How are geopolitics and AI trends impacting leveraged finance?

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Kevin Foley: The question now is, does the level of uncertainty on the geopolitical front - or concerns around AI disruption - do they end up being a headwind for that M&A revival that's been expected, which was ultimately going to drive a pickup in issuance? At the same time, I can look at some of those themes and say there's beneficiaries to that and it may spur on some M&A activity. But that, again, continues to be the key driver for 2026 is… ‘Does M&A come more alive?’

Amaury Guzman: Welcome to another episode on J.P. Morgan's Making Sense. I'm your host today, Amaury Guzman from the Leveraged Finance desk, and I am joined today by two very special and returning guests, Kevin Foley, our global head of Capital Markets, as well as Tarek Hamid, our head of North American Credit Research and Strategy. And all three of us are fresh off the plane coming back from Miami where we hosted our 31st annual Global Leveraged Finance Conference. And in today's episode, we're going to be debriefing all of the different conversations that we had down in Miami. Kevin, Tarek, thank you for joining us today.

Kevin Foley: Thank you. Forgot to pack that nice weather from Miami in our suitcase. We're back in our rainy New York.

Tarek Hamid: It's still better than the snow we've had all winter. (laughs)

Amaury Guzman: I'll take it. I'll take it. Why don't we jump right in and start with you, Tarek. Could you tell us what your key takeaways, or the main themes that were top of mind in your interactions during the conference?

Tarek Hamid: Thanks, Amaury. So this conference has a habit of timing major events like Russia, Ukraine, the regional bank crisis, or even COVID. Clearly, this year was no exception with the conflict breaking out in Iran. So, things we probably wouldn't have spent too much time on became very topical, geopolitics, energy, which has a very large footprint in credit markets, defense and logistics. In terms of market impact, about twenty percent of global oil and liquified natural gas traverse the Strait of Hormuz every day. So, we've seen calendar 2026 oil prices up roughly twenty percent. Calendar '26 LNG price is up a remarkable fifty percent since the start of the conflict. The US 10-Year has moved about 20 basis points, but credit spreads are basically unchanged and the S&P 500 is down about three or four percent as we speak. So, while there has been a market impact, it's been relatively orderly outside of commodities. The longer-term story people were focused on remains AI and AI-related dislocation. So, obviously some very big winners in terms of data center owners and power companies and semiconductor and power equipment manufacturers - and obviously, potential disruption for businesses that are exposed to new competition from potentially lower cost entrants, like software and parts of professional services. But there's a lot more nuance to these markets than just saying that every software company has a problem. You know, this technology is incredible and we're still in the early innings, but that early takeaway is, yeah, there is a massive step change in productivity and potential reduction in the marginal cost of creating new applications and new competitors. In a hypothetical world where everything prices to marginal cost, then that is a real challenge for incumbents, but we live in a world where many of the best companies, especially software, have a big economic moat, whether it's from compounded network effects, regulatory complexity, et cetera. And so for many of those companies, you know, these technologies and productivity improvements are actually a net benefit long-term. So, if that's the case, we’ll probably see a lot of consolidation in these industries as winners rapidly grow and take share.

Amaury Guzman: Thank you for that, Tarek. It's good to hear that the Conference provided the right environment to cover a lot of ground across many different topics. Kevin, in turning to you, how do you see the themes that Tarek just mentioned reflecting on the current state of the Leveraged Finance market?

Kevin Foley: Well, they definitely are weighing on the market as terms of the level of uncertainty. What I'd say first on the geopolitical, there was a lot of tension. The tension was rising and building up during the past month. And now we've got concerns about what's going to happen… Is there going to be further escalation? Tarek's point around what's the price of oil going come into that? You know, that interestingly plays into an assumption around where rates go from here. The assumption is that inflation is under control, but, as you mentioned, twenty percent of oil going through the Straight - that could have a real impact on oil prices globally, which in turn hits the consumer and hits those inflation numbers. So, the assumption around rates going lower and the Fed having the ability to lower rates, while the Market's still pricing in several cuts over the next twelve months, the odds of those have come down. In addition, as you've heard, the widening out of the 10-Year Treasury is a reflection of that. The other part that was debated heavily was the AI disruption theme. And, we did not solve that in Miami, nor are we going to solve that in the next six to nine months. That's going to take much longer, as Tarek talked about, in terms of identifying the winners and losers. But the impact within the Leveraged Finance market is creating a level of anxiety in certain sectors. Software's been the center of that. We've seen other industries start to come under pressure as potential to be more susceptible. That, in turn, is going to manifest itself in more challenging for certain issuers and certain borrowers. They're going to have a harder time navigating this market in the current state. Again, I think it's going to take time for all of that to settle out, but that's going to be something you're going to have to navigate depending on where you sit in the market. At the same time, there's a lot of beneficiaries from this. And, we are seeing that halo trade happen. We're going into those hard assets, low obsolescence risk, and seeing those businesses benefit, and seeing the rotation within the Leveraged Finance market, which will have a positive impact for those borrowers and issuers in the Leveraged Finance market.

