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Tech Financing: A Goldilocks scenario?
What’s The Deal? | Tech Financing: A Goldilocks Scenario?
Kathleen Darling: Hello, and welcome to the podcast. I'm your host today, Kathleen Darling, a member of our debt capital markets team. I'm excited to have with me today David de Boltz, a managing director with our leveraged finance capital markets team, covering technology, to discuss the current financing activities being seen in this sector. David, great to have you.
David de Boltz: Thanks, Kathleen. Delighted to be here.
Kathleen Darling: Before we start, can you walk our listeners through your background and roles held at JP Morgan?
David de Boltz: Yeah, absolutely. So I've been at the firm now for over 12 years, across multiple different roles, London, Luxembourg, New York. And since 2017 I've worked within the leveraged finance capital markets team in EMEA, covering technology, media, telecom and automotive sectors. And then purely switched to focusing just on the technology sector in New York for the last couple of years. If you think about the technology sector, it's around 15% of the leveraged finance markets, but from a selfish perspective and what I cover, I think it's the most exciting and fast-growing part of the leveraged finance space. And we work with companies across the spectrum, so think about it from early stage, negative free cash flow names, all the way up to pre and post-IPO, and all the way through to mature, large 20 billion plus tech companies looking to access the capital markets.
Kathleen Darling: Fantastic. To kick off, can you give an overview of what activity is being seen in the US leveraged finance markets related to technology? Specifically, it would be helpful to understand the market dynamics unfolding now.
David de Boltz: Yes, absolutely. So to understand where we are now, it's worth quickly recapping the year what we've had in the technology space. So we came into the year with a clear pivot from the VC world all the way up to the public companies that the tech sector needed to pivot away from a growth at all costs to bottom line profitability. With the expectation we had of rising rates, the debt market was taking a very bifurcated approach between what we say, the haves and the have nots.
And that really came down to the positive free cash flow companies, to put it very simply, having access to the markets, and the negative free cash flow companies, obviously having more difficulty coming into the market. And then we had the regional banking crisis bubble up, with tech at the very epicenter of that with the Silicon Valley Bank. And as a result of the volatility, we saw rating downgrades across the technology space. And just to put that into some kind of perspective, we saw a very sharp move in the cost of borrowing from technology companies from around the mid 8% all the way up to over 10% in only a two to three week period. So it's an incredibly sharp uptick in the cost to access the markets. And it was really split between the haves and the have nots, if they could access the markets in its entirety.
So naturally at this point, we saw direct lenders actually take a significant market share away from the banks in the tech space specifically. And many of the tech private transactions were financed away from the banks in Q1. And again, to give you some perspective of the magnitude of that, 65 technology deals were financed by the direct lenders in the first half of the year alone, which is obviously an incredibly busy part of the market. But bringing you right up to the present day, demand from institutional lenders has actually snapped back so significantly that banks are now willing to enter into firm commitments with the expectation of being able to syndicate the term loans to institutional lenders. And the actual average price of technology loans has increased nearly three points since effectively late March. And that is a huge movement in the markets.
Kathleen Darling: That's really interesting, can you tell us more?
David de Boltz:
Kathleen Darling: You mentioned there needed to be a pivot away from growth at all cost, given the changing landscape in the macro and interest rate environments. Can you expand on this point? If it's the case that investors and lenders are still factoring in a potential recession, how has this mindset impacted the willingness to put money to work? Is the preference still to deploy capital for higher quality, profitable tech names?
