A deep dive into the world of investment-grade private credit

[Music]

Christian O'Donnell: Given the favorable demand supply dynamics that we've talked about, and the broader interest in the product on the investor side, we actually feel that private markets are not just going to remain very resilient, but arguably more resilient than public markets, especially if we see uncertainty out of Washington or geopolitical tensions, or just broader volatility over the balance of the year.

Emily Dzieciatko: Hi there, and welcome to ‘What's the Deal?’, our series on J.P. Morgan's Making Sense. My name is Emily Dzieciatko from J.P. Morgan's investment grade finance team, and I'm thrilled to be your host today. We're diving into the world of private credit markets, especially focusing on opportunities for IG borrowers. This area has seen incredible growth, especially over the last year or two, and we wanted to dive in and explore a little bit more on why. So joining me today is Christian O'Donnell, managing director and head of our Debt Solutions group. His team specializes on creating these private credit deals for investment grade clients. Christian, thanks a lot for joining.

Christian O'Donnell: Great to be here, Emily. Thanks for having me.

Emily Dzieciatko: Alright, let's start off with the basics. Can you explain what investment grade private credit actually is and how it differs from the public credit markets?

Christian O'Donnell: Yeah, of course. And maybe just quickly to clear up what could potentially be a source of confusion, private credit, as we all know, is a very broad term. But people tend to typically associate it with core middle market, first lien, senior secured lending. And that's generally a high yield product. For this discussion, I'm going to focus on the narrower subset of the private credit universe, which is rated investment grade. So I just want to make that distinction from the get-go. And incidentally, if people are interested in the sort of, more regular way, term loan B, direct lending private market, our colleagues, Jake Pollock and Lee Price provide an excellent overview of that space in a recent podcast which was released on June 10th. So listeners should certainly tune into that if they’re interested. And you can find a link to that episode in the description of this podcast. But pivoting into what private IG is, I like to explain it through a historical lens. I feel that there's this sort of mistaken perception that private IG is a new or a newer addition to the broader private credit universe, and that's just not true. Private IG has existed for decades, and J.P. Morgan has been a placement agent, a structure, an advisor, and a market leader in that space for decades. And when we look at it historically, private IG was, and it continues to be a financing product that's used by investment grade corporates to get additional flexibility, which the public market may not be able to accommodate for them. We don't need get into the features now, I'm sure we'll come back to it over the course of the podcast, but the punchline is that it's essentially a regular way corporate borrowing tool. In other words, it's issued directly by the corporate, not out of a JV or any boxes and arrows, and it tends to be issued in the traditional private placement market, which if we want to be precise legally, that means that we're issuing it in reliance on section 4A2 of the Securities Act of 1933, which is a fancy way of saying that the securities are not registered with the SEC, they're generally not centrally cleared, and they have trading restrictions or impediments, which makes them less liquid. And so as a result of that, they tend to price at higher yields, anywhere from say, 20 to 40 basis points on average compared to public benchmarks.

Emily Dzieciatko: Got it. Helpful starting point in terms of how we can define investment grade private credit, but how does this historical context actually apply to what we're seeing today?

Christian O'Donnell: Yeah, so it's a good segue. As I said, the starting point is debt issued by corporates, which is a little more customized, issued in 4A2 format, and not very liquid. If we pivot to the more modern version of private IG, I think we can definitively say that over the last three to four years we've seen this very meaningful growth in terms of the scope, the size, and the complexity of the private placement market. And there's a number of reasons as to why. One obvious one of course is that there's a massive need for capital in a variety of different sectors in the United States and globally, like digital infra or technology or AI or energy or manufacturing and a whole host of other areas. And then of course, asset managers are also looking for excess returns. And so this newer vintage of IG private credit elegantly bridges the needs of those two constituents. So on the one hand, we can now offer heavily structured, heavily customized financing solutions at scale, which is very valuable to borrowers. And by the same token, because of that complexity, because of that scale, these private credit deals tend to come at a significant premium. And that's of course, very attractive to investors. And maybe just to contextualize that premium, in many situations, we see it coming at a hundred to 200 basis points higher in yield than what we see in the public bond space.  

Emily Dzieciatko: So you alluded to this already, but what are some of features of these private debt transactions compared to public ones that appeal to borrowers? And also if you could touch on some examples of types of transactions, different themes of those sorts of transactions that we've seen recently.

