, the 2%, if we focus on that, as I like to say, also, "The ice is thin and the water is deep and cold." So the default environment in that 2% is very treacherous. So although it's a small part of the market, it can not be ignored. And that generally is with poor credit picking, poor documents, and poor underlying assets. So I seem to be giving a fairly optimistic view of where credit's going and where it is now. You being the risk-taker, how do you look at the downside currently, and what do you see on the forward?

Jake Pollack: Yeah. I mean, look, I think you're right to point out that the 2% is a treacherous world right now. But I think we have to be realistic, 2% is far below what the, I'd say, the regular way default rate should be. So it's tough to pinpoint it, but if the default rate tripled from two to six, we shouldn't be surprised at all. Now, you will see plenty of press headlines saying, "Default rate tripled," and it was going to read negatively. But I mean, in my view, whether or not that's your base case, you should be able to operate in that case. I think some historical context is useful. In the GFC, the default rate got to 15%. Now, let's think about that. 15%, so it's 12% if you don't include distressed exchanges, it's 15 if you do. The math gets a little wonky. But in a 15% world, the average recovery of the lenders of a loan in that environment was something like 40 cents, 50 cents. If it's a bond, it's 40 cents. If it was a loan, it's 60 cents. That's getting a little bit lower. But let's just use 15 and 50%. That's seven and a half points of loss experience over a two-year period. If you assume the cycle last two years, it could be shorter or longer, but let's just... So that's only 3.5, 4% a year. And what I think is really interesting right now is those numbers are nominal numbers. The return you get is also a nominal return, which is to say that you get SOFR Plus, and even though SOFR Plus is coming, it used to be SOFR plus, let's say 7. Now, it's SOFR plus 4.5 to 5. The returns would suggest that you can still absorb some of those potential losses. I spent a lot of time thinking about, look, 15%, that would be bad, and it'll be disproportionate in certain lenders. Certain lenders will have even worse experience. You can have some people that tide came in, they were naked, and they'll have in the 20s, and those might have some real problems. But the best lenders are likely to do better than that, materially better than that, and that'll average into the 15. So it's actually, if you think about it, kind of hard to get to a case where there's a negative return, on average, for the industry. So that's a long-winded way of saying, "It's going to create a lot of opportunity. There'll be a lot of distressed trading for us to do." I think our financing is going to be, that's going to be a fantastic environment, frankly, for our financing business, and we will likely grow as some of the weaker players don't navigate it well.

Anthony McCann: Jake, describe private credit as if you were describing it to a seven-year-old.

Jake Pollack: I have an eight-year-old and a six-year-old at home. I would say to them, "Look, lending is often described, it's one of the oldest businesses in the world." And the reality is before Jimmy Lee and some of the advent of the broadly syndicated loan markets, a lot of credit was private. In most credit, if you walk into the bank and get an auto loan, it's really a privately arranged transaction between you and the bank. So private credit's not a new theme for us. At its core, what is private credit? It's a direct transaction between a lender and a borrower. That's what it is. I think why has it gotten so much attention? Well, I see two reasons. One, there's been a boatload of capital raised. You don't raise one and a half trillion dollars of capital under the private credit header without getting a lot of attention. Two, and this is where it's even a little bit interesting, it is private credit and direct lending as distinguished from calling a middleman who arranges the transaction. So when one of our clients, rather than calling J.P. Morgan to buy a loan that we've arranged, goes directly to the client, they've in some ways circumvented that public market. As you and I know, we were very early to private credit. So whereas, if one counterparty goes direct to that borrower and just lends the money, and they're going to hold it forever, I guess they don't want to trade it with us. Okay, that's okay. We can understand that. We can provide financing against it. So that's really when you go back to what we started in the financing business in 2010, that was really the innovation. It's super simple, but these folks are making loans directly. Okay, we'll deal with that. They want to augment the returns. They want to put in equity dollars and augment it with leverage. J.P. Morgan can provide that leverage, and that's been a huge growth market for us. So Tony, if you could swap roles with anyone at J.P. Morgan, who would it be?

