Capital Markets

Navigating volatility: M&A and leveraged capital markets update

[Music]

Evan Junek: Hi, you're listening to What's the Deal?, our investment banking series here on J.P. Morgan's Making Sense podcast. I'm your host, Evan Junek, global head of Corporate Finance Advisory at J.P. Morgan. Today I'm joined by Jay Hofmann, head of North American M&A, and Brian Tramontozzi, head of North American Leveraged Finance Capital Markets. Jay and Brian, welcome to the podcast.

Brian Tramontozzi: It's great to be here.

Jay Hofmann: Thanks, Evan.

Evan Junek: Well, we've got a lot to unpack today. We've got universal tariffs in place. We've got 145% tariffs on China. We've got tariffs on steel and aluminum, tariffs on auto and auto parts. We've got equity capital markets, the S&P 500 as of this recording, which is taking place on the 21st of April, down roughly 10% year to date. And we'll talk a little bit more about how the debt capital markets have responded as well. But maybe I'll start with you, Brian, because you're gonna give us the most up-to-date moment to moment view on what the capital markets are thinking. Why don't you unpack for us what's going on in the debt capital markets in your world, from as you see it, with this very volatile and uncertain backdrop?

Brian Tramontozzi: Sure. So I'd say this, markets are behaving very rationally. From prior to the noise at round tariffs to where we are today, the high yield index is only about 75 basis points wider. By comparison, the first 13 days after COVID, the high yield index moved by over 600 basis points. So the market is reacting very passively to the news. Part of the reason for that is that we came into 2025 with record liquidity in high yield, and that hasn't changed. While, yes, we had large outflows during the last two weeks, every month there are sizable inflows from coupon generation into high yield. And in fact, today versus where we started the year, liquidity is arguably higher in the leveraged loan market. Volumes have been subdued, there hasn't been a single deal clear the market in the last two weeks. There are a couple of deals that launched but are on hold until conditions stabilize. And I think primary reason for that is liquidity in the leveraged loan market is not quite as good as we're seeing in the high yield market, and therefore prices haven't yet recovered to the same degree that the high yield market has seen in the last three or four days. But we do believe that that market too is orderly, and therefore, for the right borrower, there would be an ability to get a deal done. It's just at a rate that's elevated from where it would've been three or four weeks ago. Now, there's a third market I want to talk about, which is private credit. And as many know, J.P. Morgan recently increased its private credit platform from $10 billion to $50 billion. And really what we're going to see, if the market's high yield and leveraged loans don't rally back, private credit is gonna be where we see the bulk of, I would suspect, M&A activity to take place over the course of the near future. And in fact, we're already seeing that take place now, and J.P. Morgan is gonna be leading the charge in many of those financings as they get announced.

Evan Junek: Can I ask you to maybe expand a little bit on how investors today are thinking about Treasury rates? I appreciate in your market that's a little bit less of a focus on a day-to-day basis, but one of the topics that's been coming up with clients every day is what's been going on in the Treasury markets, especially on the long end of the curve. We've not seen Treasury rates fall as much as we've historically seen in periods of elevated market uncertainty.

Brian Tramontozzi: So in normal times, Treasuries rally due to flight equality of investors owning the safe and of government securities. That really hasn't happened in this go-around, and I think the reason for that is there's so many uncertainties now pushing on Treasuries, inflation, foreign government, liquidation of potential foreign government, liquidation of Treasuries, heavy supply of Treasuries funding our national deficit, and then finally some technicals around hedge fund unwinds. It's not clear that we will expect to see a rally in Treasuries over the next several days, several weeks. So our market really right now is just trading on spread. And what we're seeing on spread is spreads are holding in quite well, both in loans and high yield. And the direction of spreads is really gonna be a function of any further news around tariffs and the impact on business and economic outlook.

Evan Junek: So maybe shifting over to you, Jay, why don't you talk a little bit about what you're seeing in the M&A environment today. Obviously we've got Brian's perspective, which feels very real time, very much of the moment. M&A is a little bit more sentiment driven, and would love to hear what you're hearing from clients and the kinds of activity you're seeing in the market right now.

Jay Hofmann: Yeah, you bring up a great point, Evan, which is that the M&A market tends to respond to what happens in capital markets on a time lag. And sometimes that time lag is a few weeks, sometimes it's a few months. And that's basically what we're seeing right now. It's quite a bit of a wait and see attitude. And it's not unlike what happened at the beginning of COVID when there was a big discontinuity in obviously the global macroeconomic environment. People didn't really know what was going to happen. And so as a result, they kind of played a game first of thinking week by week, what do I do? If I'm in the middle of a transaction, do I progress it? Well, the answer generally is yes, let's keep going, but let's see what happens week by week. How are the markets doing? What's going on in my own business? What do the prospects look like? On the other hand, it's not a great time to start a transaction. So what we have seen is a lot of folks who might otherwise have been thinking about starting things in mid-April have pushed off that decision-making. They haven't necessarily pushed it off a long time, although it does vary quite a bit by industry and even subsector. But decisions that people may have been thinking about taking in mid-April and now sort of pushed off to early to mid-May. And we'll have to see, when we get there, what people do.

Evan Junek: You mentioned differences between sectors or industries. Any notable commentary in there that'd be more specific?

Jay Hofmann: Yeah, look, not every industry or sector is affected by tariffs in the same way. So the first question that our clients have been asking themselves is, is my business affected by tariffs or the business of the company that I'm thinking about buying? And if the answer to that is no, they have to ask the second-order question, which is, okay, but if all the talk around the potential recession actually comes into play, is my business affected by the recession or recession? What about the target business? Now, not all businesses are equally affected by tariffs nor recession, right? So if you look at things that tend to have heavier services content, which could be potentially in healthcare, they may be more domestic, not cross-border. Again, healthcare services might be a good place to look. Sometimes technology services. There are some consumer product sectors that are not as affected by what happens globally. We seem to see a little bit more continued momentum there. On the other hand, you know, anything that has to do with manufacturing of physical products, and particularly electronics where there's been so much offshoring to Asia and China over the last 30 or 35 years, those are sectors where people, where executives are really questioning whether this is an entire restructuring of the global economy. And if that's your perspective, then obviously your approach is to just sort of stand pat and focus on your own business before you think about the additional risk you might take on in an M&A transaction.