Christian O'Donnell: Yeah, of course. And so the, the, the many features that we've seen crop up in private credit deals, to give some examples, first of all, delayed draw is a feature which is very popular. It essentially allows borrowers to access funds as and when they're needed as opposed to having to borrow everything upfront. A second feature that's pretty common is amortization schedules that are sculpted, if you will, to better fit the cash flow needs of a particular project. And I think a third theme, which is worth highlighting, is we're seeing increased reliance on rating agencies outside of the big three from a credit ratings perspective. And that's proliferated in particular over the last two, three years. We also typically see unique maturities that are tailored to specific project timelines. And I think we could also add that private credit deals often embed put or call options, or both, which give borrowers more flexibility in terms of how they manage their debt loads. And then lastly, confidentiality is certainly enhanced, for obvious reasons in a private credit deal, and in certain instances, speed of execution. When you put all of those features together, we're able to construct a range of transactions which are very appealing to borrowers. And again, just to give some examples, we're seeing the financing of minority stakes. We're seeing infrastructure and project finance deals. We're seeing the securitization of oil and gas reserves, of royalties. We're seeing stadium financings. I mean, the list goes on and on. And, and I hope what listeners can infer from all this is that it's the versatility of private credit, which makes it such a valuable tool for financing, and thereby obviously giving borrowers the ability to structure deals that better align with their objectives.

Emily Dzieciatko: Maybe we can get a little bit more granular on the second part of your answer. How should companies view investment grade private credit as an opportunity? When and how would it be relevant to them?

Christian O'Donnell: Yeah. And so maybe if we focus more on private debt in its more modern form, which is the more topical one, I'd say that it's particularly useful when companies need a financing solution that doesn't just offer customization, but also more favorable either balance sheet or rating agency or accounting treatment than what you can get with standard debt. So a good example of that is, what we typically refer to as a structured minority equity transaction where a company creates a joint venture, they contribute assets to that JV, they sell a minority stake, or sometimes even a majority stake, and the buyer of that stake finances their investment with private debt. So that de facto capital raise by a borrower can result in, for instance, either full or partial equity credit from their agencies, while at the same time allowing the company to control the assets. And in addition to that, potentially even buy back the stake at a future point in time. And variations of that structure also allow potentially the JV to be entirely de-consolidated from the company's balance sheet, again, while still allowing the company to operate the asset. So these are obviously very valuable features, which are win-win, right? Investors get yielded debt for their credit profile while companies get either cheap equity or arguably more attractive off balance sheet treatment for a given project. So maybe to summarize more generically, I'd say that private credit is particularly compelling or relevant for companies that have large capital needs and or need to finance large-scale infrastructure projects, or in general just need solutions that don't impact the balance sheet or their earnings in the same way that traditional debt might.

Emily Dzieciatko: That certainly all sounds great, but I have to ask, what are the risks? What's the catch? What's the downside to these private credit solutions for borrowers?

Christian O'Donnell: Yeah, of course there's always, there's always a con or a disadvantage. The main, downside is cost generally speaking. Private debt usually, or almost by definition, comes with a higher price, meaning either wider spread or higher coupon than what we see in public transactions. So for companies that are focused purely on price and that don't necessarily need or value customization, then public transactions are probably more suitable, right? And so it's imperative for companies to weigh the pros and the cons and consider their long-term strategic goals when deciding between private and public. And I think this is where we, J.P. Morgan, and this is an important point, where we can guide our clients through that decision process as opposed to pushing a particular product. I would be remiss not to add here, just for the sake of completeness, that private IG can on occasion actually be a cheaper form of capital than public markets, particularly in the context of high yield borrowers who may have specific assets that can be monetized to create an IG rated security. So just to give an example, any cash flows from things like receivables, inventory, software, brands and other IP assets in general, can be particularly interesting from a financing standpoint. So I just want to mention that, but broadly speaking, generally private IG is more expensive than public markets.

Emily Dzieciatko: That's a good segue. Let's dive a little bit deeper there. How does J.P. Morgan fit into this picture?

Christian O'Donnell: Yeah, great question. And, and maybe just to contextualize it a little bit, I think I want to make two key points here. First of all, J.P. Morgan is not a new entrant into this market. We have, as I alluded to before, been a structure placement agent advisor market leader in the private credit space for decades, originally of course in the less complex, regular way corporate private placement deals, but then increasingly in this newer vintage of larger more complex private credit deals. So we obviously bring deep expertise that we can bring to bear in the context of these transactions. The second key point is we are completely product-agnostic. The key mantra for us is to approach every client situation with a solution-focused mindset. So our focus is to consider all the available options that optimizes the outcome for the client. And that can be bonds, that can be loans, that can be hybrids, it can be equity linked, it can be preferred stock and private debt, public debt. It can be anything. What matters to us is that the financing solution meets the needs of our clients. And I think the key point there is that because we approach every situation with that mindset, we can provide impartial advice as to which is the optimal financing tool in a given situation and for a given set of client objectives. And maybe to go into some of the specifics of what we do in a given transaction, first of all, we provide advice in the context of some of the more strategic considerations that tend to crop up in the context of private credit deals. So things like selling stakes and assets, in some instances, selling stakes in core assets. Second, as part of that, we provide structuring expertise in what's obviously, as we've talked about, become an increasingly complex space. Third, we help coordinate the rating agency process, which is integral, I'd say, to the success of most of these transactions. And again, with an increased reliance on some of the smaller agencies. And then lastly, of course, just facilitating execution. And that can be through syndication, but also in certain instances via our balance sheet, again, just to make sure we achieve optimal outcomes. So again, to give a more concrete example in the context of say, a structured minority interest transaction, we fulfill all of those roles. We provide sell-side advisory capability, we provide structuring, balance sheet ratings, advisory advice, and of course, in the context of the financing, ultimately execution expertise, which given the decades that we've been in this space, is unparalleled.

