Debt Capital Markets

What’s The Deal? | Soft landing? M&A boom? Unpacking the Global High Yield & Leveraged Finance Conference 

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Kevin Foley: Hello, and welcome to What's The Deal, our investment banking series here on J.P. Morgan's Making Sense Podcast channel. I'm your host today, Kevin Foley, Global Head of J.P. Morgan's Debt Capital Market's Practice. I'm also joined by my colleague, Tarek Hamid, Head of North American Corporate Credit Research, as we just wrapped up the 29th annual Global High Yield and Leveraged Loan Conference in Miami, an industry-leading event for the debt capital market's business. Tarek, great to catch up after a busy week.

Tarek Hamid: Thanks, Kevin, great to be here.

Kevin Foley: Exciting and packed few days with panels, keynotes, one-on-ones with our issuers and borrow clients. 3,000 people attended, which is a record for us. For our listeners, I really wanna hit on the key themes discussed during the conference and what is most top of mind for our clients. Tarek, Jamie shared at the conference that the economy's booming with the support of a number of inflationary pressures that look to be continuing. However, concerns around a downturn remain with Jamie sharing his views for the one-third probability of either a hard, soft, or no landing scenario. What did you gather from the conversation with clients and how they're thinking about the economy?

Tarek Hamid: So, if you look back, we had over 500 basis points of rate cuts in a 16-month period. And so coming out of that, there was really broad consensus that a recession was, you know, frankly inevitable. Yet, GDP grew 3.2% in 4Q23, with most leading indicators and nowcasts pointing to similarly robust growth here in the first quarter. For comparison, the JPM economics house view a year ago was for 4Q23 growth of 1.5%. So that narrative has shifted dramatically with soft landing and frankly, no-landing scenarios now the dominant viewpoints from the investor community. You know, there's always a natural tension between fears of growth and fears of rates and that pendulum has definitely shifted much more to the rate side again as folks start to push out their expectations of rate cuts from the spring into the summer. We had always had a house view that cuts would ultimately not occur until June, but we're still forecasting 125 basis points of cuts by year-end. Now underpinning that rate view is GDP growth decelerating to 0.5% in 2Q and 3Q. And I can say that the buzz at the conference was that was perhaps a bit too draconian for both our investors and lenders and our issuers/borrower clients. Regardless, I would characterize the majority of our investor and issuer clients is probably a little bit more bullish on the economy even than Jamie. And I think also an underlying theme of, again, resiliency of the economy through what has been an unprecedented monetary policy experience has been just remarkable.

Kevin Foley: Now it's interesting and meeting with a lot of CEOs and CFOs over the few days at the conference, it was clear that the concerns around the economic slowdown is not as prevalent amongst them. They continue to feel the resiliency and you walk away, there's certainly that debate seems like it's shifted towards a soft to no landing and almost starting to take a no hard landing off the table. I think as Jamie pointed out in the discussion, it's probably a little bit premature, because there's a lot of things still working its way that could have an impact. And I wouldn't take the hard landing off the table, but the sentiments definitely leans towards soft and no landing.

Tarek Hamid:  And so I guess Kevin, as the sentiment has shifted a little bit and rate expectations have moved, we have seen loan financings up more than 300% and high yield financings up around 90% from about a year ago. We walked into 2024 with the market pricing in six rate cuts. Now given that shift in expectations towards no landing, we're seeing the market and fed converge with futures pricing in about half that amount of rate cuts in 2024. Given that more muted rate front, how do you think this will impact leverage on high yield market activity in the coming quarters?

Kevin Foley: So the attractiveness of the rates is pulling forward a lot of activity, that a lot of issuers still can see. There's potential risk on the horizon. Let's take the refinancing risk off the table. It feels more of the same in terms of, as you pointed out, heavy activity, but 90% of that being refinancing driven. We still have to see the animal spirits in M&A come back. So while I expect that we'll see the momentum in refinancing activity, investors  [FK(U1] taking advantage of an attractive window. I think we're still waiting on seeing M&A, whether it picks up or not and the extent we continue to see the economy hang in there, that's going to give more confidence around it. There's also an element of buyer and seller trying to find middle ground on pricing in terms of valuation for those rates to happen. And I think that that's going to be a matter of time. If the economic picture remains strong, then we'll start to see a pickup in that M&A discussions and charting to find those valuation levels. Building off that Tarek, what are you hearing from clients on the M&A front?

