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Serving corporate, institutional and government clients, J.P. Morgan’s presence in global credit markets is unmatched. The firm combines debt origination and structuring expertise with exceptional distribution capabilities to a large base of investors.

The origination team works directly with issuers including corporations, banks and sovereign governments seeking funding. J.P. Morgan advises clients on debt financing strategies, from a simple bank loan to multi-billion-dollar capital raising across asset classes. Colleagues partner across borders to deliver successful structuring, marketing and pricing; the business then distributes that product to investor clients.

J.P. Morgan provides leveraged financing options to help companies achieve objectives such as making an acquisition, effecting a buy-out, repurchasing shares or funding a one-time dividend or investment. To do this, the firm arranges leveraged loans, high-yield or junk bonds and mezzanine debt for clients.

Capital Markets insights

WHAT'S THE DEAL? - 00:23:05

2024 Outlook: Windows of opportunity, bouts of volatility 

In this year-end episode, host Kathleen Darling leads a roundtable discussion with Kevin Foley, Global Head of Debt Capital Markets, and Achintya Mangla, Global Head of Equity Capital Markets. Dive into the forces that have shaped capital markets in 2023 and the factors driving a resilient economy to date. Explore the challenges and opportunities that lie ahead in 2024, from broad themes such as geopolitics and potential rate cuts to market specifics including IPO pipelines, M&A activity and more.

What’s The Deal? | 2024 Outlook: Windows of opportunity, bouts of volatility 


[MUSIC]


Kathleen Darling:
Hello, and welcome to What's the Deal, our investment banking series here on JP Morgan's Making Sense podcast channel. I'm your host today, Kathleen Darling, a member of JP Morgan's debt capital markets team. Today, we're diving into the dynamic world of capital markets with Achintya Mangla, global head of equity capital markets, and Kevin Foley, global head of debt capital markets. Achintya, Kevin, great to have you both on the podcast.


Kevin Foley:
Thanks so much for having us, Kathleen.


Achintya Mangla:
Kathleen, thank you for having us here.


Kathleen Darling:
It's certainly been an interesting and dynamic year for capital markets. Let's first start with a quick year in review. Can you both name one or two major highlights for capital markets in 2023, Achintya, let's start with you.


Achintya Mangla:
Sure, Kathleen. I would say the key word is resilience. And I would put it in two buckets. I would start with technology. I think going into and transitioning from a very low rate environment to the current rate environment, there were a lot of question marks on what happens to the tech sector. And I think resilience is the key word when we look at the entire global tech landscape. Away from the performance of the big seven, which is significant and driving a large part of the market gains. I think we have seen companies starting to successfully navigate the journey in profitability while maintaining some element of growth. And I think that balance of growth and profitability is something that we got to give both shareholders and management of these tech companies a lot of credit for achieving in a very credible way. They're reducing cash burns and achieving a business model that can sustain these rates. And at the same time, we continue to see meaningful innovation in the tech space. Clearly, the last 12 months or more have been inspired by AI and large language models, but it is more than just one or two companies. It is the entire ecosystem of innovation. And some of it, the evidence we will only see a few years later, because while the private capital markets in later stage companies have been slow, the reality is we have seen a very meaningful pickup in early-stage venture financing for the tech companies, which really points to greater innovation. So that's on the tech side. I would also say on the secondary markets, and I was wrong once again. When I started the year, I don't think I would have predicted the S&P and NASDAQ to be where they are. But I think the markets have been incredibly resilient, really driven by optimistic data on the inflation side and good earnings data. What's interesting, though, is the primary activity on the equity capital market side hasn't really caught up with the secondary markets, and I think that's unusual to have such a low correlation between a very strong secondary market, but rather muted primary activity. So resilience, Kathleen, is what I would say is the key highlight.


Kathleen Darling:
Great. Kevin, can you pick up on that?


Kevin Foley:
Sure. I'll play right off the term of resilience, 'cause it's definitely been the factor in the credit markets as well, right? We've had an economy that's been more resilient. We had an employment picture that's been more robust. The conviction around the end of fed hikes has set off a rally here along with the optimistic view of inflation being under control and with the consumer spending remaining robust, all of that has driven a rally here in the last six plus weeks in the credit markets. It's also been helped by the fact that there has just been a lack of supply in terms of primary market, so you have an environment right now where the need to come to the market for refinancing, is limited. You have a muted M&A picture. And you have limited Capex investment or balance sheets that are well-funded already for those investments. And that's keeping new supply limited in an environment where cash is still abundant and there's a lot of liquidity looking to be put to work. And that's creating a very positive technical for our markets, across investment grade, leverage loans, high yield bonds. All of them have had the benefit of having demand outstripping supply, along with a more optimistic view of the economy and where we are in the rate cycle. That has driven a nice rally here at the end of the year. That has definitely been the biggest surprise of the year, and obviously the delay or potentially avoiding of a recession has been one of the biggest surprises of the year.


Kathleen Darling:
There's a lot of uncertainty in the year ahead, from geopolitical concerns, the macro backdrop, both in regards to rate movement and a potential recession, as well as an upcoming presidential election in the US. We recently had Jay Horine, head of North American investment banking, on the podcast, and he's approaching 2024 with cautious optimism. Kevin, we've heard you stress the word caution before, so let’s dig into that.