David de Boltz: Yes, you're absolutely right, Kathleen. So investors in high yield bonds and lenders in leveraged loans are still very much concerned around the aforementioned potential recession that we could see over the next 6 to 12 months. But they're also incredibly focused around the Companies that have over levered capital structures, who potentially have refinancing risk, or may need to come back to the market in the near future and raise more capital. So over the last three months alone we've seen 34 downgrades to CCC across both high yield and leveraged loans. And respect to leveraged loans especially, CLOs are actually trying to navigate proactively away from the capital structures that are starting to see pressure, to go down into the CCC territory. And actually what you see is a mini flight-to-quality amongst leveraged loans. The flight-to-quality that we typically see is sometimes from equities into gold, or from high yield into investment grade. But it's a lot more nuanced than that in the leveraged finance side. What we actually see in loans is the navigation from B3 rated loans all the way up to B2, which sounds very small but it's a massive difference in how CLOs can actually treat that capital as part of their lending thesis. And that's where we're seeing a large divergence right now in price. So the haves versus the have nots, you're seeing a huge divergence in price between those names that are performing, and ones that are not. With respect to the leveraged finance markets, I will say those companies who were negative free cash flow who probably didn't have access to the leveraged finance markets in Q1 or the early part of Q2. They're starting to now have access once again. So lenders and investors from hedge funds, to real money mutual funds, they're now starting to see what other opportunities there are to put some cash to work, and that ultimately leads to them going down the quality spectrum. And to the negative free cash flow tech names that's actually potential... we're gonna start to see that coming back into market again.
Kathleen Darling: Refinancings. We have started to see a theme of lenders willing to lend at par, or even above par, for high quality names. Can you talk about what is driving this? And if you expect this trend to continue now that north of 50% of loans are trading in the secondary market above 99? And to put this into context for our listeners, we have not seen this trend since April of 2022.
David de Boltz: Absolutely. So this really emphasizes the previous question. There is a trend developing around the higher quality companies, where they're seeing a significant amount of cash and demand effectively chase all of the same opportunities. So you think around the demand in the system and the lack of new names coming to the market. Ultimately, that leads to the cash all chasing the same opportunities and this Goldilocks scenario right now where the mini repricing wave is just starting. And we've seen a number of tech borrowers actually borrow and cut their spreads on their leverage loans in the most recent weeks, which again, as you mentioned, hasn't been seen for quite a while in the loan market. The more exciting outcome of the secondary levels improving so significantly is that many companies can borrow for small add-ons, whether that's to fund general corporate purposes, or to even just replenish RCF drawings, when previously the upfront costs associated with coming to the market were so significant that the companies were shying away from coming to the market at all. So very much right now, the change in price is given not just repricing opportunities, but borrowers can now come back to the market and raise various different forms of lending activity, which is, again, three to four months ago, a very different place to where we are right now.
Kathleen Darling: Moving from refinancings to M&A, the current underwriting M&A pipeline remains pretty subdued, with approximately 50 billion of committed financing. As we think about strategic and sponsored capital that is looking to be put to work, can you talk about what M&A financings you're starting to see? As well as the appetite for larger underwritten holds?
David de Boltz: So, to put that 50 billion into historical context, at this point last year the streets underwritten bridge book, so the total amount of underwritten risk on the banks, stood at over 100 billion. We've cut that in half. And that really isn't a significant number, and that's not difficult for the market to digest. So very much it's okay. And given the fact pattern, it is our view that the market is firmly open again for transformational M&A and LBOs once again. We're actually starting to see activity really pick up in the background. And we actually, as a bank, underwrote over 8 billion of financing in the payment space in the last couple of weeks. So were really starting to see that activity pick up once again. And I would say the demand for transformational large cap M&A, is definitely back on the table. And lenders and investors are all very excited to put that cash to work in these large companies. I think what we're starting to see, finally, is a match between the buyers and the sellers on the M&A side, which is then funneling into much more activity in the leveraged finance markets. And ultimately what people want to see is that supply and demand balance kind of rebalance effectively, so we're not gonna see this repricing wave continue. Everyone's very excited to see this.
Kathleen Darling: Last question, David, as we would be remiss without inquiring, artificial intelligence. We are certainly seeing the impact in the stock market, with seven tech issuers tied to AI leading the charge in returns. Are we seeing the AI impact in the debt markets as well? Or are we still in too nascent of a stage to gauge this?