Tarek Hamid: Yeah, Kevin, I think that they really are. I think our investors and lenders, and company clients generally agree that we're gonna see a lot more M&A. From the issuer standpoint, you have equity market performance that's been really remarkable over the last year, probably not as broad-based frankly as CEOs would like, but remarkable in the context of all the rate, uh, increases that we've seen. Additionally, you've had really strong earnings, you've had really positive guidance as well. So we track earnings and guidance pretty carefully in high yield research. And so what we're seeing in 4Q23 earnings is 1.4 times as many companies guiding up versus guiding down for 2024. So you combine that with very clean balance sheets, all the dry powder on the sidelines, you know, over $2 trillion potentially that could be deployed, it's a really potent brew for M&A. Additionally, you've had a very active FTC under the current administration. Heading into the election and even post-election, it's very reasonable to think that that will be a little bit more amenable to transactions. From the investors and lenders standpoint, people [FK(U2] [FK(U3] want M&A not just for change of control payments and tenders and the positive impact that tends to have on returns, they [FK(U4] [FK(U5] also want M&A just because it creates more paper. There's a real desire for more paper and frankly, just for more new names to invest in. One of the big themes of the conference from the lender and investor communities, was a desire for new names and just new opportunities to look at and to deploy capital into.

Kevin Foley: And it's interesting from the issuer and borrower perspective, I can see some pent-up demand around the M&A activity levels building, right, in terms of you start to get into a holding pattern, you're not divesting of assets in a goldilock scenario with maybe you are start to see some economic slowdown but not a hard recession, that starts to push them into finding growth. There are strategic things that companies wanna do, while, [FK(U6] that if you get the confidence there's a stable backdrop in the economy and financing markets are attractive and stay at current or better levels, then you could see it setting up. There's two trillion of dry powder sitting with private equity shops right now with limited activity. So you can see that coming. You look at from a corporate standpoint as well, the strategic things companies need to do, a lot of that's been on hold. So I think a lot of things are lining up, whether that's in the back half of '24, but you could certainly see it building into '25 and '26.

Tarek Hamid: Yeah, and I totally agree on that confidence point you made. I mean CEO and board confidence is just such a big driver of these things actually come to fruition.

Kevin Foley: So the other thing that was (laughs) no shortage of discussion around was private credit. It was topic of the de jour a year ago, it continues to be so this year. We're hearing a lot of debate about private credit versus syndicated markets. We're starting to see what many would view as an inversion that we saw a lot of things go private credit over the past 18 months, now coming back into the syndicated market. I know on our side on average the deals we've been taking from direct and refinancing, there's a 200 basis point savings, so a really, a lot of attractiveness to thinking about coming back to the syndicated markets. What are your thoughts on how you see this space evolving?

Tarek Hamid: There certainly was no shortage of private credit content at our conference. Obviously, this is a topic that we've kind of written a lot about in our team's flagship credit watch publication, as well as a bunch of other different reports over the years. And you know, a few years ago, when you first started to hear about estimates of private credit potentially growing to become a $2 trillion plus market eventually, there was an enormous amount of skepticism. I'd say now people don't really bat an eye at those forecasts. Our view has been and kind of continues to be that it's hard not to see these markets so private credit, high yield bonds, leveraged loans, not all sort of growing together synergistically. If you think about high-yield bonds and leveraged loans, over the last decade and a half, you've had capital ebb and flow between the two asset classes and ultimately, deal volume has ebbed and flowed between the two asset classes. And so if you think about the next five years, you'll see a very similar dynamic between private credit and syndicated markets as capital ebbs and flows between private credit and syndicated markets deal volume. Again, it's gonna follow there and I think it gives issuers and borrowers the opportunity to really optimize between speed and surety of outcome, rates, covenants and ultimate all-in cost of capital. And I think that's a very powerful message to issuers and borrowers and a powerful asset to issuers and borrowers. From the lender and investor communities, I think they're thinking about it very, very similarly. Most of our big, leveraged finance managers are looking to either build or buy private credit expertise. In some cases, it's because they actually want to be in the asset class. In other cases, it's 'cause they have a big platform and they like to leverage that platform more. And I think in the third situation you just have a lot of people who want to kind of put that toe into the water and sort of keep track of how this market ultimately evolves.