Kevin Foley:
I think cautious optimism is the right way to term the year. Yes, there is a reason for optimism given what we've seen and the resilience of the economy what looks like a conclusion of fed hikes, because the inflation data has been encouraging. But to declare we're out of the woods, it feels like it's a bit premature. We definitely have the impact of higher rates still working its way through the system. The consumer has been resilient, but that's because the jobs picture has held up. But what is going to be the impact on higher rates on businesses, individuals, as a lot of that still works its way through the system, regardless if inflation is under control or not. Higher for longer feels like it's the mantra. There's a lot of optimism out there about cuts coming from the fed as early as the second quarter of next year. That feels like it might be premature, to be drawing those conclusions. So a lot to be played out. Reasons to be optimistic, but there's also a lot of reasons to be cautious too. So I think we go into it hoping for the best but preparing for the worst. What we're telling our issuers and borrowers right now is there is a good environment. We are coming off the highs that we've seen over the past year. It's a good environment to go out and try to take advantage of the market technicals. When you look at spreads in the high yield market as well as in the high-grade market, neither one is indicating a recession. Or even the possibility of a recession. We're well inside the recessionary averages on a spread basis. We're inside the non-recessionary averages as well. So this is a good backdrop to take advantage of it. You mentioned the geopolitical concerns. Those are still hanging in the balance. We've got a presidential election. We've got the uncertainty around the economy. And there's always the known unknowns that could be a factor. When you look at QE and QT, these are unchartered waters that we're navigating through. And the side effects of that are to be determined.


Kathleen Darling:
Achintya, what are your thoughts?


Achintya Mangla:
Look, I agree with Kevin, but I would divide the world into I'm cautious on certain elements, and I'm optimistic on some others. And I'm really cautious on the secondary markets. Kind of a reversal of the highlights that we saw in 2023. I think geopolitics, we've talked about it, but an interesting data point that I heard and this might not be entirely accurate to the number, but there are, I think, elections in about 40 plus countries, which represent approximately 40% of the world's population, and 40% of the world's GDP. That is a lot of overhang, and probably unprecedented in recent history. I agree, I think the investors, both [inaudible 00:10:00] equity and credit, are probably being a tad too optimistic on the rate cuts. And I think the other two reasons to be cautious are we are yet to see the impact of lower inflation in corporate earnings. And I think that will drive equity markets to some extent, because the multiples are reflecting the expectation of lower yields, lower inflation, but the earnings are not yet reflecting an impact of lower inflation. So cautious on the secondary markets. I am a little bit more optimistic in terms of primary activity on the equity capital market side. This includes IPOs, follow on offerings, private capital. And it's really driven by various issues, including some companies will need to provide liquidity to shareholders. Others would have made a significant journey towards a business model which combines growth with profitability. And hence, are ready to go public. Yet others would have gone through a phase where they have reduced the cash burn, and haven't needed capital yet to grow further, but the time has now come in 2024 to take advantage and capitalize on the developments that they have needed. And of course, I think we might also see some equitization of balance sheets as corporates around the world start to prepare themselves as they should, for a higher rate environment and a higher rate for longer. So I think cautious optimism is the right way to look at it. Perhaps with a slight reversal of the trend we saw in 2023.


Kathleen Darling:
Achintya, in an earlier episode, Lorenzo Soler, head of global equity syndicate, talked about the IPO markets, and he was really focused on quality, that being high quality names, the quality of engagement from the buy side, and the quality of cornerstone investors. How are you thinking about quality as we approach 2024?


Achintya Mangla:
Look, I think that's exactly right. IPOs have had a tough time, right? We looked at 2021, 2022, and that class of IPOs has clearly end up [inaudible 00:12:35] as we look at the IPO class of 2023 to 2026 the next cycle of IPOs, I am confident and hopeful that they will give investors the performance expected from the IPO class as well as shareholders and employees the returns they expect as well. That's largely anchored in the quality of the companies going public. There is a lot of liquidity with investors, and investors are absolutely willing and have the risk appetite to invest in IPOs, but the bar has gone high in terms of growth, profitability, quality of management, corporate governance, and scale, to some extent. And yet I do believe that the muted activity of IPOs in 2023 was driven as much by supply as by demand. I think the market is there, the liquidity is there. In fact, we've seen a lot of investors become cornerstones, which is a relatively new trend in North America which shows their keen desire to participate and get a fair allocation in IPOs. But yet, it is also driven by the fact that, as we talked earlier, some of the shareholders and companies are not ready to go public yet. They are on a journey to change their business models, reduce the cash burns, position for a very different market environment than we have seen since 2008. And I think as that journey gets closer to completion, you will start seeing a lot more IPOs in the next couple of years. I don't foresee a first quarter of '24 or the first half to suddenly go back to pre-COVID IPO levels, but I think over the next few quarters, we will gradually go back to an environment where IPOs are a very viable and important aspect of the capital markets. An important tool for private equity venture capitalists and other corporates, and investors start seeing the returns, though I would say that one of the things... And you know, we're working with a lot of investors and corporates, is we go to divert the attention from just the day one performance of an IPO to really the midterm and the long-term performance. And I'm really hopeful that as we keep tracking the delivery of a company versus what it's promised at time of the IPO, three months, six months, 12 months from the IPO, that could align well with shareholder returns. So I think a lot more to happen in the next few years. Interestingly, I think there are a few geographical trends as well. Clearly North America will continue to be the largest and the broadest market for IPOs. And I think we'll continue to attract a host of international companies including European companies.


Kathleen Darling:
Can you talk a bit about which specific markets you're keeping an eye on?


Achintya Mangla:
The two markets that I think we will see increased activity, particularly relative to pre-COVID is going to be the Middle East and India. I think those are two markets where we're seeing a lot of momentum in terms of domestic liquidity, in terms of local economic growth, private company formation and hence, IPO activity. And the last one is eventually we will see Hong Kong market activity pick up as well. So I think we're really focused on IPO as an asset class, but less so quarter by quarter, more so in making sure that the next class of IPOs over the next two, three years really delivers everything that IPOs are expected to, both from an investor as well as a shareholder perspective, with quality being absolutely the cornerstone and the foundation of a healthy IPO market.