Brian Tramontozzi: And I can add a point there too, so we're seeing something very similar in the high-yield and leverage loan market with lenders pushing their preferences toward defensives and non-economically sensitive sectors. There's an outperformance of double Bs versus triple Cs and an outperformance of defensives versus cyclicals.

Evan Junek: And interestingly enough, as my team has done a lot of work around looking at the impact of tariffs across sectors, both in the equity markets and strategically, I'd say we've seen very much the same thing taking place in the equity markets, which is to say rational. Again, it's hard to kind of step back when you've got so much red on the screen and see the forest from the trees, but when you do dig into it, you do see the traditional sectors, the utilities, the consumer staples. These are sectors that have generally outperformed real estate and other, another sector that's generally outperformed in this environment. I think indicating that as much volatility as we've experienced in recent weeks, it is orderly to some extent and to some extent rational in terms of how investors are operating. Maybe let's talk a little bit about the global dynamic for a second here, because of course, so much of what we're talking about with trade and tariffs impacts the relationship between onshore and offshore U.S. Jay, maybe I'll point to you. I'd say if we were having this conversation three, four, five months ago, we'd be talking about things like relistings, right? This massive wave of capital that continues to find its way into the U.S. Companies looking at everything from separations to carve outs, trying to take advantage of premium valuations in the United States. Has that turned around? Has that reversed? Is this a pause? Too soon to say? What are you seeing?

Jay Hofmann: I, I think the place to start, Evan, is that if we were having this conversation in that timeframe, animal spirits would've been catchphrase, right?

Evan Junek: Yes, animal spirit.

Jay Hofmann: And unfortunately, that's not the catchphrase anymore. And you're right. Historically, the U.S. capital markets have obviously been more highly valuing a lot of different types of companies than foreign markets, particularly Europe. And frankly, you know, year in, year out, more or less, the U.S. M&A market accounts for about two thirds of global volume. So you know, if we sneeze here, other places catch a cold, right? I would say that prior, or in that timeframe that you were talking about, there was definitely a point of view from a lot of European companies. They wanted more U.S. exposure. The point of view is that the U.S. economy was gonna outperform other economies, and that if there were gonna be tariff barriers that were put up, it would be better to own businesses in the U.S. than to try to export into the U.S. I don't think that's the case anymore broadly speaking. We've heard from my colleagues in Europe and from some clients in Europe that they've done a bit of a 180 in terms of wanting to buy businesses in the U.S. right now. And it's not particularly surprising why, right? There's, number one, a lot more uncertainty here about where the economy's going. There's difficult transatlantic political dynamics. And then you put on top of that, there's a point of view that, in Europe, perhaps there'll be some better opportunities if in fact this is gonna lead to more of a reindustrialization of Europe. I would say less impact, to be honest with you, in Asia and Latin America.

Evan Junek: Yeah.

Jay Hofmann: Because the corridors, frankly, are not as active from an M&A standpoint.

Evan Junek: Right. You heard me talk about the S&P 500 being down about 10% year-to-date. Again, this is as of April 21st.

Jay Hofmann: Down two more points this morning.

Evan Junek: Down two more points this morning. If you look at the rest of the world, excluding the U.S.-

Jay Hofmann: Mm-hmm.

Evan Junek: ... markets are up about 6%. So 16 percentage point delta between the U.S. and the rest of the world. That is almost by construction in part due to capital flows out of the U.S. into the rest of the world.

Brian Tramontozzi: Still trading at a much higher premium.

Evan Junek: Yeah, and we still trade at a much higher premium. Some of the fundamentals of the trends that we were talking about just a moment ago, with respect to the bias towards wanting to be in the United States, technically a lot of those fundamentals still exist, still a large PE premium on US companies. The S&P 500, again over roughly 20 times PE right now. Probably a little lower than that as of this morning. But these are still healthy multiples in global terms. But it does seem to be that there is a little bit of a shift taking place. Whether it's in the Treasury market, whether it's in the equity markets, all of these seem to suggest that there is a sell America theme at the moment, and we'll see how long if that persists, or whether that ultimately reverses. I want to shift gears a little bit and talk about private credit. Brian, as you mentioned earlier, we're re-upping our commitment in private credit to $50 billion. Can you talk a little bit about what that really means, what are we're doing in terms of that initiative, and how it's impacting your markets and our strategic dialogue with clients?

Brian Tramontozzi: Sure. So J.P. Morgan has been in the private lending business since 1799 through its predecessors, starting with The Manhattan Company. A few years ago, we created a direct lending business within leverage finance of $10 billion and we've recently announced that we're gonna take that program to $50 billion. When in combination with our co-lenders, that program's roughly $65 billion in size. That makes us one of the large players in that business, and we want to be a leader in everything we do. What we have seen in changing markets, and used 2022 as an example, when the broadly syndicated markets pulled away from underwriting leveraged buyouts, the private credit market was very much open for business and was the source of, in the second half of '22, the majority of financing for M&A. And I would suspect, as we look at market conditions today being uncertain, that the private credit market very well could be the source of the majority of the financing, at least for the foreseeable future until this market volatility subsides.

Jay Hofmann: I agree with Brian. It has been a tremendous lubricant for the M&A market, as you pointed out. I mean, it's just driven a lot more LBO activity that we would've otherwise seen. And I've also gotta thank him and his colleagues for the commitment that they're making and everything they're doing in that market, because, frankly, it's a big differentiator for us. Not just when we're talking to our clients about the solutions we can provide to them, but it gives us differentiated access into the private credit market and how it works to the benefit of everybody.