Kevin Foley: Tark, how about liquidity impact the private credit markets?

Tarek Hamid: So one of our panels had a very interesting comment when you think about sort of liquidity in the context of private credit. So in the private credit market, you have a lot of folks arguing about liquidity and trading as a major pain point. And this panelist's point, which I think is very valid is that one of the things liquidity potentially does in private credit is, it creates the ability for new entrants to get into the market faster by sort of short-circuiting the need to build a huge origination platform to invest in originators. And so that's a really natural point of tension between incumbents and between new entrants. But if you think about this, eventually we will have stress, we will have a de-stress cycle and we're gonna need the ability to transfer risk from private credit managers to opportunistic capital. So it's really fascinating to think about how private credit will grow, how liquidity and trading of private credit will grow and evolve over the next couple years.

Kevin Foley: Yeah, and it's that last part. Evolve, is the operative word there in that statement from my perspective, because we're just in the midst of this evolution, right? I don't think what we see today is a status quo of very much parallel markets and it's an either or. I can see a convergence over time to hybrid approaches that at the end of the day, we're just talking about lending. This is not a new product, right? This is credit loans, it's been around for hundreds of years and you're starting to see the landscape change in terms of how deals come together and the players in that. But I don't think that this is a parallel universe permanently, right? That there would status quo today of here it's either the direct loan market, or the syndicated loan market. I think each will start to take on features of each other and we can really see a full conversions to a hybrid approach over time. And then at the end of, as you mentioned, that there are a lot of people are looking... at existing players in the syndicated market or high-yield market are looking to add a private credit leg to the stool. I think it's gonna be one of many legs for a lot of major clients in the credit space.

Tarek Hamid: I think that's a hundred percent accurate. I mean also, at the end of the day, you know, you have similar risk profiles and so we’re eventually going to solve as a market for how to share in that risk profile and how to price that risk profile appropriately given somewhat smaller incidental changes in terms.

Kevin Foley: So, Tarek, we always talk about fat tails and Jamie's always mentioning that’s what his focus is. So when you look back in '20 after the conference, we shortly after that had Covid shut down the world. Last year, we had the regional bank crisis post our conference. As I look at the rest of '24, what's your fat tail concerns?

Tarek Hamid: So I think the, the one item that probably comes up the most right now is commercial real estate. Yet when you look at it, if we're all talking about it, it's very hard for that to truly be a fat tail event. And so you put commercial real estate, you put interest rates, you almost have to put 'em to the side because they're so well understood at this point. What concerns me[FK(U7] , personally, our geopolitics more than anything. We're in an incredibly unique environment with obviously the geopolitical conflicts ongoing in Russia and Ukraine as well as in Gaza. And so I think between the two of those, you have two real potential hot points that could be very problematic. Historically, in markets, the right trade has always been to fade geopolitics, that they tend to not matter as much as we all worry and think they are, but those are the things that keep me up at night.

Kevin Foley: Yeah, and I think it's interesting, because it's one of the things we talked about with Jamie at the conference of, reciting what Larry Summers had said the week before. Jamie's been out there saying it frequently, is there is a lot of potential for chaos in the geopolitical landscape and we haven't seen this kind of environment in 80 years. And whether that's looking across Europe, Middle East, Asia, we've got an election here at home, there's a lot of things that are shifting out there and while they are on the radar screen, still unclear where everything shifts to. With that, I think we'll wrap it up. Tarek, I wanna say thank you. This has been a very insightful conversation.

Tarek Hamid: Thanks, Kevin.

Kevin Foley: And I also wanna say thank you to all our conference attendees and those who are listening today. I wanna put a few reminders out there: we have our European High Yield & Leveraged Finance Conference, it gonna run from September 4th to September 6^th. That will be our 8th annual event in London. And we will also have our 30th annual Global High Yield & Leverage Finance Conference in Miami next February, running from February 24^th to 26^th. Thanks everyone.

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What’s The Deal? | What to Expect at the 2024 High Yield & Leveraged Finance Conference? 