Kathleen Darling:
Kevin, switching over to you. Talk to us about your expectations for the debt capital markets in 2024, specifically what are you anticipating across investment grade, high yield, and leverage loan markets? And what do you anticipate the key drivers to be for market activity?


Kevin Foley:
So from an investment grade standpoint, we expect issuance volumes in the bond market to be flattish to slightly up in 2024. From a high yield perspective, we're forecasting up around 25%, and from a leveraged loan perspective, up 10%. Probably expect to see similar volumes that we've been seeing in the fourth quarter of 2023 continuing into the first six months of the year and are hopeful that we can see a pickup in activity in the back half of the year, kind of even out to those numbers that I cited. M&A, M&A, and M&A is going to be the three keys in terms of what next year's going to look like. In order to get volumes up or to even hit those levels certainly in the high yield market and leveraged loan market or to exceed them, it is going to be tied M&A. As we were hopeful that if we're getting more clarity on the economic picture, more confidence out there, that we're going to see a pickup in M&A activity. There has been a lot of activity in the fourth quarter in terms of behind the scenes, not necessarily announced in financing commitments being put on the tape, but activity is picking up, and it feels like that is tied to the increased confidence, where we are on the economic cycle, where we are on the rate cycle. And belief that valuations are finding their level, right? We've spent a lot of 2023 of buyers and sellers trying to work through matching up on where are clearing levels? What I often like to say as I'm working through the stages of grief that everyone is past denial that the world has changed and we've gone through a correction, but we've been working our way to that final stages of acceptance. So that is going to be the key for next year in achieving that forecast, particularly in the leveraged finance market. We will benefit from the fact that we start to see the maturities pick up in the back half of '24 into '25 and '26, and a lot of issuers and borrowers are going to choose 2024 as an opportunity to start to address those. There's been a little bit of hesitancy on that because of the fact that everyone has locked in low rates or low spreads. So it's been a very good environment. We've gone through the greatest refinancing wave, no one's been in a rush to go out and take that paper out, but they're gonna have to start to address that as time marches on. So we expect as the year progresses, we're gonna see it pickup in the refinancing activity, but again, the key is going to come back to that M&A picture, what the volume's going to be like and what's that going to drive demand for new financings.


Kathleen Darling:
Across each of your businesses, are there certain trends you're closely watching? And Kevin, let's start with the debt capital markets.


Kevin Foley:
I think what everyone is watching, what's happening with the treasury market. We're running deficits with no end in sight. You've had an environment where banks, foreign governments have been big buyers. The fed has been a big buyer of the treasury market. The regional banks. All of those have pulled back their appetite for treasure issuance at a time when the need for issuance is going to pick up because of funding of deficits. You have treasuries that have been sitting on fed balance sheet that are gonna start to come out without a natural buyer. We watch each auction. We're trying to assess demand and the pickup in supply and how that's going to play itself out. That is going to have an impact on rates, regardless of what the fed is doing. So even in an environment where the fed may be done cutting rates, the fact that you have a anticipated pickup in treasury supply at a time where demand may be pulling back from entities that have been making up the lion's share of the buyer base over the past five years, shifting, that can have a significant impact on rates. So we'll be watching each auction closely starting today.


Kathleen Darling:
Achintya, what are you closely watching in regards to the equity capital markets?


Achintya Mangla:
I think first, all the points Kevin mentioned are actually gonna impact the broader markets with current equity, so I think treasury markets and the rate trajectory is absolutely critical like it has been in '23. The two additional things I would say are corporate earnings, going back to my earlier point, if inflation does come down, how do corporate earnings fare? And consumer spending. I think we have all benefited from pretty robust consumer spending post-COVID, and I think it'll be interesting to see how consumer spending, business confidence approaches and what the trends are in that direction in 2024. That combined with the treasury aspects Kevin mentioned I think will define, to a large extent, the broader market sentiments.


Kathleen Darling:
As we close out the year and this podcast, what is the one take away you want to leave clients with today?


Achintya Mangla:
I think the one take away we would leave our clients with, and we'll continue to work with our clients with is really prepare for a higher rate environment, and we alluded to earlier in this podcast, hope for the best, but prepare for what might be less than ideal market conditions, especially when it comes to rates. And I think the thing that we're going to start working with a lot of companies and our clients is the conversation on what the right capital structure is how a capital structure should look like in a higher for longer rate environment is the one that we want all our companies and clients to focus on. And the conversation will go beyond absolute leverage levels. The conversation will include modeling in what could be the higher cost of financings as the debt maturity wall comes closer. The impact on interest costs, debt servicing costs, and therefore, the implied strategy for capital structure. And I think that'll be an interesting conversation and we will work with our clients to anticipate those changes, anticipate the refinancing as they come along and ensure that they're ready for all environments, including rate cuts. Or if indeed the market has or sees less rate cuts, then anticipate it. That would be our best advice, and as always, be nimble as the markets present different opportunities.


Kathleen Darling:
And with that, Kevin, we'll round it out with your takeaway for clients.


Kevin Foley:
So being a credit person versus the equity person, I'll stick with the hope for the best prepare for the worst, glass half empty folks. But it is don't be complacent. It is take advantage of the environment while it's there. There are reasons to be optimistic. There are reasons to be cautious. Our expectation is at the very least we will see some volatility in these markets, so try to take advantage of the backdrop while it's there and take the money while it's available. We're going to anticipate volatility. At what point, what's the trigger? Hard to say. But there will be plenty of windows of opportunity. There'll be bouts of volatility and that's going to be 2024 in a nutshell.