Evan Junek: Brian talked a little bit about potential outcomes or potential ways in which this market will adapt to the year ahead. Jay, talk to us a little bit about how the M&A market might evolve given this backdrop, or the kinds of conversations or engagement you're having with clients in this uncertain backdrop.

Jay Hofmann: Yeah, that's a great question. I think that what we're gonna see is that the focus on, you know, down the middle of the fairway transactions that have obvious strategic logic, real synergies, real cost takeouts that you can underwrite with your investors and your lenders, those are definitely going to be in vogue, right? And when we're in times like this, it's more difficult for people to pursue transformational deals or things that may be one or two fairways over from their current business. And frankly, what we're seeing from public investors already are messages to that effect, right? There's been a couple of larger deals that have been announced since April 2nd. The ones that have been best received are the ones where people are talking about buying businesses where there's real strategic logic, real synergies, businesses that tend to be less cyclical or volatile, and are financed in such a way where that it doesn't increase the underlying enterprise risk.

Evan Junek: And maybe could I just ask you to expand on that a little bit? 'Cause there's the profile of the deal, which sounds like this is sort of the, it's like the no duh deals that are getting done, for lack of a better term, right? The obvious ones, the things that I think people will cheer and champion that are sort of easy to understand. But maybe talk a little bit about how they're getting done, 'cause I think the other aspect of this, and it ties back to the private credit piece, is there's probably a greater willingness for creativity, would you say?

Jay Hofmann: Absolutely. And you know this because obviously we partner very closely with your team and have worked with them on a couple of recent transactions in the past couple of weeks where we've brought that to the fore. So I think people looking at different mixes of consideration, different ways that they can extract the maximum amount of tax benefits from a particular transaction, ways that they can structure a deal so that payments may be more focused on the achievement of milestones, things like this, they're all gonna be tools that people wanna pull outta that toolbox and use. And so again, I think the complexity for some of these transactions may go up in terms of the way we structure them, even if the underlying profile of them, as you say, are focused more on things that are just obvious deals to people.

Evan Junek: I think we're gonna be on back in sort of a first principles market, right? Scale is gonna be attractive for investors in this kind of uncertain environment. People are gonna be seeking simple stories. So I think you've got trends like corporate clarity that are gonna continue to resonate for folks, and structures like spin-offs where it's at the whim of a management team that isn't requiring another counterparty to potentially transact may be more attractive at the margin. But at the same time, mergers that enhance scale will also be potentially an attractive outcome, especially if it's supporting a balance sheet that is ultimately, quote unquote, "Fortress in nature," over time.

Jay Hofmann: Yeah, and look, our conversation up until now is focused almost entirely on strategics. I think we need to think about financial sponsors as well. Because in environments like this, they tend to be actually a larger proportion of M&A activity. And the U.S., usually financial sponsors account for about 25 to 30% of volume. I suspect it's gonna be more like 30 to 35% this year. There's a lot of tricky things going on in that ecosystem as well that you have to take into account. But particularly as they, number one, seek liquidity, I think they're gonna be looking at a lot more creative structures and creative approaches to monetization that are gonna span markets. It won't just be M&A deals, it'll be all the interesting things in capital markets that happen in Brian's world. And then on top of that, fortune favors the bold with those folks. If we're in an environment where valuations come under a little bit of pressure, there's quite a few who are sitting on a lot of capital and now actually have the license to spend it. So I think you could see a lot more activity in the take private world too.

Brian Tramontozzi: And I'd say one of the criticisms of private credit in the past was the depth of the market. Today, there's at least 5, if not $10 billion of capital available for any given transaction to fund the M&A debt quantum.

Evan Junek: And I think that's an important consideration, right? Not just for those who are inherently going on defense, but there's gonna be a portion of our clients who are absolutely gonna be thinking about this environment as an offensive one, one where they can be opportunistic. And it sounds like, from both of you, we're really well positioned to help them take advantage of that potential.

Jay Hofmann: No, absolutely. And in a volatile environment, we do best and we can help people understand what the art of the possible really is and even push the envelope.

Evan Junek: Maybe just as a final thought here from both of you, any additional comments on the outlook for the rest of 2025 and potentially even going into 2026? I'll start with you, Brian.

Brian Tramontozzi: Yeah, I think the key is in the direction of the economy. The market right now is positioned where current spreads are not necessarily predictive of a recession. If we are heading toward a recession, I think conditions could certainly get more challenged. Spreads would widen, and the availability of capital could become more limited in the broadly syndicated markets. But as I said before, we now have three hats to wear, including private credit, and I think we'll be able to continue to support our clients when they need us most.

Jay Hofmann: Yeah, I think the period of uncertainty is gonna progressively lift as we get through this 90 days of suspension around tariffs, and hopefully with positive news, right? I am more bullish overall, I think, than the popular narrative is around the ability to sustain positive trends in the economy and, therefore, hopefully in my market. And I would also say that in my mind, like the only question out there is you always wonder, is there another shoe that would drop? Because what we haven't seen in this particular set of economic circumstances yet that we've seen sometimes in the past is uncertainty or difficulty in the real economy causing challenges in the financial economy, which then becomes a bit of a self-reinforcing cycle. I think as long as we can avoid that, we'll be in good shape.

Evan Junek: Jay and Brian, thank you so much for joining me today, and thank you to our listeners for tuning in to another episode of What's the Deal?. We hope you found this conversation insightful, and be sure to tune in to our upcoming episodes as we stay up to speed with the markets. I'm your host, Evan Junek, and until next time, goodbye.