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Brian Tramontozzi: Hello, and welcome to What's the Deal? our banking series on J.P. Morgan's Making Sense podcast channel. I'm your host today, Brian Tramontozzi, North American head of J.P. Morgan's leveraged finance capital markets team. I am trilled to have with me Brian Rubin, head of US fixed income trading at T. Rowe Price, and Michael Schechter, partner and head of credit trading at Ares Management. We asked them to join us today to help set the tone for J.P. Morgan's upcoming Global Leveraged Finance Conference. Our conference is considered the gold standard of leveraged finance, and will take place February 26th through 28th in Miami, Florida. Brian, Michael, it's great to have you both joining us today.

Michael Schechter: Thank you, Brian.

Brian Rubin: Thank you for having us.

Brian Tramontozzi: Before diving in, it would be great if both of you can give our audience a brief background on your roles at your respective firms. Brian, let's start with you.

Brian Rubin: I have been at T. Rowe Price for 27 years, started off in the middle office, I got to trading in 2003. And as of now, I run the US fixed income. What that entails is all credit, plus EM and, securitized.

Brian Tramontozzi: Excellent, thank you. Michael, how about you?

Michael Schechter: Sure, I’m partner and head of credit trading at Ares Management. I've been at Ares now for four and a half years. Before that, I was on the sell-side as a sell-side trader at both Citigroup and Morgan Stanley. Brian was a trusted client and friend when I was over at my previous shop, so thank you for having me as well.

Brian Tramontozzi: Appreciate it. Thanks, guys. So, let's jump right in. Market conditions today are quite different from those we experience to start last year. Inflation is moderated, short- and long-term interest rates, appear to have peaked, and equities have rallied. Michael, what's your view of leveraged loan market outlook, and how has your perspective changed from last year?

Michael Schechter: Sure. If you just take a quick step back, we've seen a tremendous amount of new loans so far year-to-date. We're at about 130 to 140 billion of gross credit in the loan market. The unfortunate part of that is only 10 billion of that has been net new money. We're seeing, unsurprisingly, given the macro backdrop you describe, a good amount of repricing and refinancing activity. Luckily, at least on our side, only 15% of the market now trades above par, so we should start to see that repricing activity abate. I guess the question that's on our minds and the question that we talk to you a lot about, Tram,   is what's down the   in terms of new money opportunities? LBOs, M&A, where are they? Are we starting to see some green shoots in that side of the market? We don't see a ton in the market right now, so net new money is probably gonna be made up of dividend transactions, first lien for second lien take outs, revolver term outs. But we are hearing and then seeing some green shoots in terms of LBO and M&A activity. So, right now, in the current backdrop, we expect loans to perform in line, not a whole heck of a lot of net new loans, CLO generation's very strong. So, we assume we're gonna be a little bit stable here, outside of some, some macro shift. Obviously, we've seen rates over the last couple days, loved to hear Brian's thoughts about that in high yield. But loans, until we see a meaningful pickup in net new credit, I think we're gonna kinda chug along here.

Brian Tramontozzi: Got it. Brian, how about the high-yield market?

Brian Rubin: We're kinda surprised that there hasn't been more high-yield issuance. We've seen 14 billion year-to-date of secured bonds. But as Michael said, we agree, we're surprised there isn't more M&A down the road, there isn't a lotta hung deals like there was this time last year. And the environment feels pretty good. And even with rates backing up the last couple days, high yield is tighter. But there is still demand as seen in a lot of new issues where books are 10 to 12 times oversubscribed, and there just is not enough paper to go around.

Brian Tramontozzi: Are there any fundamentals that have you worried right now? Whether they're election, geopolitics, anything else?

Brian Rubin: The Middle East is always on our mind. Feels like that shoe could drop at any moment. I guess what we're worried about is what we don't know. Seemingly, there's always something that pops up that we should've thought of or seen or been aware of that we can't predict. The unknown is always the hard thing that we face.

Michael Schechter: Yeah, from my perspective, geopolitical is obviously top of mind. But for me, especially over the last week or so with some of the data we've seen, it's really this concept that maybe the Fed isn't gonna be as aggressive with their cuts, rates aren't gonna come down as quickly as the market is projecting. We were never at the six cuts that the market was at, and we were probably longer, call it a June time- type timeframe. But, you know, the higher-for-longer narrative is something that we kinda still believe in, which is a boon, obviously on the investment side. You're getting that higher short-term rate for longer on your investments. But, my concern is, does that higher base rate, if that lasts for longer, longer than the market expects, do we start to see some sort of degradation in some of the lower quality segment on the  loan market?