Kathleen Darling:
Achintya, Kevin, it has been a pleasure having you both with us on What's the Deal to provide your insights on both the equity and debt capital markets. We'll definitely stay tuned for the new year to see how markets unfold, so thank you again for joining us.


Achintya Mangla:
Kathleen, Kevin, great to speak to you both. And for all our listeners, thank you for listening and have a great holiday season.


Kevin Foley:
Kathleen, thank you for having us, and to all our clients out there, thank you for all the trust you've placed in us in 2023, and we look forward to working together in the future, and happy holidays, happy New Year to everyone.

 

[END OF EPISODE]

 

WHAT'S THE DEAL? - 00:17:47

Ready to navigate market windows?  

Todd Rothman, Managing Director of North American High Yield and Leveraged Loan Capital Markets, dives into the latest developments in the leverage loan and high yield markets with Kathleen Darling. They shed light on key catalysts influencing market dynamics, including geopolitical conflicts, a precipitous move in treasuries, recent economic data and more. Tune in to discover how companies can seize market windows of opportunity before year-end.

What’s The Deal? | Ready to navigate market windows?  


[MUSIC]


Kathleen Darling:
Hello, and welcome back to What's the Deal? I'm your host today, Kathleen Darling, a member of J.P. Morgan's Debt Capital Markets team. I'm excited to welcome back Todd Rothman, a managing director with our Leverage Finance Capital Markets group, to discuss the sentiment and activity in both the leverage loan and high yield markets. Todd, welcome back to the podcast. 


Todd Rothman:
Thanks, Kathleen. Great to be back.


Kathleen Darling:
We have really seen a pendulum swing in markets over, call it a week's timeframe, so I think it's important to first set the stage for our audience in term of October performance and drivers thereof. When we last spoke with Brian Tramontozzi towards the end of September, he discussed how lenders in the leveraged loan market and investors in the high yield market were showing a constructive bias and a willingness to take on more risk post Labor Day, with supporting market backdrops as evidenced by 58% of loans trading above 99, and the J.P. Morgan Global Dollar High Yield Index sitting at roughly 8.8%, which was 100 basis points inside the high for the year at the time. However, sentiment quickly changed with conflicts arising in the Middle East, the 10 year Treasury crossing the 5% threshold for the first time since 2007, and key economic data coming in hotter than expected, further emphasizing this notion that rates may need to remain higher for longer. Let’s start off by contextualizing for our audience what we saw in both the leverage loan and high yield markets in October?


Todd Rothman:
Sure, I'm happy to. I think it's important that we start with the precipitous move that we saw in treasuries. If we go back to the end of September, we had a 10 year that was sitting at 4.6%. If you roll the clock forward to the end of October, we were just north of 5%. That was the first time, as you said, since 2007 that we hit that level. So not only was it a large move in terms of numbers, but also psychologically had a lot of impact on market sentiment. To give you a little bit more context there, if you go back to July, the 10 year was actually just below 4%. So we're looking at 100 basis point move in base rates in just over four months. The ramp that we saw in the 10 year can likely be attributed to really a few things. First and foremost, I think was the economic data that we saw, which pointed to a much more resilient economy than the market was really expecting. And that took both the risk and some of the fear of a recession off the table. The other couple things were around the shear volume of treasuries that need to be issued and some of the supply/demand concerns that the market had there. And finally, what the market's experiencing is a bit of a shift in the buyer base for treasuries. A lot of the typical players, sovereigns and the like that were traditional buyers of treasures are steeping back, and so that's created even further supply/demand imbalance, which has helped pushed rates a bit higher. Away from rates, the other dynamic that we saw play out over the course of September and October was around VIX, or the Volatility Index. In September, we were sitting at multi-year lows of 13 to 14. We saw that climb over 75% to 20 by the end of October. So if you combine the run-up in treasuries, the overall market volatility, the end result was seeing markets trade off fairly meaningfully and fairly quickly. So with that market backdrop, maybe I'll start on the bond market and then we'll move over to the leverage loan market after that. So the bond market, in particular for tight spread BB rated credits, that market is a lot more sensitive to the move that we see in base rates. So if you take that, the market volatility, the way that manifested itself was over an eight-week period, we saw high-yield mutual funds experience outflows of over 12 billion dollars. So you take that, you take the macro backdrop, and the end result was a big move in both the High Yield Index and a slowdown in new issuance. So case in point, the first week of October, we actually didn't see a single high yield bond yield print, you'd have to go back to the regional bank crisis at the end of March for the last time that we saw a regular market week without any issuance. The rest of October, nearly half the deals that did come, they came at the wide end of price talk or wide of price talk, another sign that the market was shifting away from issuers. And then the High Yield Index in secondary, we saw a pretty meaningful move there. We started out at just over 9% in September and we widened out nearly 65 basis points to 9.7% at the bottom on October. Spreads, on the other hand, did offer a bit of solace to issuers. So, at the end of October, we were sitting in around a 475 basis point spread level. If you compare that to historical periods, the average non-recessionary average high yield spread is around 550 basis points. And for recessionary periods, it's 980 basis points. So from a spread perspective, it did look  quite attractive for issuers to enter the market and to raise capital, but we did see a bit of sticker shock set in and a number of issuers saying, "I don't wanna take those higher coupons in this environment. I'm going to wait." The other thing that that told us was, with spreads that tight, the market's probably not pricing in that material or that near term a recession or other geopolitical events that could upset the market. So now, if we turn to the leverage loan market, very similar to what I described on the high yield bond side, September was a really robust for leverage loans. So, a couple things to note that were going on. One, we had very strong CLO formation, one of the strongest months that we've seen of the year. We had north of 26% of the loan market trading above par in secondary, so a really strong sign for the robustness of the market there. And the end result of all that, between new CLO formation, a strong secondary market, we actually saw two things happen. One, we had one of our highest volume months of the year in terms of new facilities. We had roughly 59 billion dollars come through the market. That compares to a monthly average this year of just about 25 billion dollars. The other thing going on was 40% of that volume was actually related to term loan repricing, to where we took the margin down from existing levels for borrowers. Roll the clock forward to October, and similar to what I talked about tin the high yield bond market, a lot of the same outcomes happened here. So, we went from 26% of the loan market trading above par all the way down to 4%. We went from 40% of deals being repricing related down to no repricing deals at all. And the other thing that we saw, very similar to the bond market, 50% of the loans that did price in October came at the wide end or wide of price talk.