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. To stay ahead of the curve, sign up for J.P. Morgan's In-Context newsletter, packed full of market views and expert insights delivered straight to you. To subscribe, just visit jpmorgan.com/in-context. 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]

“A year of surprises”: Global capital markets recap and 2025 outlook

[Music]

Amaury Guzman: Hello, you're listening to What's The Deal? on our investment banking series on J.P. Morgan's Making Sense podcast. I'm your host, Amaury Guzman from J.P. Morgan's Leveraged Finance desk in New York. Today, I am joined by returning guest Kevin Foley, our global head of Capital Markets, to discuss market development since our mid-year conversation in July, as well as to explore the outlook for global capital markets in 2025. Kevin, welcome back to the podcast. Great to have you.

Kevin Foley: Amaury, great to be back. Thank you for having me.

Amaury Guzman: Alright, why don't we dive right in. Kevin, almost 12 months have gone by in what seems, at least to me, the blink of an eye. But in reality, a lot has happened this year. How would you characterize market developments almost twelve months in?

Kevin Foley: I'd say it's been a year of, I'd call surprises. The economy's been more resilient than we would've thought. The expectations around rate cuts coming into the year were much higher. We got them less of and later in the year than what was expected, obviously, because that ties back to where the economy has been and the resiliency around it. And we obviously got through an election season as well and in a lot of ways, people would refer to as a Goldilocks environment right now. There is belief that you're gonna continue to have some tailwinds from the Fed easing. You've got a view of less regulation under the next administration. That's the belief. People are putting on rose-colored glasses  with regards to what tariffs or changes in immigration policies may be and the impact that may have on employment. And right now there's a very optimistic view about the resiliency of the economy and the ability to continue that and starting to see that in cross debt and equity markets. And I'd say the animal spirits right now are very much alive and strong.

Amaury Guzman: Markets have reacted accordingly, not only in terms of like asset prices where equities have rallied significantly on the credit side where spreads are tight, how would you characterize what the market activity has been on the primary side?

Kevin Foley: So we've been on record levels volumes when you particularly look at the leverage finance market, right in the leverage loan market, to be even more specific. Interestingly, 90% of that activity has been refinancing driven. So we've been very quiet on true new issuance coming to the market. So it's a lot of recycling of capital. It's created a very borrower friendly market because of the lack of new issues, fair amount of cash still on the sidelines. There's a natural inflows that happen from coupon clipping that happens every month with any fixed income product. All of those have created a very favorable environment of demand outstripping supply. And that is driven a heavy refinancing wave. Because we start to think forward to 2025, the question on top of everyone's mind is M&A gonna pick up. And we start to see actual new issuance coming to the market. You can have volumes come down next year, but if the mix shift happens towards more new issuance tied to M&A, that starts to bring that supply and demand a little bit more in balance which will create... It's not necessarily a bad thing, but it can create a little bit different dynamic than what we're seeing right now.

Amaury Guzman: No, that's a great take and I'm gonna come back to some of your references on M&A and the outlook. But before we do, I wanna go a little bit deeper in one of your references that you just had on the U.S. election, specifically, results are now behind us. They include a sweep of Congress. As you mentioned, as the prices have been on the move, equities rallying, rates higher as the market tries to, if you may, anticipate the impact of the policies. How would you assess the balance of risks and opportunities from what you may call the expected policy shift?

Kevin Foley: It's not an easy proposition right now because I think we do have a market that feels like it's priced for perfection. And while there's a lot of reasons to be optimistic and the economic results are supporting that, and there's certainly the optimism with the election behind this, what that may mean on a regulatory front, what that can do from M&A activity and other business activities. You could debate whether a lot of that has already been priced in. And when you look at the multiple expansion that we've seen in the equity markets, that is pricing in a fair amount of growth. You look from a rates perspective and more in the high yield market and the investment grade market, you look at a spreads basis, we are near record lows. The high grade market has taken out its historic lows on a spread levels. The high yield market is several hundred basis points inside its non-recessionary average. So you've got a market that in a lot of ways is priced for a perfect economy and a perfect world. But at the same time, we've got geopolitical concerns that are still out there. We are not entirely sure if inflation has been whipped. There are things that under this new administration that could be viewed as some headwinds for the economy. So while we're optimistic and you could feel good about the outlook, it's not a throw caution to the wind environment.

Amaury Guzman: Yeah, I mean, I just had you walk through the fiscal side of the puzzle, but for instance, if we were to look at it from the monetary side of things, for instance, the Fed has outlined that they will remain data dependent, right, in assessing near term policy decisions. The market itself is pricing additional cuts in December, maybe January, March, who knows? And potentially quarterly thereafter, as the market expects, bring the policy rate down maybe closer to the 300 quarter, 3.5% range. Do you think, these kind of fiscal policy plans throw a wrench in those plans?

Kevin Foley: I think it's... When I started this talking about 2024 being a year of surprises, we obviously saw a lot less cuts than what the market was expecting. And the market was comfortable with that, right? They focus on the fact that here, the market got comfortable with less rate cuts during the course of 2024 because the economic picture continued to be strong. You can definitely have a debate about here, the stimulus that's happening from less regulation, some of its positive sentiment too around the anticipation of that. Is that going to then prevent the Fed from doing some of those policy tightening that is expected, and are they even gonna have the luxury to even debate it? We're still not at that 2% inflation target. There are still things out there that are, by definition inflationary. Take for example, the fact that as we're shifting towards more sustainable energy, that by definition is inflationary. When you look at the investment that's needed on the defense front because of the geopolitical picture, that is inflationary by definition as well. So whether they're gonna have the luxury even easing policy further, is it going to be the challenge that they're facing now, is that gonna increase because of the stimulus that's coming in from other aspects? Yeah, that's gonna be a something we're all gonna be watching in 2025.

Amaury Guzman: Thank you for that, Kevin. I mentioned I was gonna go back to the M&A point. We recently had Alka Gupta and Matt Gell on our podcast discussing tech sectors IPO and M&A trends in EMEA. They were positive about the IPO market in '25 and '26, but they did note that companies are still cautious about M&A due to regulatory uncertainty. What are your thoughts on this outlook? And does this echo with what you're viewing at a global level?