Brian Tramontozzi: Great, thank you. So, let's now just talk about the origination calendar. Schech, when you mentioned this before, you talked about the roughly $140 billion supply, and for sure, the vast majority of that was repricing and refinancing. What are your overall thoughts on this robust activity? And as well as how are you thinking about supply-demand balance for the remainder of the year? Do you think it will be refinancing-driven? And how will lenders react to a return of M&A and LBOs?

Michael Schechter: From what we're hearing , and this is in conversations with street as well as our feel into the direct lending markets, it seems like M&A and LBO activity are getting closer to getting accomplished. I think a lot of what you saw last year was a lot of transactions that wanted to happen that didn't happen [inaudible 00:07:40] on the five-yard line. Whether it was leverage, or whether it was an equity check, we're hopeful that we start to see more activity in that LBO and M&A pipeline. What that activity's made up of, I think it's gonna be a little bit of a question to me. I think you'll see more corporate carve-outs, I think that's gonna be a sweet spot for private equity. The return of sponsor-to-sponsor transactions, maybe. I think those are a little bit more challenged, and that drove a lot of the 2021 type of LBO volumes. But we're hopeful that you see some LBO and M&A activity. I think that the backdrop is materially better than it was last year. Whether short-term rates or rates volatility continues, which I think it will, it does feel like at least we've probably peaked in terms of rate. So, modeling a deal from both the equity and the debt perspective's probably a little bit easier. Also and Brian mentioned this earlier, the hung calendar has kinda cleared. As well as, you know, you've seen this refinancing wave that has brought spreads in the loan market a little bit lower. We do feel like banks are going to be more aggressive in lending, which I think will also help M&A and LBO activity. You've already seen three deals this year in the syndicated loan markets refinance direct lending deals. So, it feels like between at least a modestly more stable macro environment when it comes to rates, as well as a healthier banking system, we're hopeful that LBO and M&A calendar will pick up.

Brian Tramontozzi: Great, thanks. And then, Brian, over to you, we talked a little bit before about the calendar only being $30 billion, which candidly, is actually a pretty good January. But with spreads at 400 basis points, lowest level that we've seen since the end of 2021, are you surprised there isn't more volume?

Brian Rubin: Really surprised. And I think what the market really needs is new names. We're hoping that we see more activity and we see new names. The refinancings, it's not great. Especially when you look at environment, where you losing, more paper than what you have, it's 'cause the deals are so oversubscribed. And we're just hoping for new names that we can look at.

Brian Tramontozzi: So, new names come from M&A for the most part, at least, my experience. And then driven further by LBO activity, is the market ready again for LBOs, CCC-rated, five, six times levered type of deals?

Brian Rubin: I think they are. I think people really just are getting tired of the same old names. And I think the opportunity to look at new opportunities are attractive to people. And, you know, CCCs, I guess the issue in, what was that, 2022, where the banks unfortunately got hung with stuff, that led to no junior capital in '23, really, or a limited junior capital. To make returns work, you need CCCs, you need single-Bs, you need something where you're gonna have a double-digit type return to our first.

Brian Tramontozzi: All right, so we've talked about supply. What about demand? We'll start with Brian this time. What's your sense of high-yield bond market liquidity today? And is the wave of upgrades from high yield to investment grade, has that now largely passed?

Brian Rubin: So, the market shrunk over the past two years. Whether it's been because the lack of new issuance or because of the upgrades. That was predominantly in the energy space where we saw the most amount of rising stars. It feels like that trend is ending. You see strategics taking out companies still. Kinda contradicting myself, because I said the high-yield market grew in (laughs), in January because of all the secured financings, you know, I just don't see that trend holding tight. So, I think the supply, we would like to see more of. But the liquidity is fine. I mean, you look at trades on any given day, there could be $10-12 billion of securities traded, only 18-20% of that is street-driven. And that tells you there's a healthy appetite for accounts to trade the portfolios, which is incredibly helpful. And, you know, when new issues come it creates more activity. And that's always welcome.

Brian Tramontozzi:  Michael, there was a lot of talk last year about static CLOs passing the reinvestment date. Do you still see this overhanging the market?