David de Boltz: Yeah. This is almost the first question that we're starting to see from lenders and investors, whether it's in an update call, or whether it's at a conference, AI seems to be on the touchpoint of everyone's lips right now. And everyone wants to know what companies are doing about it, whether they are effectively trying to mitigate those risks form just being disrupted, their business model. Or now we're starting to see them actually think about their opportunities and how they're gonna take advantage of this. We're even actually seeing it added to the risk factors in the offering memorandums as well. So there's no shying away from the topic, but for now the market is very focused on a lot of what ifs, rather than taking investing views based on the AI wave. Venture capitals are still working out which horses are the right ones to back, whether that's in the infrastructure, the date centers, et cetera, or the actual providers. So we may see some new subscription style models coming out in the near future. And we're not gonna see these Companies come to the leveraged finance market in the short term, but I think it's safe to say in the medium term we're gonna see a wave of the AI backed technology firms coming to the leveraged finance markets pretty soon.
Kathleen Darling: David, this has been a great conversation on what we're starting to see in the technology sector as it relates to the leveraged finance market. I think we'll very much be interested to see where this trend continues going forward. So thank you for joining us.
David de Boltz: It's going to be an exciting few months. Thanks for hosting, Kathleen.
[END OF PODCAST]
How are companies supporting innovation in the health care industry, and what does the future hold?
Vis Raghavan: A very warm welcome to this, our inaugural innovation symposium in the health care space. It's absolutely fantastic that you can all kind of join us here today.
Dania Chehab: There is quite a lot of innovation coming from health care. And this really permeates across all subsectors, be it cutting edge R&D in biotech, genetic sequencing, and life science tools and diagnostic-- the consumerization of health care, which we have seen accelerate over the last couple of years.
Jeremy Hunt: Life sciences is one that we are particularly proud of, not just because we are home to a third of the European life science startups, but because we can see the impact on ordinary families of what happens when you have a strong life science sector.
Christian Wolfum: We have a growing, but also aging population. There's a strong need for more and more precise medicine. And life science companies help there a lot. The life science industry, it's an industry where you have partners from corporate, academia providers. You can really create an ecosystem of open innovation, bringing new ideas into your company, really seeing what will impact health care and the clinical practice in a couple of years from now.
Rose Nguyen: Over the past 5 to 10 years, there has been tremendous progress in the field in some areas that even exceeded our expectations. We believe that there is a technological revolution going on in health care and life sciences.
Shobi Khan: There's so much innovation going on. And I think to be in that space now, to be able to participate in those discoveries is an extraordinary opportunity.
David Redfern: We feel very optimistic about the level of science. There's a lot of great innovation happening, a lot of great science happening. It is being accelerated by the tech revolution. And the interface of data science with biological and genetic science is hugely exciting.
Juha Anjala: We support innovation in many different ways. We have always been willing to invest early in a relationship with innovators. We are a relationship-based organization that invests in our clients early, consistently, and over time.
David Ke: I'm very excited by a number of the strong innovations that we have coming out of the health care sector. For example, whether it's the latest cutting edge science coming out of biotechnology. It's been unique and remarkable to see just the globalization within the health care industry over the past decade, whether it's European companies that want to list in the U.S., but also attract capital from Asia, or Asia companies thinking about listing in London, but also wanting to attract U.S. investors.
Chris Hollowood: We're incredibly lucky relative to some other industries, where clearly you need to create value for shareholders, but also you create value for so many other stakeholders. At the scientific level translating world-beating science into medicines, then at the medicine level when you see the impact on patients. And the wonderful thing is actually when you serve all three, all three have the greatest success. So there's an alignment there. So if you can't get out of bed in the morning energized by all of that, I don't know what you can.
Fred Turpin: There’s been an extraordinarily challenging backdrop. It's harder to get deals done today than it used to be. Rates are higher, equity markets are less forgiving, but there is no shortage of strategic activity. Everything we thought about meeting communications valuations for course segments over the last three or four years has changed. So what's driving some of these changes? Obviously, the economics of streaming are very different than the economics of linear content on cable.
Fred Turpin:And I do think that it seems self-evident that over the next five years we're going to see reductions in content spending, more consolidation and probably higher prices for all of us to watch Yellowstone and Succession.
Fred Turpin: Another area that we're very focused on our practice is audio. There's a lot more opportunity to grow, share and to advertise more effectively on audio right now than there may be on video, because it's video is just kind of overwhelmed with high quality content and competitors. Gaming has exploded and the community that is very focused on gaming as a form of entertainment are also very active online.