Kevin Foley: So there's definitely a lot more enthusiasm about M&A activity in 2025. I think some of it has to do with a year ago we were sitting anticipating when were we gonna actually see an economic slowdown and anticipation of a recession. That recession never showed up. And so while the economy has slowed down, it's been more resilient. So I think there's an increased confidence in a lot of boardrooms to think about a backdrop that allows them to even think more strategically about what they wanna do. So I think that's a factor. The rates coming down, that's another positive factor. I do think the U.S. economy has been more robust than other parts of the world, in particular when you compare the U.S. with Europe, that you probably would expect to see the U.S. leading the way on the pickup and M&A activity. We've been at near historic lows for the level of activity for private equity shops exiting their investments. So we expect to pick up on that, which will be say the opportunity for strategics to add to their portfolio, to look at other sponsors who may be trying to expand the footprint in this particular industry. There's gonna be a lot of opportunities on that front. So yes, I think that the tailwinds are coming. We're expecting a lot more activity. Some of the concerns that we have, if any of them come to fruition, you can see them derailing that M&A pipeline pretty quickly.

Amaury Guzman: Now, Kevin, as we sit here today in December of 2024 and we look forward to 2025, what are you keeping an eye on for what could be a material risks to markets next year?

Kevin Foley: Well, I think a lot of the risks that we've seen in 2024 remain. I think you're gonna continue to look at the long end of the Treasury curve, where we're gonna continue to be running fiscal deficits. We are gonna have to increase borrowing. At the same time, the buyer base that's been buying Treasuries over the past 5 to 10 years, the banks, the Fed, foreign entities, foreign investors are all pulling back. So despite what the Fed may do in cutting rates on the short end, think of the long end, you continue to have pressure upward because of the supply demand and balance.

Amaury Guzman: Got it. Thank you for that assessment. I think that resonates a lot with what we're hearing from other market participants. Now, the last topic that I wanna review with you today for benefit of our listeners is our upcoming Global Leverage Unions conference, which is happening February of 2025. It is a special edition for all of us at J.P. Morgan as well as for market participants given it's our 30th anniversary of the conference. Why is this your conference particularly special for market veterans like yourself?

Kevin Foley: Well, I think you stare at that number of 30 years, and you look at what's happened in markets over the past 30 years. Pretty astounding when you start to look at a lot of things from dotcom to GFC, COVID, and that's just to name a few. So there's been so much history and development in the growth of the market. The conference in a way has grown alongside with the growth of the market. And so it's kind of watching both grow up and expand over time, and it's become a incredible ecosystem. And I think in a world. We've watched the evolution of road shows become shorter and less in person. The conference has taken on even more of importance because it is definitely a guaranteed couple days where investors and lenders are able to get with issuers and borrowers face to face and really get an update on where things stand in the economy, where things stand with those individual businesses and how they're performing. So we have the good fortune of J.P. Morgan and being a leader in the market and really nurturing that ecosystem. It is thrilling to be a part of that. It's just been fun to watch that grow over the years.

Amaury Guzman: Thank you for that. And what themes are you expecting to emerge from our 30th Global Leverage Finance Conference, upcoming in February?  

Kevin Foley: I think as you think about the themes for next year, I think it's a lot about what we've been talking about. We're gonna continue to gauge the economy. You'll have had the new administration in the office by that time for over a month, maybe we've had some progress on the geopolitical front. We're gonna be debating where Fed policy is. Feels like it's more of the same, but I feel like you take the best pulse when getting out there and hearing the management teams and the CEOs and CFOs of all these businesses and a lot of different industries from across the globe really give you a good insight. And it's a great pull-up at that to understand where we are in a lot of things we've been talking about today.

Amaury Guzman: Kevin, thank you so much for that. We really appreciate your time and you coming and spending your thoughts with us and our listeners and just kind of sharing your insights for what has been a lot of market activity in 2024, as well as your outlook for '25. A big thanks to Kevin Foley for joining me today.

Kevin Foley: Amaury, thank you. And I just say to all our partners out there, thank you for placing your trust in J.P. Morgan, and thank you for a terrific 2024. And we're looking forward to a great 2025 and hope you and all your families have a wonderful holiday season.

Amaury Guzman: And thank you to our listeners for tuning into another episode of What's the Deal. We hope you enjoyed this conversation. I'm your host, I'm Amaury Guzman. Until next time, goodbye.

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. To stay ahead of the curve, sign up for J.P. Morgan's In-Context newsletter packed full of market views and expert insights delivered straight to you. To subscribe, just visit jpmorgan.com/in-context. 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.

[End of episode]

Debt capital markets: A post-summer deep dive​

[Music]

Emma Zederfeldt: Hi, and welcome to What's The Deal? Our Investment Banking Series on J.P. Morgan's Making Sense podcast. I'm Emma Zederfeldt, your host today from the Investment Grade Finance team. In today's episode, we will take a deep dive into the state of the debt capital markets.

I'll be joined by Todd Rothman, a managing director in our Leveraged Finance Capital Markets group to talk about the high yield in the leveraged loan markets. But before we hear from Todd, I'd like to welcome Bob LeBeau, head of Global Fixed Income Syndicate, and John Servidea, global co-Head of Investment Grade Finance to talk about the investment grade bond market. Bob and John, thank you for joining me today.

John Servidea: Great to be here.

Bob LoBue: Thanks for having us.

Emma Zederfeldt: So John, to kick things off, I think it would be helpful to give our listeners an overall picture of the market. How would you characterize raising capital in the investment grade bond market this year?

John Servidea: Well, Emma, if I had to describe this year in one word, it would be busy. And that's a global comment. So, both in Europe and the U.S., issuance activity is trending well ahead of last year's pace. In the U.S., we're up about 30% year over year and in Europe, about 15% year over year. Key driver is really plain refinancing. About 25% of supply year to date is refinancing activity. And the driver of that is that spreads have remained stable, despite all of the potential macro headwinds that we've all been talking about. We've seen supportive backdrop despite the heavy supply, which is great to see. Technicals remain incredibly strong as investors have cash to deploy. And even as we've continued to break some records with some record weeks and some record months, we continue to see investors with appetite to continue to buy. Inflows continue to be strong as well, so we feel really good about the backdrop for our clients.