Michael Schechter: It's not as big of an issue as it was last year. And it certainly sort of, self-corrected in a couple ways. First off, Brian's mentioned the increase of, of secured bonds in the high-yield market. And that was kind of the first way that the CLO cliff, for lack of a better terms, kind of self-corrected. You saw secured bond deals launched alongside of A&Es to help buffer that CLOs needing to drop from extensions. That was kinda the first step in it getting better, and then overall, just the secondary market and, and CLO issuance picking up is the other thing that the made that a little bit less of a concern this year. I think you had about twelve and a half billion of CLOs priced in January, one of the most robust months in quite some time. And you know, the calendar remains very strong. You have AAAs inside of 150, they wind out to almost 240 at their wide. So, you've got new CLO generation that could also pick up some of those drops from those static CLOs. And then, finally, you're, you're also gonna get some of those deals able to be reset and refied. We probably need AAAs to tighten it in a bit from here still to have a real deluge of reset and refi activity. But with an outlet to the high-yield market in the form of secured bonds, with CLO generation, with ETF inflows, the static issue, I think, is less of a concern. Where it might still be a concern is in CCCs. You saw 24 billion of loans taken out by private credit that were CCC in nature shorter duration.  CCC extensions are still a little bit tricky. But between private credit or high-yield or just credit opportunities, we don't really see that as being a huge issue right now in the market.

Brian Tramontozzi: Got it, thanks. And then, Brian, just following up on that, with short-term rates, 100-plus basis points wide of longer term rates, do you ever see your high-yield accounts buying into loans just to manage coupon generation and just excess cash that you might have on your balance sheet?

Brian Rubin: I know Mike for all these years, just because of our high-yield accounts have been involved in loans. We launched a loan product in 2007, we don't have any CLOs. So, you know, it's something that we've done for years. It's always been a [DD surrogate][1] as well for us. So, I don't think anything changes from that. As long as rates are what they are, and you could pick up, if it's a place to  invest, it’s attractive. We agree, the higher for longer is a rhetoric that we weren't expecting probably two months ago, three months ago. So, when you're looking at shorter duration high yield inside 6%, or between 6 and 7%, it makes loans very attractive.

Brian Tramontozzi: So, to round it out, are there a couple of things that you wanna get out of the High Yield Leverage Conference? Michael, anything in particular for you?

Michael Schechter: I always enjoy both the sponsor panel as well as the private credit panel. Private credit seemed to be a very hot topic the last year around the conference. So those are two panels I'm looking forward to. But I really enjoy the conference because I get to spend a lotta time with the J.P. Morgan team. But more importantly, I get to spend time with people like Brian and other buy-side accounts that I've known for 15 years. And having strong relationships with both your sell-side and your buy-side counterparts is extremely important. So, I'm looking forward to that and I'm looking forward to the warm weather as well.

Brian Tramontozzi:  (laughs) Well, it hasn't been that warm a winter, but it's, it's gonna be great to have you down there. Brian, what about you?

Brian Rubin: Unfortunately, Schech, you took everything that I was gonna say. It's very similar. You know, the access that J.P. Morgan gives us is great. we try to take advantage of it, me especially. You can get in and out, and you can see the sponsors, you can hear panels. And it makes the time well worth it. And it's always great to hear Jamie Dimon speak.

Brian Tramontozzi: Outstanding. So Brian, Michael, this has been a great lead into our conference. We are very much looking forward to the event and the discussions that'll be had. To our listeners, stay tuned for a follow-up podcast post the conference with J.P. Morgan's global head of debt capital markets, Kevin Foley as well as Tony McCann, global head of leveraged-finance sales, and Tarek Hamid, North American head of corporate credit research. Thank you both.

Michael Schechter: Thank you.

Brian Rubin: Thank you.

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What’s The Deal? | Opening with a bang”: An update on the European leveraged finance markets

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Daniel: Hello and welcome to our podcast. I’m Daniel Rudnicki Schlumberger, I’m the head of Leveraged finance for EMEA for J.P. Morgan. And I’m joined today by my partner, Ben Thompson, who heads leverage finance capital markets.

Ben: Hello Daniel.

Daniel: I’d like to start with Natalie Netter, who is our head of syndicate for Leveraged Finance in Europe. So, Natalie, you’re in the thick of it, right? You’re on our trading floor. You hear the flows, you hear what our investors are thinking. How is the mood? How are the secondary markets these days?