Anthony McCann: Moussa, and I'm sure you don't know who he is. He's the security guard that I see first every day at J.P. Morgan when I walk in the building. And he and I have a daily routine that differs on Monday, Tuesday, Wednesday, Thursday, and Friday. And I think it'd be great for him to be on the third floor for a day, and I'd be down checking IDs and making the building safe.

Jake Pollack: Wow, you'd be great at that.

Anthony McCann: One other thing about Moussa is he's an Olympic ping pong player. He represented Nigeria in 1988 and '92 in the Olympics in ping pong.

Jake Pollack: That is unbelievable.

Anthony McCann: Jake, you grew up in Livingston, New Jersey. Is this where you thought you'd be here today?

Jake Pollack: No. I mean, I'll be honest, I was a psychology major in college, so I think banking and trading was about as far from my mind as it could have been up until my second semester of junior year in college. And then I switched to econ and said, "You know what? Maybe I'll give it a shot." And Chase hired me in 2004. So I would say growing up, I don't think J.P. Morgan was on my radar. But I will say I'm thrilled that Chase took a shot on me at the interview day in 2004. Tony, you're a kid from Long Island, military, you spent a lot of time on Wall Street. Is this where you expected to be as a kid growing up?

Anthony McCann: No. History major in college. I served in the Army in peacetime. I got out, moved back to New York, and my dad was in advertising. He worked for the same firm for 42 years. My brother has worked for the same firm in his business for over 35 years. So I knew whatever I did, once I found it, I was going to stick with it. And it just happened to be this. It's sort of random how it started. I was five years at Lehman Brothers, and I've been here for almost 30.

Jake Pollack: And I will say, this is supposed to be the fun, how did we get to know each other part of the session, but I will say, our client base really values that. And in all of our discussions, I mean, they know that J.P. Morgan as a brand is extraordinary, but it is not without the long tenure of our key people. They really like the fact that we have been in the seats for a long time, and a promise we make is not going to be honored by somebody else. It'll be honored by us.

Anthony McCann: Yeah. Certainly, it's lucky that it starts at the top with Jamie and the other senior leadership. But when you go through 2008 with some of the same clients, and then you go through COVID with some of the same clients, and they pick up the phone and call you first for the biggest, hardest things that they're going to do, you know that the consistency of the people and the process and your business is why they're doing that.

Jake Pollack: Do you remember your first time on the trading floor?

Anthony McCann: I do. Yep.

Jake Pollack: Talk about it.

Anthony McCann: So it was January 1990 at Lehman Brothers. It's a very similar trading floor to what we have now. I had just got out of the Army, and when I got to that floor, the eighth floor, I looked out and I saw individuals with specific skills working as a team in small business units, all coming together on one floor for a common goal of winning. And I was like, "I like this," but I had none of the glossary. I knew about guns and grenades, but I didn't know anything about basis points and yield curves, and that just took time. But as soon as I walked on the floor, I'm like, "I like this." And that's almost 35 years later.

Jake Pollack: It's a good point about the getting along too, because when you're in those close quarters, you do have to get along with people. And I will also say, look, it's a testament. You have been a senior leader on the floor for basically the entire time I've been on the floor. And the tightness of our ship, while also allowing for people to have fun and laugh at each other and make small talk while getting stuff done, is really great. I don't remember a single difficult event with anyone on the floor. I mean, obviously, we've had growth and some people have left and some people have joined and all that. But I mean, the collegiality is really strong.

Anthony McCann: That's why sometimes I push back when people, something gets changed, their regulation, a new mandate from the top, so to speak, and they say, "It's not fun on Wall Street anymore." I'm like-

Jake Pollack: "Come to the third floor."

Anthony McCann: "Nah, I don't think so. That's not right. This is still fun."