Emma Zederfeldt: Thanks, John. Sounds like it's been an interesting year so far. Let's maybe shift our focus to today. Bob, what has the environment been like over the past couple of weeks?

Bob LoBue: Well, as John mentioned, activities been much larger than we've become accustomed to over the course of the year and August and the beginning of September have continued that trend. When we look at August, we raised approximately 110 billion over the course of the month, and that's compared to a four-year average of about 85 billion in a usual August. So tremendous supply for the market to digest. And the beginning of September, we did 70 billion in the first week. We'll probably approach about 40 billion going into the Fed. And so once again, we're testing demand for the market. The focus remains on spread premiums and the absolute rate cost for borrowers. And the good news is that despite the heavy calendar, over subscription rates have remained robust for the supply that we're raising for companies and new issue concessions were relatively minimal below five basis points. And so, from a issuing standpoint, we think it is quite opportunistic for borrowers. On the demand side of things, once again, we continue to like what we are seeing from the investor community. Demand remains robust across the curve, especially in terms of duration, where 10 to 40 year demand is showing the deepest pools of liquidity for borrowers. And when we think about trending into a fed easing environment over the balance of the year, we anticipate the front end demand will continue to deepen as investors look to capture that rate reduction in that part of the curve as well.

Emma Zederfeldt: That is very interesting, Bob. It certainly feels like we have kicked off the post-summer window with a bang. And John, knowing that we have the election looming in early November, how do we think about supply for the rest of the year?

John Servidea: Yeah, so as I mentioned, we expect it to be active, but it is very clear that a lot of our issuer clients have pulled forward transactions just given the strength of the market in the face of these variables around the election, around central banks, et cetera. So we expect it to remain busy, maybe not quite as busy as it has been. But to Bob's point, we feel very good that investor appetite will be there for whatever supply that we do have. Again, that's a global theme. I'd say, this year in Europe, we've seen a tremendous strength of the market there relative to the US market. So we'd continue to expect a lot of our U.S. based clients to look at opportunities borrowing in Europe, where the pricing is highly competitive, if not better than the dollar market. And here in the U.S., there's a slight uptick, wouldn't call it overwhelming, but a slight uptick in M&A a related financing, which is about 15% of the market so far this year.

Emma Zederfeldt: Shifting our focus from issuers to investors, Bob, you spent a lot of time with chief investment officers and portfolio managers on the buy side. What are you hearing from them? And how are they thinking about spreads and absolute yields?

Bob LoBue: When we look at the risk asset classes spreads continue to remain near the tights. And so that is the biggest struggle that investors are focused on is the direction of travel from a spread perspective. Our strategists are forecasting our US dollar spread index to end the year at around 110 basis points. We're currently trading around 113, so modest upside from today's levels. And while we're expecting a widening in Europe of approximately 20 basis points to an index level of about 150 basis points, it leaves us relatively optimistic when we think about the spread environment. Despite that, appetite, as I mentioned earlier, remains strong. Returns have turned positive over the course of the year with the rate rally and spread compression that we have seen. So we continue to see flows coming into the spread asset classes and that is assisting us in maintaining our levels. Despite the decline in all in yields, they're quite still attractive. And so when we look at investor demand, we think that they will continue to migrate toward the fixed income and spread asset classes. And especially once again, mentioning the trend of rates going lower over the course of the balance of '24 and into '25, we think that only exacerbates demand increasing for the fixed income asset classes. We do think that the pace of fed easing in curve shape as we move forward will likely have the greatest influence on investor relative value opinions. And so that's probably where our biggest focus is in terms of where we think value is and where we believe investors will begin to invest their cash available.

Emma Zederfeldt: And following up on that, what upcoming events would you say that investors will be focused on?

Bob LoBue: There's a number of events that investors have on their radar screen that can be quite important over the balance of '24. First and foremost is likely rate volatility, and we think that that is both general market moves that are causing volatility in the market, but also the amount of treasury supply we will get in the receptivity to those auctions. Secondly, the economic data that we'll get over the coming months will be quite informative about the forward trend of the economy and any recession risks. And we think that is one of the big indicators right now for how investors are trying to put money to work. We will get more information out of the central banks, we'll get the fed minutes on October 9th, that will be quite telling for how they were thinking about the beginning of their easing program. We also have two more fed meetings following September meetings. So we have a meeting in November and in December, and let's not forget we will get third quarter earnings as we trend into the next couple of months that we think will be really important in terms of the forecasting of what companies are seeing on trends around the economy.

Emma Zederfeldt: And John, turning back over to you. Out of these events, which ones do you think are the most important for issuers to look out for?

John Servidea: It's really the fed, as Bob talked about it, it's the trade-off of inflation versus growth. The election clearly people love to talk about it and makes a good discussion topic. Historically, though, we've found that it has a, a limited or at least very short term impact on the investment grade credit market. So it's really about what is the path of the fed as we, as we look towards the balance of the year here.

Emma Zederfeldt: Last question for you, John, before we bring in Todd. Based on your interactions with issuers, what would you say are the most consistent themes that they are focused on?

John Servidea: Yeah, Emma, it's really just a, an approach of risk management. So a lot of our clients are saying, "I, I don't have the market crystal ball," and, and neither do we. But if you look at the various issues to navigate out there, and the fact that spreads have remained as resilient as they are and you look ahead to a maturity dollar amount in 2025, that's about 25% higher than this year's. There's a lot of refinancing activity for our clients to do. And so the question becomes why wait? So it's really, again, a risk management perspective of what are the trade-offs of going now versus waiting thinking through issuance, hedging, or just sitting tight. And so it's really a, a very pragmatic approach is how I would describe it.