Kathleen Darling:
Great. Now, taking us to present day, the 10 year Treasury
rallied roughly 30 basis points since October, 27th, closing out the week of October 30th at around 4.5%. This rally was largely driven by the Fed choosing to hold rates steady at their November 1st meeting, overall softer labor data, and a smaller than anticipated treasury refunding size. Can you talk about how markets have responded to this?


Todd Rothman:
Sure. So, I think the Fed holding rates steady was really already priced in by the market. Some of the comments by Chairman Powell, however, did point towards a move dovish tone as he mentioned that their efforts to bring down inflation had made meaningful progress and that they'd continue to monitor the data to see their path forward. With that sentiment, traders are now pricing in a virtual certainty that the Fed is going to hold rates steady in December. That's only picked up in recent weeks as we've seen more data, seen more Fed speak. And this view is also in line with J.P. Morgan economic forecast that the Fed is likely to hold steady on rates for the remainder of this year and then start to take action late in 2024 with their first-rate cut. In conjunction with the Fed meetings last week, we've seen payroll data, jobs data that continues to point towards a message that the market is believing is saying the Fed is likely done, and if they're not done, they're close to done in terms of rate hikes. And it's also provided more comfort to the market that a recession is not a near term event, and that if there is one, it is more likely than not to be a soft landing than a hard landing. So the result of the economic data and treasury tightening has been that we've seen a big rally in secondary markets, both in the high yield bond and the leverage loan side over the course of the past week. The hope here is that that is going to start moving some issuers on the bond side to come of the sideline to address their refinancing needs. And we've already started to see that a fair bit this with a big pickup in volume versus last week. The High Yield Index, from a secondary standpoint, has also proved this out, so we've seen a meaningful 60 basis point move down to inside of nine and a quarter percent on the J.P. Morgan High Yield Index. And then on a similar note, we saw high yield spreads tighten roughly 35 basis points last week as well, so those now sit around 450 basis points. Back to my comment earlier, that's still sitting well below recessionary and non-recessionary levels. And then on the loan side, we've seen the exact same thing. So after having 11 consecutive sessions of secondary loan levels trade downwards, we saw secondaries start to trade up towards the end of last week, and that's continued into this week. Case in point, back to my stat around loans trading above par again, so if we bottomed out at 4% in October, we're now back up to 10% of loans trading above par, not quite at the 26% that we hit in September, but potentially signaling the beginning of September part two for the loan market as well.


Kathleen Darling:
If we think about it, there're really two market windows before year-end for companies to transact, roughly two weeks before Thanksgiving, and then call it three weeks before the December holidays. What is your message to companies now in terms of executing on these windows of opportunity?


Todd Rothman:
So, the first message is that markets are completely open right now. What we're talking about is optimization on pricing and terms, and what we constantly remind our borrower and issuer clients is that volatility can rear its head at any time, and if you need the money, go take it when it's there. So some of the themes that we talked about last time, Kathleen, you and I spoke, and throughout the year, on the loan side, we still talk about roughly 40% of CLOs reaching the end of their reinvestment period at the end of this year. That'll grow to slightly more than half at the end of next year. The good news is, as I mentioned before, September and the end of the summer were really good new CLO formation windows. Slowed down a bit in October, starting to pick up again in November. But the question for the loan market remains: will new CLO formation be able to completely make up for the amount that is going out of reinvestment period? And as a reminder, CLOs make up about two thirds of the buyer base for leverage loans. So on the loan side, we continue to encourage our borrower clients that there is a first mover advantage to taking care of your refinancing needs or any capital raising needs that you have today when you know what the market looks like. Similarly, on the bond side, for several quarters we've been talking about above average cash balances that high yield mutual funds were sitting on. When we got to the end of Q3, for the first time in a couple of years, we actually dipped below the longterm average, and we're kind of sitting around three and three quarter percent cash balances right now, still very good, but not as lofty as it was before. What is helpful for the technical and the high yield bond market is that we've had a number of repayments, and then you've also had a number of large rising stars that exited the high yield market as they migrated up to the investment grade market. So as I said before, markets are open, there is cash out there. The buy side is waiting for new deals to come through. The final point to take into consideration there is that we have a really, really light M&A pipeline of underwritten deals that are due to come to market. If you look at that across both loans and bonds, in the US, it's only roughly 11 billion dollars. If you add Europe in, it's only another couple billion euros. Compare that to the post-COVID peak in 2022, we hit 110 billion dollars then. So, the pipeline here is really, really small, which means that the cash is looking for a home and does create good conditions for borrowers to access the loan market and issuers to access the high yield bond market.


