What’s the outlook for credit financing in 2026? 

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Brian LaRocca: Welcome to J.P. Morgan's Making Sense. My name is Brian LaRocca. I'm the head of our Vida Portfolio Solutions team in North America here at J.P. Morgan. Joining me today is Lou Cerrotta, who's our head of liquid credit financing globally. And we're here to discuss the credit financing outlook for the year ahead. Welcome, Lou.

Lou Cerrotta: Thanks, Brian. It's great to be here. I have to ask, what is Vida Portfolio Solutions?

Brian LaRocca: So Vida's a, a suite of cross-asset applications used by our clients in the entire investment lifecycle. That's from pre-trade to post-trade. Think of portfolio construction, management of that portfolio, any ongoing, monitoring and visualization, and of course, any reporting at the end. So I need to ask you then, what exactly is liquid credit financing globally?

Lou Cerrotta: So, Brian, my liquid credit financing team, or LCF as we like to call it, focuses on the financing and leverage aspects of liquid credit assets. That's predominantly price-transparent and publicly-traded loans and bonds, but can include other asset classes also with price transparency. The format is either through total return swaps or ABLs, which are asset-based lending structures.

Brian LaRocca: Okay. So in a seat like that, I'm sure you see a bunch of varied investment strategies. Specifically, I should mention you are the top provider of Loan TRS financing on the street. So what trends summarize the activity you sell in 2025 in both loan trading and in financing?

Lou Cerrotta: Well, Brian, we were really busy in 2025 as there was a huge demand for Loan TRS product, specifically for two reasons. First, credit spreads continue to tighten and clients increase their leverage usage to meet return hurdles. As you're probably aware, loans are in securities, so our various clients were not able to get the necessary leverage through typical financing options like prime brokerage, margin lending, or a repo. So instead, clients turn to synthetic Loan TRS exposure to meet their leverage returns. Second, overall trading volumes in the loan market were up over 20% from the prior year. Clients sought to manage this operational onslaught by trading via swap to both access the market and benefit from J.P. Morgan's operational expertise and efficiency. In essence, we were doing the operational work for them.

Brian LaRocca: I presume the vast majority of the financing you're providing are on par names, but there's concern that when trading in the distressed part of the market, clients may become ensnared in a messy distressed situation. So top of mind, of course, are liability management exercises, or LMEs. These are financial maneuvers sponsors or borrowers deploy to reduce their debt burden, and this often comes at the expense of other debt investors. So surprisingly, in 2025, we saw significantly fewer of these. Do you think this pertains to a less contentious restructuring process going forward?

Lou Cerrotta: Well, Brian, I agree with you that the number of distress exchanges and LMEs decreased by about half from the prior year. The main driver for less activity here was better than expected economic growth and more accommodative Fed policy. 2024 was also an outlier, producing two times the amount of LMEs and distress exchanges in the prior year, so this is probably more of a return to normal. As you're aware, courts are currently examining some of the tactics being used, but I think LMEs are here to stay. Overall, investors have built up their distress resiliency and they're better equipped to handle these types of situations.

Brian LaRocca: Okay. So on the LME front, a reversion to the mean, but we think that clients are more prepared for them. Let's look at the year ahead. What should clients be expecting in the loan market in 2026?

Lou Cerrotta: So specific to the loan market, the analytics are predicting a sizable increase in both gross and net supply. We're seeing a sign of more LBO activity as rates and spreads compress, and this allows for more deals to come to fruition. We have a great recent example, the EA Sports LBO, which is a sign of just how large deals are now in play in this market. There's also a growing wall of B- and Triple C rated issuers. This is definitely going to present some opportunities for clients to pick their spots. Overall, with the backdrop of new supply and topical refinancings, I think clients are going to see increasing opportunities to pick their spots, and we will have opportunities to provide synthetic LTS financing to clients while continuing that focus on operational lease.

Brian LaRocca: So we're expecting both more LBOs and an increase in total supply along with some situational opportunities at the lower end of the market. How can clients use a product like Loan TRS to take advantage of them?

Lou Cerrotta: Well, Brian, Loan TRS is an over-the-counter derivative or OTC derivative used by a variety of entities from hedge funds, private equity funds, BDCs, and other credit funds. It allows a user to obtain a synthetic long return on bank debt to replicate various strategies. This can include anything from an attempt to maximize leverage to achieve a strong carry trade. We see a lot of this done on a higher quality portfolio of par first lien loans, risk arb names, or even yield to call opportunities. Second, we see a lot of lighter leverage opportunities on special situations in the market, cap structure arbitrage, or other topical names. Finally, we provide marginal leverage on distress situations. Here, Loan TRS is usually used as a means of loan market access and more about achieving operational efficiency. I'm sure I could come up with a whole bunch of other use cases. A setup is especially easy for a client who already has an ISDA in place with J.P. Morgan.