Amaury Guzman: Tarek, maybe I'll turn it back to you. Something Kevin just mentioned was kind of the outlook for the rest of the year, given all of these different topics that were discussed and that there are continue to be top of mind at the market. One is we have a relatively large pipeline of new supply coming to the market and, you know, issuers and borrowers are going to have to navigate both that, in the context of, let's call it for simplicity, high-end volatility. What's your view on the Markets' capacity to absorb the supply, and do you see any impacts to spread to it throughout the rest of the year?

Tarek Hamid: Yeah, I'd say that the uncertainty is real, but talking to investors down in Miami, you know, the market is still pretty hungry for new paper, particularly in high yield and high grade. So, high yield spreads are roughly 320 basis points as we speak, and are, at this, point basically unchanged despite all the uncertainty on the year. High grade spreads are still inside of 100 basis points. So, historical context is still relatively tight. You know, the investors I speak to have been, frankly, a bit underwhelmed versus expectations going into the year. Going into the year, there was a decent amount of, frankly, fear about the amount of issuance that we'd see. And what we've seen so far has been up year over year, but it hasn't been sort of that flood that folks were worried about. You know, we do sort of see this pattern kind of replay itself over time that investors like to price in a new issue ahead of time, market backs up a little bit or maybe doesn't rally as much as it would have otherwise because of supply concerns, but then once that supply happens, it does tend to be a little bit of a clearing event, and we do tend to see markets rally post-sort of getting through that supply wave. I think to Kevin's earlier point, the leveraged loan side's probably a little bit more complicated than the bond side. You know, the loan market is still, again, mid-innings in terms of sort of dealing with its software exposure issues, roughly 15% of that market. So as investors get a handle on their exposures, and as we talked about earlier, start differentiating a little bit between winners and losers we expect that market to become a little bit more receptive to supply as well.

Kevin Foley: What I'd add to that is the key coming into 2026 from an issuance standpoint was going to be tied to M&A, right? We talked about the animal spirits in M&A waking up. We saw a pickup and activity in the back half of 2025. The pace has, I'd say, sustained itself, but not necessarily the big uptick that maybe people were expecting coming into this year. The question now is, does the level of uncertainty on the geopolitical front - or concerns around AI disruption - do they end up being a headwind for that M&A revival that's been expected, which was ultimately going to drive a pickup in issuance? At the same time, I can look at some of those themes and say there's beneficiaries to that and it may spur on some M&A activity. But that, again, continues to be the key driver for 2026 is… ‘Does M&A come more alive?’

Amaury Guzman: Got it. Thank you both for that. I want to explore a different angle now of the market as we continue to look forward in the role that we play for our clients and market participants. Kevin, something that we've highlighted here before is the strength of our platform, is across credit, equity-like, straight equity. How do you see our ability, our appetite for risk, and our appetite for our company clients to navigate the markets for the rest of the year?

Kevin Foley: So at first, I'd say J.P. Morgan's always going to have appetite for risk. We're obviously going to be prudent measure to make sure the risk-reward equation makes sense, but we always want to be there to support our issuer and borrower clients, as well as our buy-side clients. As you think about this year, yes, we have set up the platform to be product-agnostic. That's even more paramount in an environment like right now, because you need to be able to have a broad view of what all markets are doing, what is best suited for what you need to get done. And we've set up our entire team to be collaborative that way, and to make sure that we're coming in with a product-agnostic objective, as well as thinking about all of the art of the possible, of what is going to be the most effective way for you to get a financing done. And in volatile markets like now, that is most important. And, that's where the J.P. Morgan platform, and the people on it, differentiate themselves.

Amaury Guzman: That is certainly the case. Tarek, I'm going to put you on the spot here, because we've talked about many different things that are top of mind, but if I were to ask you to pick your most important one for folks to observe or monitor throughout the rest of the year, what would that be?