Kathleen Darling:
As we wrap up this episode, there's approximately 740 billion of 2025 and 2026 maturities across leverage loans and high yield bonds. As companies move towards year-end and start planning for calendar year 2024, do you have any thoughts on how companies with either a 2025 or 2026 maturity should be thinking about addressing these?


Todd Rothman:
So, it's really interesting. Obviously, we've dealt largely with 2023 and 2024. I don't think most people realize that we've already addressed a third of the 2025 maturities with refinancing activity that we've done over the course of this year. What surprises a number of people is the shear number of companies that are already proactively looking at 2026 as well. Close to half of what we've done this year has not only addressed '24 and '25 maturities, but actually started going after 2026 maturities as well. So, we continue to encourage our borrower and our issuer clients to think along those lines. We talked about the CLO reinvestment period fall off. So in terms of addressing the remaining 2025 and 2026 maturities, and by the way, I think by the time we get into next year, we may start talking about 2027 maturities as well, the themes remain the same. So, we just talked about the CLO reinvestment period and the importance for borrowers in that market to take advantage of the first mover advantage that's out there. On the high yield bond side, one of the trickiest things we've had to manage as treasuries have continued to gap out, even though spreads have remained relatively tight, we've had to get a number of high yield issuers comfortable with the concept that a 6% and change coupon that was available a year ago had become 7% and change this year, and now, in some instances, may be as high as 8% or higher. October was the first month that we saw the BB High Yield Index close above 8% since 2009. And so, one of the things that we remind people of is that we are in a higher rate environment, and even if one does believe in the concept that rates are going to start getting cut towards the backend of next year, the shear volume of treasury issuance that needs to take place means that base rates are likely to remain higher for longer, and therefore this is a new normal in terms of pricing dynamic for issuers in the high yield market. And finally, windows are going to come and go. I think one of the key lessons that we've learned here post Labor Day, September was a great borrower and issuer friendly month to access the loan and the bond market. October was really volatile and became a less hospitable environment for people to raise capital. Markets were open, it was just more expensive. And so, encourage everyone to remember that volatility isn't going away, get ready to go to market, and look to hit a window as soon as they open. The risk feels asymmetric in terms of cost of capital going wider a lot more than it gets tighter.


Kathleen Darling:
Todd, thank you for the thorough read on the markets. Although we do not know what is to come of tomorrow, the current backdrop and supporting technicals seem to support a promising pathway to end the year for both the leverage loan and high yield markets. We will very much be looking forward to activities ahead. Todd, thanks so much for joining the podcast today.


Todd Rothman:
Kathleen, thanks for the discussion. As always, enjoyed it.

 

[END OF EPISODE]

WHAT'S THE DEAL - 00:16:43

Considering an IPO? Themes and thoughts on the next wave

Although the IPO market has been quiet since its 2021 peak, signs of resurgence are emerging. Join Lorenzo Soler, Head of Global Equity Syndicate, and host David Rawlings to explore the current state of the IPO market. Topics include issuer and investor engagement, macroeconomics and geopolitical dynamics, strategies for a successful IPO and a glimpse into the 2024 market landscape.

What’s The Deal? | Considering an IPO? Themes and thoughts on the next wave


[MUSIC]


David Rawlings:
Hi. I'm David Rawlings. I'm the country head for the JPMorgan business in Canada and one of the hosts for the What's the Deal? Podcast. I am joined today by Lorenzo. Lorenzo is responsible for the Global Syndicate Team within our Equity Capital Markets group, has been with the firm for over 20 years. Over the course of this podcast, we're going to spend some time on equity markets broadly, the current state of the IPO market, and how things could evolve over the course of the next 12 to 18 months.


David Rawlings:
Lorenzo, thanks so much for being here.

 

Lorenzo Soler: Hi, David, and thank you very much for having me.

 

David Rawlings: So Lorenzo, let's just spend a minute on you, and your history at J.P. Morgan,


Lorenzo Soler:
My first job out of college was at Cazenove in London, which as you know was the last boutique British investment bank at the time. They had an incredible graduate rotation program, which meant that I was able to spend a few weeks in each of the departments within the banks. I spent time in sales. I spent time in trading, in ECM, in asset management, and at the end of that stint, I felt like the best fit for me was ECM. I really enjoyed, advising corporates the excitement of doing deals, but at the same time, I also liked the market aspect and the investor dialogue aspect of the business. Four years into my career at Cazenove, JPMorgan, bought us through a joint venture, and here I am 22 years later, sitting in New York, talking to you. II spent 19 years in our London office, always working in equity capital markets, origination, and syndicate roles and in 2020, I moved to New York to run the Americas team and in the last couple of months, I've been given a global remit, so I am also responsible for our teams in Asia and Europe.

 

David Rawlings: So Lorenzo, you said, 2020 is when you moved, from the UK to the US. It feels like there've been two or three cycles that have happened since 2020. So it's been an interesting time for you to be leading this business for us. Let's spend a minute on, the current state of the IPO market, and maybe you’ll give some comments on, what we've seen over the last several months and what we're seeing today.