Fred Turpin: And it makes them very, very attractive and important consumers for leading edge technology companies. There is a scramble to try to make sure that platforms have access to those really important, incredibly dedicated and high intensity users. And gaming is often a platform for that.
Fred Turpin: One of the biggest changes we've seen over the last three years since COVID has been in consumer broadband. We saw valuations hit all time highs for cable companies and for certain wireless companies. Since the pandemic ended, and the technology cost of deploying very high quality broadband has is dramatically less than it was five years ago. So we've seen competition come into a number of these markets and it's become a much more dynamic marketplace where for 20 years, basically cable companies had home broadband to themselves.
Fred Turpin: We do continue to see growth in fiber to the home. There's a half a dozen players that are driving that very capital intensive. But these are 50 year assets.
Fred Turpin: The market cap that has been created in the tower sector, in the data center sector, as well as the fiber sector over the last ten years is is dramatic. Right. And while it's down from the peaks, it's certainly still amazingly value creating for both the companies and the investors that have been early to the space. We continue to believe that we're in the early innings, third, fourth inning of the total architecture of the digital infrastructure for the United States and then subsequently the world demand for advanced devices, Internet connected devices and data creation continue to explode, whether it's storage, connectivity, compute latency.
Fred Turpin: These trends are here with us to stay. If your sovereign wealth fund, if you're a major PE fund, if you've got a dedicated infrastructure fund, how are you not a participant in the datacenter sector, in the cloud sector, in the tower sector, in the DAS sector, in fiber, like every zero sum game, there are going to be winners and they're going to be losers and boardrooms and CEOs and management teams across America and the world are very, very focused right now in my sector, I'm trying to make sure that they're putting the pieces in place to ensure that they have competitive advantage in a consumer facing business in the future that’s going to allow them to create value.
Chris Grose: The future today, in my opinion, is as bright as it’s ever been. TMC is going to continue to be the engine for the U.S. economy. Now on the M&A side, companies remain cautious given the macro uncertainty. What’s the one lone bright spot? It’s been sponsor activity. So we’ve seen a good amount of take privates and we expect to see more. And the debt markets has just been, frankly, more resilient than the equity markets. And we expect a relatively healthy financing backdrop to support M&A going forward.
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See highlights from our Clean Tech Stars conference, which brought together 30 of the most exciting, successful, high-growth companies helping to make net zero happen.
See highlights from our Clean Tech Stars conference, which brought together 30 of the most exciting, successful, high-growth companies helping to make net zero happen.
James Janoskey: What do we mean by Clean Tech Stars? To us, these are the companies that are leading to find solutions and technologies that are required for the world to address our net-zero commitment by 2050. That these companies are the ones that are purely focused on finding solutions through new technologies, new capabilities, new partnerships to address this challenge.
Karl Atenburg: To master the challenge and to get these companies to industrial scale and these clean tech solutions to an industrial operating efficiency, we need a lot of capital. So banks and capital markets are obviously crucial to help raise that capital.
Chuka Umunna: We've brought together 30 of the most exciting, most successful high-growth companies across the different green economy verticals who’ve raised around $7 billion in aggregate over the last few years. Our role here is very important here as a bank because they won’t be able to do what they need to do without raising the finance necessary and we’re committed to financing and facilitating $2.5 trillion to delivery against the UN’s sustainable development to 2030, with a trillion of that focused on the green economy.
Sydney Locksley: So, when we think about the importance of green and sustainable financing, not all financial instruments fall under this green label, but the really rapid growth in green investing, such as in green bonds or in SLBs, demonstrates an appetite to shift capital towards clean investment. And with support for additional clean and sustainable investment, we can reorient cashflows towards clean investments and have this reciprocal benefit bode for investors as well as for the clean energy companies that require this intensive capital inflow to scale and grow the businesses.
Alberto Piana: This is not a slogan anymore. The carbonization net zero company really have to take action and they are taking action. And there’s a reality: all the company who’re here today with us are enabling the transformation to happen. So that’s why it’s so important that we identify company that would be the future leader in this transition towards the net zero and the carbonization economy.
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