Emma Zederfeldt: Bob and John, thank you so much for being here and for sharing your thoughts on the market today. I'm sure this all will be very helpful for our issuing clients as we move throughout the year.

John Servidea: Thanks, Emma.

Bob LoBue: Thank you.

Emma Zederfeldt: And now switching focus from the investment grade bond market to the leveraged loan and high yield markets, let's now bring in Todd Rothman, a managing director in our Leveraged Finance Capital Markets group. Todd, welcome back to the podcast.

Todd Rothman: Thanks for having me. It's great to be back.

Emma Zederfeldt: So Todd, as John and Bob just recapped, a lot has happened in the investment grade bond market so far this year. How would you characterize performance year to date on your side of the market?

Todd Rothman: So if we start on the leveraged loan market, so far, we've had just over $800 billion of supply this year. It's actually higher than the combined 2022 and 2023. And to put that in further context, if you think about the size of the overall US leveraged loan market at roughly a trillion and a half dollars, that means that we've turned over more than half of the market, and we're only two thirds of the way through the year, and new supply continues to emerge. Now, as we look at the composition of the money that we've raised in the loan market this year, I'd say 80% to 85% of that has been used towards refinancing. At the same time last year by comparison, that was only 40%. So we had a lot more M&A and net new money supply coming through the market last year. So borrowers have been able to take advantage of that this year. This technical imbalance where lenders have had a lot of money they want to put to work, but there's been very little in the way of net new supply to put it to work. And that's part of what's allowed companies to come back to market to reprice their loans lower, not even once, but for a number of companies, sometimes twice.

Emma Zederfeldt: So what's been driving that opportunity set for our clients?

Todd Rothman: Well, there's two things really happening there. One is what I just mentioned in terms of the lack of net new supply. But the other thing is the CLO market. CLOs make up roughly two thirds of the buyer base for leveraged loans. And if you look at 2024, we've had roughly $130 billion of issuance so far this year, and our strategists are calling for that number to end the year at roughly 140 to $150 billion. And those are record levels that we haven't seen in quite some time. The final element that's really helped create this dynamic for our borrower clients has been the portion of the market that's trading above par. So typically, when we get above 20 or 30% of the loan market trading above par, we've tended to see a repricing opportunity emerge. This summer we peaked up at actually 65% of the market trading above par. Now, when we have the August volatility, that number dipped down to 13%, but as we've gotten back to school here in September, we've gotten back above 40% again. And so we've seen the beginning of a repricing wave to kick off the autumn period.

Emma Zederfeldt: And what about the high yield bond market?

Todd Rothman: So again, very similar to what Bob touched on the IG side as well as everything I ran through on the loan side. The themes remain really consistent here. Thus far, we've had about $200 billion of issuance year to date. Last year, that was 170 billion. So we're already exceeding last year's pace. If we look at primary volume on the high yield bond side this year, on a gross basis, we're actually running close to two X the amount that we issued in all of 2023. Yet, the amount of net new supply, similar to what I talked about in the loan side is actually same as last year. So a lot more people are coming through the market, but the, only the same amount of opportunity for investors to, to put money to work. The same story holds true there, where roughly 80% of the proceeds thus far have been for refinancing and not for M&A or dividends. One of the results of that trend has been as investors haven't had an opportunity to put money to work in primary, that's forced investors to look at the secondary market to deploy their cash balances. So if we look back at how the year has played out, this summer we peaked with spreads as tight as around 350 basis points. If you compare that to post-financial crisis period, the all-time tight was 335. So we've been bouncing around the tight levels for the bulk of the year. When you look at the volatility that we saw in August, that actually took us well above 400 basis points. We've since retreated to 374. So still really tight levels, but it's now offering a little bit of spread cushion for investors, which has helped make the market even more attractive for both issuers and for borrowers.

Emma Zederfeldt: So we've talked about supply, we've talked about spreads. Could you maybe touch on how rates also play into this?

Todd Rothman: So the loan market being a floating-rate asset class, the fact that we've been living with really high rates has been one of the things that's made that market very attractive for the buy side. When we look at things now from the issuer perspective, one of the reason we haven't seen as much supply in the bond market as the loan market is a bit of a, a mentality of, "Why would I issue at a coupon of X today, when surely that rate is going to be lower later this year and certainly into 2025 once the Fed starts cutting rates?"

Emma Zederfeldt: With all of that in mind, what is one message you would leave our clients with?

Todd Rothman: I think one of the things that we need to remind our issuer-side clients around though is back to that spread story, where do we sit in the world. So today, we sit at roughly 375 basis points. If you look back to the COVID period, we were sitting around 440 basis points there, for comparison. I mentioned the tight levels that we've achieved before. We haven't had a recession yet in this economic cycle. But if you look back over the course of the past few decades, high-yield spreads have actually averaged around 975 basis points over that period. And so while we're not expecting a recession any time soon, while we're not expecting spreads to balloon out to those types of levels any time soon, I think the punchline message that we look to give our issuer clients is that, "Yeah, the Fed is probably gonna start cutting rates soon. We don't know the pace at which that's going to happen. That's a big wild card. But if we do start to get some economic downturn, some data that makes the market feel a little bit uneasy about growth and, and future-earnings prospects, the direction of travel on all-in coupons could actually go higher as spreads widen out more than the Fed will actually cut rates." So, the punchline advice is, "Go grab the money today while it's there at what we think are still relatively attractive rates."

Emma Zederfeldt: Thank you so much for that overview, Todd. I know that we also recently held our AMIA High Yield and Leveraged Finance Conference in London. What was your key takeaway from the conference?