Lorenzo Soler:
So in terms of the current state I think the punchline is there are some green shoots. I am very excited about the next 12 to 24 months. I am very optimistic about the calendar coming back. But I think you do need to, take a step back, and look at the numbers to realize that we're still far off normal levels of activity. Pre-2021, where we had the record high year, the 15 years prior to that on average in the Americas, you saw about 115 IPOs per year, raising about 40 billion dollars per year. And these are IPOs about 50 million in size. Last year, there were 19 IPOs. And this year, we're at 24. So yes, the trajectory this year is encouraging. Yes, there are green shoots. But we're still running way below normalized levels. So I think it's hard to draw too many conclusions from what we've seen this year as we think about IPOs coming back in 2024, which was always our base case, and 2025. What I would say from the class of IPO that I've worked on this year and the ones we've seen this year is we do remain, super encouraged by the quality of engagement from the buy side, the quality of cornerstone investors. You know, those same investors continue to want to look at new ideas, and we're engaging with them as we speak on potential deals for next year. So investor engagement, very high, but tough to draw too many conclusions based on the limited data set

David Rawlings: What are you currently seeing from a performance perspective?

 

Lorenzo: I would say, you know, similar thing. a lot of recent press talks about the challenges, in the last few weeks. There have been some IPOs that are in the year that have done extremely well, that have traded extremely well. But it's fair to say that the batch that we saw in the last three or four weeks, have been more mixed. And I don't think you can separate what's happening in the world, what's happened to S&P and NASDAQ in that period, you know, down about six or seven percent, what's happening to rates with the 10-year going through five percent.


Lorenzo Soler:
The challenging geopolitical environment. So, again, looking at these IPOs and looking at day one, week one, month one performance in the last couple weeks isn't the right way to be thinking about them either. we should really be, looking at the macro and thinking about IPOs, on a longer term basis. How are they doing two, three, four quarters out, not in the first couple weeks?


David Rawlings:
Well, I take your point on two things. One, the narrowness within the equity markets this year and the leadership concentration within really a few names, if you will, versus the broader market. But I think secondly you talk , about quality. So, in a less vibrant market, only the highest quality names, can get done. So can you just talk about some of the issues that you've seen in 2023 and really the quality around those issues?


Lorenzo Soler:
Well, if you mean it in terms of, what our investor's looking for, what types of, quality businesses are they prepared to, buy, I would say, massive focus now on structural growth stories with profitability. The days of, 30, 40 percent top line with less of a focus on bottom line are behind us. I think everyone now is much more interested in a disciple management team that's growing high single digit, low double digit, with strong margins. I think that has become, critical in the IPOs we've seen this year, and that is most of the class we've seen this year have, had those characteristics. I think conservative guidance is very important and something investors will be focused on as we think about the next wave of IPOs. I think capital structure, stating the obvious, but with the rate environment that we're currently going through, people are going to want to see balance sheets that aren't too stretched and companies that are able to deliver, high free cashflow yields. And I also think from a technical perspective, and we've talked to a lot of investors over the last few months around this, I think, appropriate lockups, particularly with companies that have deep capital bases and have had lots of private rounds, I think, making sure we have structures in place whereby, existing owners sell over a longer period of time in a coordinated way, in a staggered way. I think those will become factors that the buy side will look for as we think about the next wave of IPOs to come.


David Rawlings:
Terrific. So what I'm hearing from you is it sort of leads you to generally larger, more established companies, to your point, clean balance sheets and a more sustainable earnings and growth track. How has the cornerstone investor evolved over time, and how important is that in today's environment? And then secondly, just a little bit more detail on lockups and what might be expected.


Lorenzo Soler:
So listen, I think the cornerstone investor, has evolved in the last 12 to 18 months and has become more prevalent and I believe, will become more prevalent as IPOs come back, in 2024 and '25. The challenge is to really try and spend time early on and be thoughtful about introducing, these companies that were mandated to meet with these types of investors nine months, 12 months, in advance of the IPO and really give them the opportunity to get to know these companies, to build their models, to gain the trust of the management teams, and to identify the right long-term shareholders for these businesses. We will be spending and we continue to spend a lot of our energy on IPOs and introducing companies to clients at an earlier phase, and setting up not one round of meetings, but three or four in that lead up to the IPO, and giving them more access to the business doing site visits. and that has become a very important part of the IPO process, because we want to make sure we are seating these companies with the right, long-term investor. So I do believe, , we will see a lot more of that. I think it's the right thing to do. and I think the buy side are also, very keen to engage at an earlier phase. so that, will continue to be the mold of how we execute IPOs over the next 12 to 18 months.


David Rawlings:
And just one more question on that. Is there sort of a perfect place in terms of size of, of deal? Do we think the cornerstone should be 20%, 30%, 40%? Is there sort of a going in position in terms of what would be ideal, for the outcome of an IPO?


Lorenzo Soler:
Yeah. And actually, (laughs) that's a good question, David, I'll answer that in two ways. when we think about size of deal, I do think as a base case, size of deal going forward, will be bigger than size of deal we saw in 2021 and 2020. So I think as a percentage of float at IPO, we're going to see bigger IPOs as a percentage of float, to make sure we have adequate liquidity. to make sure we have the right clients being able to buy appropriate positions and build on those positions. So I do think you will find bigger percentage of floats at IPO in the next phase. That'll also help with the overhang and perception of overhang. And then within that float.


Lorenzo Soler:
As a rule of thumb 20 to 30% feels like the appropriate mix to ensure there's still enough available for new investors but also to seed the right cornerstones with enough of the company so they have, what they need on their side. So I would put it in that, 20 to 30% bracket. But there will be exceptions, on either side of that number.


David Rawlings:
Terrific. So, that helps us understand the cornerstone piece. And let's just talk about the lockups, maybe what's changed there and what investors are expecting at this time.

