Jake Pollack: Hi, my name is Jake Pollack. I'm the global head of credit financing as well as the head of North America Credit Trading. Tony, want to introduce yourself.

Tony McCann: Thank you, Jake. Tony McCann. I'm a Vice Chair in credit and public finance sales.

Jake Pollack: So I think the first question is how has the role of sponsors evolved over the years in credit markets? But I almost think it'd be helpful to take a step back and actually define what a sponsor is. So do you want to answer that first?

Tony McCann: I'll take a first chop at it and then you fill in. But the way I like to think about it, calling a sponsor just a sponsor is like calling this just a cell phone. I mean what a smartphone can do today compared to the flip phone that I had back, my first one is sort of a great parallel. If I think about a private equity sponsor back in the day, you think of KKR buying RJR and buy a company, borrow bonds and loans, improve the company, eventually IPO it or merge it with someone else. The complexity today of our sponsor clients is like almost none other, and many of them are public.

Jake Pollack: I agree with you. I mean, I think it's almost more apt to say it's a multi-strategy asset managers act, and I think sponsors today obviously have very large and successful equity businesses like the KKR buying RJR example. But it's interesting that when you think of a typical capital structure, there's equity and there's debt and there's usually more debt than equity. It could be 60/40, it could be 70/30. So it's not surprising that over the years how have they evolved? Well, they've grown as their LPs have demanded more into the debt side of that capital stack.

Tony McCann: Exactly. Think about the global investor base, the global LP base and their desire, what seems insatiable desire for corporate debt, including private credit, direct lending, BSL, investment grade, investment grade corporates, it's almost unending and they've done an incredible job, the sponsors, of filling that with business lines that have got to scale are expertly run, have great risk management, and we're lucky to face off with them every day as partners. To think about those LPs, they're global in nature and have an intense desire to put large quantums of investable capital into the debt markets, the credit markets. And they've built businesses, these sponsors in individual business lines to match that. And what they've done is they've captured that dollar, investable dollar that would otherwise go to another asset manager. And it's in their expertise because of course they've borrowed it in their private equity businesses.

Jake Pollack: And look, from my perspective, I also think all of our clients to some degree have that DNA today, and I think it's the sponsors that have probably almost taught it to the credit markets and the client base today that we trade with, that we provide financing to, that we provide securitization to, that we do exotics business with, whether it's currency hedging or all those things. We do that in service of these clients that have these multi-strategy approaches to investing their capital.

Tony McCann: I agree. And they've created products that are long-tenured, have sticky money for them, they've got good fees, and they provided their LPs with good returns. And we're lucky we run businesses that are to scale and market-leading so we can face off as partners.

Jake Pollack: And service them. Yeah, I think that's exactly right.

Tony McCann: Have you led the credit financing business through the changes and the market trends that the private equity firms have gone through?

Jake Pollack: Yeah, I mean, I think, well, so our financing business does a few things, right? We have a private credit back-lever business where we back-lever sponsors, direct lending businesses. We have a liquid credit financing business, which does financing for the broadly syndicated loan as well as the bond markets. We also have a CLO primary business which securitizes credit and oftentimes that credit is issued to sponsor-owned companies. So we are basically servicing directly and indirectly the ecosystem, so to speak, that I think the sponsors have created.

One thing that I think is probably worth taking a step back on, today, the sub-investment grade, and I say sub-investment grade because most of the credit that goes into the sponsor ecosystem is sub-investment grade, but we can talk about investment grade as well. The sub-investment grade market is about 5.5 trillion today, and it's about 1.8 of high yields. It's about 1.7 to 1.8 of leveraged loans and it's about 1.7 of private credit. And that universe is really... It kind of indicates that if you are an equity sponsor, you can borrow in all three of those markets and each of those markets have their own idiosyncrasies and are, I would say, the balance between the broadly syndicated market and the private credit market is really kind of the sweet spot for how we run our business.

Tony McCann: Talk about our offering that you talk about, it's got multiple parts and we're going to bring up the word flywheel, which actually is appropriate here as opposed to overused by other people.

Jake Pollack: Well, I think the flywheel is real. When we provide, let's say financing to a sponsor, that demonstrably leads to more things we can do with that sponsor. So a CLO transaction that we are able to do for a sponsor, that will lead to secondary trading, that will lead to potentially a private credit financing, that can lead to us doing exotics revenue. We can do credit linked notes. We can do a lot of things that with structuring expertise to create bespoke returns for sponsor clients. So the ability to bring sponsors closer to us by doing one piece of good business ultimately leads to two, three, and four. And I think it really does reinforce each other. I think when you think about how competitive the market is, when you can do all of those things, that's what these multi-strategy asset managers demand. And so J.P. Morgan's ability to be great at all of those things and to have them be kind of interoperable, so to speak, that differentiates J.P. Morgan from the competition. So, Tony, let me talk a little bit about how do we manage the long-term relationships with sponsors in credit?