Todd Rothman: The conference was, was fantastic. It was one of the largest ones we've had yet. On the bond side, one of the key themes coming out of the conference for sure was that rate cuts are coming. There seems to exist broad consensus that rate cuts from global banks are imminent in the last few months of the year. The pace that that's going to happen and, and how deep those cuts go into next year is what really remains the, the moving target. How the market reacts to these rate cuts I think is really going to be a function of, "Why are we seeing the cuts happen?" Is it more about normalization of policy, or is more because we're actually seeing a real economic downturn, we're seeing a real shift in employment data and things that are worrying from a growth perspective? In that kind of scenario, we could certainly see spreads widen out a fair bit more. If it's the more benign pure normalization, we actually could continue to have very attractive conditions for issuers in the year ahead. But again, we encourage people to get out in front of that, not knowing how that's all going to play out over the course of 2025.

Emma Zederfeldt: And how are things looking from an investor perspective?

Todd Rothman: If we think about things now from the investor, the fixed-income asset class remains a really attractive one to invest in. So despite the expectations for lower rates in the near terms, credit funds continue to attract sustained inflows thanks to the overall appealing yield backdrop and what remains a really benign default rate. So corporate earnings continue to be strong. The high-yield issuer base continues to have strong liquidity. And from a credit standpoint, it feels like a safe place to put money to work while still achieving an attractive return. One of the things we also talked about at the conference was what the outlook for supply looks like, because as I mentioned, both in the loan side as well as the high-yield bond side, it's been a very refinancing-heavy market. And so the natural question we get is, "What's the outlook for M&A activity as well?" The underwritten pipeline for deals is at a two-year high right now, and that's been supported in what's taken a while to emerge, but a bit more of a convergence in valuation gaps between private-equity buyers and sellers, as well on the corporate side. While the numbers are still small by historical comparison, so to give you a sense, coming out of the summer, the underwritten pipeline in the US for M&A, for LBOs is around $25 to $35 billion. In Europe, it's about half of that. If you put that in context historically, pre-financial crisis between the US and Europe, we had nearly half-a-trillion dollars of underwritten capital. So, it's better than it's been throughout the balance of 2024. It is at a two-year high, as I mentioned, but there's certainly a lot more room to grow there. We're definitely encouraged by what we're seeing on the investment-grade side. We've had some large cap M&A deals emerge, and typically what you see is, first you get the large deals get announced on the IG side, and then it trickles its way down into the high-yield side. So as we look into 2025, we feel good that we're going to see an uptick in M&A supply versus the past couple of years.

Emma Zederfeldt: So maybe pivoting to the outlook. Bob and John referenced some key catalysts that may impact risk appetite in the near term. In the context of the high yield and leveraged loan markets, what are you keeping an eye on?

Todd Rothman: Sure. So on a macro front, what's interesting is we've spent the better part of the last couple of years staring at CPI, PPI, and anything and everything having to do with inflation. We seem to have reached a place in the market where everyone's gotten complacent that the inflation job is done. I think that's a risk. There's certainly a number of inflationary pressures that remain out there, but the market is pricing in right now that that is a non-event. So we'll have to keep an eye on that. Jobs and employment data has really become the new CPI, the new PPI, where everyone's really focused in terms of getting a sense as to what the pace will be of rate cuts to come. Geopolitical risk is still out there. It's been out there. But the reality is that as we've seen a variety of flareups around the world, markets have remained incredibly resilient. A lot of that is all down to the strong market technicals that we've had, and by that, I mean the lack of net-need supply, the strong cash balances that investors have. Does that dynamic change, in particular if we get a little bit more M&A supply out there? For international companies, but even for purely US domestic companies, Chinese economic growth is gonna be a really important factor. You've already seen a couple of forecasters out there lower their GDP forecast for this year and questioning whether or not they're going to hit their 5% target because of how intertwined the world still is. As China goes, that'll impact corporate earnings a lot. Clearly, in a couple of months, we have a US election as well. We get asked the question all the time, "Do I need to avoid the markets during October? Does that become a really volatile period?" And what's really interesting, we went back and looked at data going as far back as the, the early 2000s. And when you look at the data, and I'll just use the recent ones as, as an example, in 2012, 2016, and 2020 respectively, we only saw high-yield spreads rise one basis points, fell 14 basis points, and fell 40 basis points, respectively. So actually, you could argue that the election period hasn't been volatile. It's almost been a market catalyst. The other thing that has been interesting is that sort of one month leading up to the election, if you look back over the last three decades as well, on average, 90 days post-election, high-yield spreads have actually tightened 50 basis points. So you're certainly gonna see some election volatility in and around the date. But overall, we, we don't think who wins is as important as the other factors I've talked about here. I'd also argue in terms of development of more M&A volumes in the market, it's less about who wins the House and Capitol Hill, and it's almost more about what is the new regulatory regime, who's running the various agencies that approve mergers, and does that provide a catalyst or a further hindrance to C-suites and boards feeling more comfortable announcing deals. The final thing I'd mention is just how much markets are pricing in the way of rate cuts for the balance of this year and next year and I think that's a real wild card in terms of, like I've talked about already, how much actually gets cut, what is the pace of it and why. And so, it's less about what the outcomes are at the meetings and more so, I think, about what the narrative from the various fed governors is, coming out of each of those decisions.

Emma Zederfeldt: Thank you so much, Todd. A very interesting update to say the least. To recap, it's been a busy year so far, but the investment grade bond market is in very good shape. Similarly, high yield and leveraged loan markets continue to perform strongly and with plenty of capacity for issuers and borrowers looking to tap the market. John, Bob, and Todd, thank you for taking the time to sit with us and give your views on the market today. Also, thank you to our listeners for tuning in to another What's The Deal? episode. We hope you enjoyed this conversation.

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. To stay ahead of the curve, sign up for J.P. Morgan's In Context newsletter, packed full of market views and expert insights delivered straight to you. To subscribe, just visit jpmorgan.com/in-context. This material was prepared by the investment banking group of JP 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. Copyright 2024, J.P. Morgan Chase & Company, all rights reserved.

[End of episode]