Brian LaRocca: Your point is that Loan TRS is the go-to tool for clients looking for flexible leverage in this single name exposure. I know in recent years, we've been building up our portfolio financing business. How are clients using this strategy?

Lou Cerrotta: So, Brian, this is referring to our ABL, product, which fits in nicely next to Loan TRS, as it allows our clients to lock in a financing arrangement, but purchase and manage a portfolio of assets opportunistically as credit conditions might change. We've seen a lot of inquiry from clients who are seeking to manage this risk, but for whom a more stringent CLO structure really isn't going to be applicable. Clients also value the time and effort we put in for the entire experience, such as viewing their facility in Vida Finance and Connect.

Brian LaRocca: Okay, so this is exactly what Vida Financing Connect was built for. You detail all the components and then the borrowing base of an actively managed ABL. Clients can see position reporting and valuations, as well as a comprehensive visualization of their borrowing capacity. Workflow functionality, so think here cash management, collateral acceptance, that's all managed within the tool, allowing for a streamlined operational experience. Now, you're also the head of our global TRS business. Are there themes that we're discussing on the loan side that would be applicable on the security side?

Lou Cerrotta: They sure are, Brian, maybe even more so. For bond TRS, there's an ability to provide clients both long and short exposure. It really comes in two distinct formats. The first is very similar to our loan TRS product. We offer single name financing on corporate bonds. It's an alternative to repo, prime financing, or other leveraged alternatives in the market where clients can achieve more competitive economics, especially when we have an X on the other side. Probably the larger the opportunity set today, though, is the ability for client to express a view or theme via swap on a customized portfolio of bonds that they or J.P. Morgan can choose. This goes hand in hand with the emergence of portfolio trading, especially in the high-grade market, with about 15% of the volume now traded via portfolio trades rather than single name QSIP by QSIP transactions. As clients are looking to seamlessly finance a portfolio, our bond TRS's product is becoming more in demand. Working in partnership with our portfolio trading desk, we take a holistic view on a potential transaction and put together a portfolio, trading and swap financing package that's both efficient and competitive. We often refer to this as just the initial stage of the equification of the corporate bond market.

Brian LaRocca: Credit is always looking towards the equity markets to gauge what the future will look like. It's been fascinating to watch the evolution that, that's occurred there, so what lessons do you think bond investors can glean from what we've already seen develop in equity markets?

Lou Cerrotta: So if you look closely at the emergence of synthetic exposure in the equity space, there are really two key developments, which we should note. The first is the creation of tradable thematic baskets, and the second is dealers' ability to optimize their hedging strategy to offer more competitive pricing. Our colleagues in our equity franchise have done a great job of curating baskets that have focused on two-way liquidity, and they use that decreased transaction cost to offer compelling financing terms. Although it's at its earliest stages, we're trying to use that same playbook in the corporate bond market and use coordinated flow to reduce friction costs. I think that'll allow us to provide more efficient bid offer and financing alternatives to clients.

Brian LaRocca: That's exactly why we've added the market monitor into our Vida Beta One platform. It shows the thematic baskets in the fixed income market, so clients can see real-time pricing and iterate on each basket to tailor to their investment needs. This is in addition to the wealth of other services we're providing Beta One, so analytical data, optimization capabilities. Of course, if you do transact in bond TRS form, we give you all the post-trade reporting capabilities as well. It's for this reason that Vida Beta One recently won the American Financial Technology Award's most cutting-edge IT initiative. Any clients interested in learning more or getting access to Vida should reach out to their J.P. Morgan sales representatives. Lou, I wanted to close with your thoughts on some of the recent regulatory changes we've seen over the past year. So most notably has been the recalibration of the so-called enhanced supplementary leverage ratio, or ESLR. What material changes should financing clients be aware of?

Lou Cerrotta: Well, Brian, embedded in that recalibration are changes to the calculation for TLAC, or total loss-absorbing capital, or LTD, long-term debt. Estimates are varying across the street, but we think this should lead to a meaningful release of capital and banks balance sheets starting early this year. There's a lot going on in the regulatory docket, as I'm sure you're aware, and it's a space that we're actively monitoring.

Brian LaRocca: Sounds like a good topic for a future chat. Thank you for your time today. And thank you to our listeners for tuning into another episode of J.P. Morgan's Making Sense. We hope you join us again next time.

Lou Cerrotta: Thank you, Brian.

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