Tony McCann: I'll answer it this way, most of the large credit sponsors are our long-term relationships. As I mentioned earlier, they've grown their businesses stripe by stripe by stripe adding businesses. So if I think about some of our original credit financing clients have added businesses alongside them over time, and we've been there for those clients in good times and bad. So say good times, they've added then a CLO business and we help them originate their CLOs and build the depth of the market so they can grow those businesses, their drawdown funds when you get into distress cycles, we're there for them for their own credits that need work and help and capital to get them through. We are also there for them to source through cycle. So the best way to describe the credit relationship, it grows as the client grows because we offer them basically each business that they want to grow expertise and market leadership to get them to succeed.

Jake Pollack: I'd also add idea generation, right? And I think idea generation comes from all parts of the credit trading business. It comes from obviously the daily sales calls, it comes from the desk analyst capital. It comes from our outstanding publishing research partners. It obviously comes from the traders on a daily basis and it's the idea generation often especially you mentioned distressed and more opportunistic capital when times are not as strong.

Tony McCann: We talk about it all the time. If I think about 2022, 2020, 2018, '16, '11, that's when those relationships get deeper because we're providing them more than the machine that we run. It's advice, it's capital and it's a relationship that only grows.

Jake Pollack: We launched a call this year that's headed by Andrew Crook and Brena Pollock. It's terrific. 1,200 investors, many of whom are sponsors, join the call, listen to the ideas, listen to different experts across the business. And that's just one of many examples where you lead with content that is differentiated and you win.

Tony McCann: It's a monthly call. And then think about it, just a couple days ago, Kevin Foley was the featured speaker, who wouldn't want to hear from the head of debt and equity capital markets or J.P. Morgan when the markets are just reopening after having been-

Jake Pollack: And I listened to it and I certainly recommend others do it. It's a terrific... And that session was terrific. I think the other thing I would say is all of these... I use the word symbiotic. When you are on one side of the business setting up a CLO, and another side of the business, you've got topical distressed idea generation, in the old days that was on Venus and that was on Mars today, it's all part and it's a kudos to the sales franchise. It's a kudos to the traders. Everyone is being really tasked with being an expert across all of these areas because that leads to more interactions that are meaningful, which leads to more business. And I think it just brings us closer with, again, we go back to the sponsor community. That's what they're demanding. And if you can't deliver it, they're not going to call.

Tony McCann: It goes back to the relationship is we need to differentiate ourselves in the credit markets as the credit market leader. We had the Miami conference, it's a showstopper, it's a market stopper, it's a three-day affair In Miami, we had our 30th annual this year. We had over 3,000 people attend over three days. We had 250 issuer clients and borrowers present. We had almost 7,000 one-on-ones in meeting rooms where our investor clients and lenders get to beat the borrowers behind closed doors and really grind in and understand what's going on. And it's something we feel we owe the market because of our presence in underwriting lending.

Jake Pollack: I think our sell-side competitors have very high absentee rates during those days because the market's basically shut down.

Tony McCann: And we take pride in that. We want to service both our issuer an investor and our lender and borrower clients.

Jake Pollack: Yeah, I think that's a point I think is worth highlighting the extent to which J.P. Morgan sits at the epicenter of the borrower client and the investor client. And this is something that management talked about at our investor day. Nothing highlights that like the conference and how we have borrower clients talking to investors, showing them their financials, and obviously there's live capital markets transactions being discussed, and then the investor clients who we're trading with, providing financing to, doing securitizations, as I keep mentioning, they're all in the audience, both listening to the borrower client and talking with us about all the things that we can do together. And so that flywheel borrower client, investor client, all the things we do, super powerful.

Tony McCann: I agree is like to say, J.P. Morgan, there's always two clients in a trade. There's a buyer and seller, there's a borrower, a lender, an issuer, an investor, and not everybody thinks about that way we do. And the one thing that you really step back and you look at the sponsor clients, the way we're talking about them today is they are both themselves.

Jake Pollack: And that's why I always find it a little bit funny. The financial press loves to talk about this, like us versus them stuff with banks, direct lenders. The reality is when you use the investor-client, borrower-client lens, that all falls away because the reality is it's the investor clients that we've always traded with, our primary business has always sold deals to, and their asset managers, they buy credit assets. We're there on the credit trading desk. We are there to trade with them, we're there to finance them, we're there to securitize them, we're there to do exotics with them. There's a lot to do and there's a whole life cycle of that relationship. So I think it kind of comes back to what we said at the beginning. It's a symbiotic relationship between J.P. Morgan and sponsors that spans all of those activities.