Emily Dzieciatko: Super helpful. Thanks for going through all of those details. Very clear. I think we now have a much better understanding of what IG private credit is, the nuances around it, and how J.P. Morgan can help in the space. But I think it would be helpful if we take a step back and further contextualize how private credit can be used in the current broader macro backdrop of volatility. How does this uncertain macro backdrop impact these private credit markets? And what is your outlook for the private credit market for the rest of the year?

Christian O'Donnell: Yeah, and I think that this speaks to one of the benefits of private credit relative to public markets. Because it's a less liquid and a more bespoke instrument, it tends to be much less directional or, or much less volatile relative to what we sometimes see in either the 144A or SEC-registered space, which in our view are both public markets. So if, just to give an example, if you look in the days and weeks post-liberation day when public markets gapped out 40 basis points, we didn't see any impact on spreads in the private market, nor in, in terms of the broader investor appetite for the product. So in that sense, it can actually even be a reason for a borrower to access that particular market. When dislocations are at their worst in the public space, the private space can be a safe port in the storm, both from a spread perspective and also from an execution certainty standpoint. So I guess if we just extrapolate from there and just given the favorable demand supply dynamics that we've talked about, and the broader interest in the product on the investor side, we actually feel that private markets are not just going to remain very resilient, but arguably more resilient than public markets, especially if we see uncertainty out of Washington or geopolitical tensions, or just broader volatility over the balance of the year.

Emily Dzieciatko: Huh. That's really interesting. You touched on the stability of the market and you started alluding to the investor base and their preference for illiquidity. Could you go in a little bit deeper as far as who the actual investors are in this market and why they prioritize the illiquidity?

Christian O'Donnell: That's a great question, and this is an area where we've seen a tremendous amount of growth. If we look at things historically, it's again, I like to contextualize things historically, investors in the traditional private placement market were predominantly U.S. life insurance companies. And the reason they allocated capital to private credit is they're buy and hold investors, and they look for incremental yield. And so for them, it's a simple asset liability matching game. They write life insurance policies which generate liabilities, and so they seek assets to match them. And once they've acquired those private credit instruments, those bonds are set aside and they're not really impacted by daily mark to markets. Over the last few years, though, we've seen two fundamental shifts in this investor base. The first one is that traditional public investors, both in the U.S. and globally, have identified private credit as a source of alpha, as a source of incremental yield. And so as a result of that, we've seen inflows from that constituency to private credit, and that's been very meaningful. I think a second component of the shift in the investor base, is there's been a significant amount of insurance capital consolidation to third party managers. And so when you compound those two factors, in addition to the fact that traditional insurance communities is also allocating more capital toward private credit, you can clearly see that the market has scaled significantly, which is why borrowers can issue much larger size than maybe what they were able to historically.

Emily Dzieciatko: One last question for you, Christian. How do you see investment grade private capital markets evolving? Do you think that the lines between public and private markets will increasingly blur?

Christian O'Donnell: Both yes and no. Maybe if I list out, some observations in regards to the topic. First of all, private credit has grown significantly and it'll obviously continue to do so. We've talked about how attractive it is for borrowers because of the customization, and it's also attractive for investors given the higher returns. The second point I'd make is that there has been a push for more liquidity in private markets. And in fact, J.P. Morgan has started trading private IG securities recently, but that doesn't detract from the fact that trading is still going to be tricky and more onerous and more logistically challenging. And some investors even told us that they prefer the fact that there's less liquidity in private credit because it reduces asset class volatility. So complete convergence from a liquidity standpoint is very unlikely, in our view. The third point I'd make is that the two markets will definitely continue to coexist, and I definitely think that more borrowers are going to have a footprint in both markets, again, just depending on what their needs are over time. And I guess the last point I'd make is that each market is going to continue to offer unique opportunities. And again, our role in that context is to help clients navigate those options to, again, best achieve their financial objectives.

Emily Dzieciatko: Thank you, Christian. I've certainly learned a lot today. Some really good food for thought. To sum up, investment grade private credit is growing, offers customization and flexibility for borrowers, and J.P. Morgan is leading the charge in helping clients navigate both private and public markets. Thanks again for your time, Christian, and thank you to our listeners for tuning into ‘What's the Deal?’ We hope you enjoyed the insights.

[Music]

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.

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]