Tarek Hamid: You know, I'd say it's hard to ignore a giant conflict in the Middle East, but I am going to put that to the side because that is, again, a very complicated issue, and geopolitical events tend to burn slower to start and then happen and end faster than you expect. You know, I think the real focus that we're going to be talking about for years is Agentic AI. So, we spent a lot of time talking about LLMs, but in many respect, the LLMs are milk at the grocery store, in terms of getting us ready for AI agents. So, when I think about the potential enhancements of the capabilities of analysts, traders, bankers, portfolio managers, and salespeople that are coming over the next year, I think it's really exciting. And then we start extrapolating that to the broader economy, I think it's going to be incredible. But it's going to take years and an enormous amount of expansion, and compute, and memory, and power, and cost trillions of dollars investment to get that infrastructure in place to support Agentic AI at scale. And that tension between sort of investing and building AI and data center capability and the benefits from Agentic AI, I really think will define the market for the next few years.

Kevin Foley: I'll just add some cookies to your milk, in terms of how we think about ‘what is the broader impact of the volatility we're seeing?’, whether on the geopolitical front, to the AI disruption, you have a risk of contagion and sentiment. And so while there's this incredible growth story and there's huge capex needs, as Tarek pointed out, one of the concerns we have to worry about this year is, ‘Does that negative sentiment, which is more concentrated right now, and limited to certain sectors of the market, somehow broaden out across the entire market and have a negative impact on the ability to get all that capital raised?’ Whether you're looking at investment grade, Leveraged Finance, or the equity markets, these concerns are out there.

Amaury Guzman: Thank you both for that. Now the market is back up and everyone is back to executing where it is on the corporate side, deploying some capex, looking at M&A opportunities, growing their business. If you're a financial sponsor for a private equity firm, you know, raising funds, optimizing capital structures, we've talked about concerns that are global here. As we look now through executing in the market and looking forward, as well, to our EMEA Leveraged Finance Conference at the end of the summer, do some of the topics that we have discussed here, do you have any anticipation of them having any higher relative importance over there?

Kevin Foley: I think everything we've been discussing is a global phenomena. None of this is just an isolated to a US phenomena. Yes, the AI growth story is, from a technology standpoint, where it's being driven and created by, the US is leading the way on that. But, the usage is going to be global, and the impact is going to be global. So, any business that is potentially viewed as disrupted by AI, [it] doesn't matter what country it sits in, that's going to be a factor. You look at the geopolitical, yes, that's sitting in the Middle East, but oil is a global issue. And, where the Straight is a supply in terms of twenty percent of energy throughout the world, that is going to be an impact on overall prices and it can create inflation, not just in the US, but again, globally. So, when we get to September at the European Leveraged Finance Conference, I'd love to think a bunch of this stuff is solved. I don't think that's going to be the case. Put aside the geopolitical, because that's going to be hard to handicap at this point. We all hope that there's certainly no further escalation, and best news would be that it is solved and we've really got peace in the Middle East and we've got a good path forward. I don't think the AI disruption, as I said earlier, goes away anytime soon. So I think these issues, we're going to continue to debate. The only other thing that we're going to have is that six months from now, we're going to have a little bit better gauge of: ‘How has it impacted the consumer?’ ‘Has that inflation shown up?’ ‘Has oil gone higher or lower?’ We will have a better sense on that front, but my assumption is that it's not going to be all solved.

Tarek Hamid: Yeah. The one thing I'd add to that is that one of the major themes internationally in the last couple of years has been, you know, the rearmament of Europe and European defense. And so, I think the events of last week probably put a little bit more underlining of that as we head through the summer.

Kevin Foley: Yeah, that's a great point because we've talked very little about that. That theme has very much been underway, and we're seeing that from where financing activity is, where investment dollars are going. That theme is only going to pick up from here. This further solidifies what was already happening.

Amaury Guzman: Thank you both for your thoughts. Those are very good insights for our listeners. I think this is a good point to wrap up the episode, but before we do, are there any closing remarks that you'd like to leave our listeners with?

Kevin Foley: Just a few things from me, Amaury. One, since we're on the verge of baseball season here, I'd say to our issuers and borrowers, if you're going to be thinking about accessing the market, given the volatility, I think you use the approach of just like getting in the on-deck circle, making sure you're ready, because we're never going to say that you're not going to be able to get a deal done. Deals are still getting done and you should be preparing yourself as if you're going to step in that batter box. So, I would take that approach throughout the year. Secondly, I want to say thank you to all our clients who joined us in Miami and the partnership with you throughout the year. We don't have this franchise, or the success of this event, without that partnership, and we don't take it for granted. So again, thank you for all that you do with us.

Tarek Hamid: Yeah, and I'd love to add my thanks to that as well, and also remind folks that the save the date for the European Leveraged Finance Conference is going out. That'll be September 9th through 11th, and then next year's Global High-Yield Leveraged Finance Conference will be March 1st to 3rd, 2027.

Amaury Guzman: And thank you to our listeners for tuning in. We hope you join us next time.

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