 

Lorenzo Soler: Again, not enough of a sample set this year, but in the previous wave of IPOs, there was less focus on lockups because there was just a lot of euphoria around, the whole product so, perhaps less scrutiny on, what type of supply we might see right after the IPO. And there were examples of IPOs in the last phase where a week after the IPO, there were people that were able to, sell again. So I think going forward, the feedback we're getting from our investor clients is they want to make sure that if they're gonna buy in the IPO, that there is not gonna be immediate supply two weeks, a month later. So I think making sure we have orderly lockups. We could also have price triggers. So there could be a mechanism whereby if the stock gets to a certain price, that would also, enable existing shareholders to sell, but I do think that's gonna become a lot more of a focus in the market. People do not want to buy an IPO if they think there is gonna be a wave of supply coming in, the short term.


David Rawlings:
Well, it certainly makes sense, especially in a more challenged market. So you talked about earlier that you're optimistic about 2024. I mean, I'd sort of make a joke that we're, as bankers, often we're optimistic about six months forward because, the alternative is to be pessimistic. It's a lot more fun to be optimistic. But let's look at 2024, and talk about what could happen. What are you thinking about as you think about the first half of 2024?


Lorenzo Soler:
So in terms of the actual pipeline as we think about where we are today and we think about how that compares with previous years, , from a pure probability-adjusted pipeline, we're currently, , slightly ahead of where we were going into 2019. So I think we feel good that we have, you know, a long list, of mandates, two thirds of those tech and healthcare, but also across every, sector, so, consumer Financials industrials, energy transition, - renewables, et cetera. So we feel good about, the depth and the quality of our pipeline, and it comes out of private equity, it comes out of founder-led businesses, it comes out of carve out IPOs. From the demand side of the equation, I, still think, and I will always think that we. We rarely have an issue. We rarely have an issue. Identifying investors, for well-priced  and interesting IPOs. So I do feel from a demand/supply dynamic, we're in a good spot as we think about next year. The million dollar question, that's been on our minds for a while now is has the bid ask spread narrowed enough, and I do think we're in a place now where public evaluations have been such that corporates and sponsors understand the levels required if they want IPO businesses, private evaluations are also coming down. from a bid/ask perspective, we're in a good place. In my mind, the, macro is key. Stability, rates having peaked for me, that'll be a, catalyst to our product. There's still evidence that we're not quite there yet, and will that be in end of this year, will that be Q1, will that be Q2? I can't give you an answer on it. My view is that it will be in the early part of next year, but I think that'll be a key catalyst to get our product going.

David Rawlings: And how do you think the election cycle may impact this?

 

Lorenzo: If we look back over the last three elections, so 2012, 2016 and 2020, it's actually had the minimus impact on, ECM volumes in those years. And in fact, IPO volumes in terms of number and IPOs per year, in those three years have averaged about 125 IPOs per year. So higher than the last 15-year average. There will be shorter windows we'll need to get ready and hit those windows but based on the last three election cycles, we should expect normal levels of ECM activity.

 

David Rawlings: You've alluded to some of this already, but how would you define a successful IPO when things come back both from a corporate's point of view.


Lorenzo Soler:
Again, hard one to answer, David, because ultimately it'll come down to, the corporate or the sponsor. They'll have their own definition of what they think is a successful IPO. But I've been doing this for a long time, and, in my mind, it needs to be a combination of, shareholder register, of fair evaluation, and of aftermarket. And of those three, I would probably put the most emphasis on the first. But I think those three components are very important and when I talk about aftermarket, I don't mean, day one, week one, month one. I mean two, three quarters out, have the top shareholders that we've brought into the IPO, have they built on their positions? You know, is the stock trading in an orderly fashion? Is the stock out-performing peers? So for me, that is how we should be thinking about IPOs and successful IPOs. We should not be focused on day one moves. And in fact, I would argue that a day one 40, 50% pop is, not healthy for anyone. It leads to higher volatility, it leads to higher volume, and it's usually influenced by factors that are external to the IPO.


David Rawlings:
So Lorenzo, you spent almost 20 years in the UK, you've spent the last three years in the US. You now have this global remit. How has that evolved for you, and how is that an advantage, in terms of the way we can now interact with clients versus those peers who are set up more regionally?


Lorenzo Soler:
So in terms of our setup, the first point to make is we do have a very deep and experienced team globally and in all three regions that I rely heavily on. We've been doing this for a long time. Our clients Are increasingly also being set up on a global basis, so I think being able to interface with our clients and meet their needs in terms of asset allocation and how they're viewing the ECM calendar on a global basis is critical. And thirdly, I would say, at the end of the day, it enables us to share information in a differentiated way from our peers, Which benefits our... Our clients on a global basis.

 

David Rawlings: Amazing. Well, it's obviously a big world out there. We have incredible access. What a great role for you, to take on at this time to really help develop this business further, in closing, If you're a company and you're thinking about going public over the course of the next year, just to bring it home, what advice would you give those companies?


Lorenzo Soler:
I would say get ready. Get ready early. Get ready now. Start to engage. Start to meet with investors.


Lorenzo Soler:
No one has a crystal ball, so it's impossible to know whether it's Q1, Q2, Q3, I think what we can all tell you, and we've all lived through multiple cycles over the last 22 years or so, is that When the window comes back, it can move fast, and there will be first mover advantages, so if you are thinking about  listing, you should use this time to get ready.


David Rawlings:
Awesome. Listen, it's been great to spend time with you.


David Rawlings:
And Lorenzo, let's hope your outlook for 2024 holds true.

and thanks for all the hard work you do on behalf of J. P. Morgan and our key clients.


Lorenzo Soler:
Thank you very much, David.


David Rawlings
: And thank you to our listeners for tuning in. We hope you join us again next time.

 

[END OF EPISODE]

 

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