Tony McCann: How has it morphed over time? How have you tailored solutions to the client's needs and what surprised you?

Jake Pollack: Yeah, I mean, so I can say what surprised me, it's hard not to be surprised by the growth. We knew we had a good product. We knew that the market was very large, but what started from sort of 1, 2, 3 transactions has grown into a business that's tens of billions of dollars of exposure. And I think frankly, the addressable market is multiples of that. So it's a growth story for years to come. I think when you talk about tailoring for the various needs of different clients, sometimes it's very plain vanilla and sometimes that's the easiest. It's like, we'd like to borrow money because we'd like to achieve X return and we'd like to deploy X of capital with your debt to complement it. That business is great. That has been a very strong business for the direct lender community. The broadly syndicated market, one I guess an additional surprising stat, 75% of broadly syndicated loans today are held by CLOs.

When I started in the business 2004, that number was... Well, it was well below 50%. I think the CLO market in those 1.0 days was certainly a fraction of what it is today. And loans were traditionally held by either banks or mutual funds and some hedge funds, but not CLOs. So tailoring the securitization market, which is what the CLO market is for broadly syndicated loans, is very much part of the equation. And then if we look a little bit forward, the investment grade bond market is $10 trillion. The high-yield bond market, as I said earlier, is just under $2 trillion. So that 12 trillion, there's a lot of obviously trading and today trading, a lot of that is in portfolio trading and there's some algo trading. There's also a big financing opportunity in that liquid credit market. And we see that pairing the financing with the trading in those liquid markets, that is a massive growth opportunity for us and something we're spending a lot of time on.

Tony McCann: Jake, talk about the intersection of private credit and traditional lending and sponsor-driven activity.

Jake Pollack: Yeah, so I think there's, as I mentioned earlier, in sub-investment grade you got 1.7 trillion of loans, 1.7 trillion of high-yield bonds, 1.8 and 1.7 trillion of private credit. So the market has grown with both. If you look at what J.P. Morgan has done, we've committed 50 billion of our balance sheet for direct lending. And the purpose there is to show borrowers both options. And I think what we're saying is you can take the syndicated option, which prioritizes the auction mechanism of the market to get best price, but it's, of course, it's a market's process. You go out to the investors, you raise capital, you try to utilize that kind of auction mechanism that the direct lenders have come about it from another way. They basically said, "We can write a check this weekend. It might cost a little bit more, but you don't have to go through that process."

And so the borrower can make the decision which one they want. We've made it frankly very easy for them. You can hit the direct lending solution or you can take the broadly syndicated loan or high-yield bond solution. I think that is something that will continue, there will continue to be kind of a convergence there as borrowers look to sort of optimize what they're trying to achieve. There's obviously plenty, and we've got multiple deals in the market right now across high-yield bonds and leveraged loans, and there's obviously a healthy pipeline of direct lending today. So clearly, depending on the borrower's needs, either option could be appropriate. So that's something we're super excited about because again, the market is very large and we can really give all flavors.

Tony McCann: Jake, our sponsor clients have become incredibly innovative with new products to expand beyond their global LPs. They're taking what's called private credit to the masses, with BDCs, both traded and non-traded retail products, how are you innovating private credit financing to keep up with them?

Jake Pollack: Yeah, I mean, well, one great example. We did the largest private credit CLO this year for HLEND. That was a $1.25 billion deal that we did a little bit earlier this year. And I mentioned earlier the broadly syndicated market, 75% of it's owned by CLOs. In private credit, that number was 10% five years ago. It's 20% today. And I think we're leading the market this way. We actually coined PCLO, that kind of term. So the interoperability, I'll say between whether it's a back leverage facility or a CLO, I think that's one way that we are kind of moving the market forward and tailoring for the way that sponsors are innovating. I think interval funds that you mentioned, sort of bringing private credit to the masses. We have financing products for interval funds in addition to CLOs, in addition to BDC financings. And then, look, we've got a large and growing loan total return swap business.

And that's a very interesting product because there's a lot of sponsors and credit investors that don't want the hassle of closing loans, trading in loans. It's actually a fairly mechanical process and we make that very easy, right? We are able to effectively swap the economics of a loan into the investor via this TRS solution and enable them to benefit from the underlying economics while not having to invest in the heavy mechanics of the process. So those are a few examples of the way we are we innovating. And to be honest, I think the pace of change, as you point out, is increasing. So there's a lot of things that we're going to continue to have to offer and continue to have to innovate. So we're excited for all the activity going forward.