Natalie: The markets are strong, but interestingly, the mood is slightly frustrated. So While the markets are in fantastic shape, if you look on the loan side, we actually just yesterday reached a new 52-week high in cash price of loans. And in fact, you need to go back nearly two years to get to these levels. High yield, we have come off a little bit year to date, but marginally only call it 20 basis points. And we're still 150 basis points inside where we were in mid-October. And the index is still sub-7 %. So Relative to where we've been, it's still strong. That said, there's a little bit of frustration, particularly on the high yield side, where I think everyone would have happily shut their books at the end of November, high single-digit returns. But we saw 500 basis points of performance into the last six weeks of the year. And that's frustrated investors because it feels like it'll be a little bit harder this year to make returns work, given just how strong last year ended up in an asset class that tries to pitch itself as a bit less volatile and you know high single-digit returns is perfectly adequate. But where we sit right now from an overall tone, it's positive.

Daniel: And spreads are really low.

Natalie: Yes, certainly. So on the high yield side, we're over 100 basis points inside the 20-year average. We have seen very tight on the spread side on high yield. And then in loans, we've seen a very strong repricing of CLO liabilities, which is allowing that market to buy loans at a tighter spread, versus what we've seen over the last several months, if not a year and a half.

Ben: If you start to pick that apart, and I agree completely that the conditions are strong right now. How much of this rally is down to the technical imbalance versus investors' and lenders' view of the fundamental outlook for the economy and for particular sectors?

Natalie: I think my point around frustration is such that it is mostly technical. So it's not as though investors are thinking that there's a great opportunity set given where they see the macro, et cetera. What it is simply technical. So on the high yield side, you saw very low net supply last year, coupon clipping, some inflows, and that led for them to have a very high cash balance. And historically, if you sit on too much cash, it's very difficult to outperform the index. And on the loan side, again, very low net new supply. And we just talked about how CLO liabilities are coming in, a very active CLO pipeline leading to demand. We have seven CLOs in market already this year. Most of those deals when they come to market are about half ramped, which means they all have 200 million of buying capacity. And If you take that seven number, and you speak to our CLO team, they see that seven going to the mid-teens in the next month. And again, all of those vehicles will be looking to add at least 200 million of paper. So it's very technically driven, rather than perhaps a fundamental view that things should be going tighter.

Ben: And Daniel, since you're on the front end dealing with the clients, the issuers and and the borrowers, you know, that concern about some of the macro events that could happen and could affect the market and how fragile this rally may or may not be, given that to Nat's point, it's very technical. I mean how-how are the borrowers and issuers and the owners of companies, financial sponsors, corporates, how are they feeling about the outlook? And how do you feel about the outlook from here for the rest of the year economically?

Daniel: I think we're still in a reasonably uncertain situation. It certainly looks better than six months ago. Economists think there is a 50% chance of a soft landing, which means that there's a 50% chance of a recession, either late in '24 or early in '25. That cautious view is probably shared by a lot of the CEOs and CFOs I meet. I have the feeling that risk markets are not taking into account such a high risk of recession. Which in turn means if the data is coming out worse than planned, the market is going to correct.

Ben: Do you feel that's the same way on the buy side, Nat, with the investors and lenders that they're all sort of trading these conditions the same way and that introduces that risk that, to Daniel's point, if some of the data comes out the wrong way, suddenly there's a correction in secondary and primary demand?

Natalie: Certainly. I was going to actually turn the question back to Daniel because one of the points we hear a lot from investors is, why are we not seeing more refinancing now given how strong the conditions are and the fact that they're almost a reluctant buyer. You know, that’s the tone, is reluctant buyers. I think on the market side, there isn't the ability to sit on cash forever, so it needs to be deployed. There's a confusion as to why it hasn't been busier in terms of what you just described, which is the CEOs, CFOs seeing all of this uncertainty. I guess to turn it back to you, why has it been so limited in terms of the actual out-of-the-box activity we're seeing on that front?

Daniel: It is getting busier.

Ben: Yeah it is. I'd agree with that. I think as we think back and we like to benchmark ourselves at the start of your conversations to where we were a year ago with some of the major factors that would affect company confidence to go out and do a transaction or sponsor confidence to buy a company. If you think about at the time a year ago, the direction of interest rate trajectory was clearly higher. Inflation was still not at all under control. Rates were going up. The forward curve was looking like rates were going to go up even further. That chance of recession that Daniel referred to, a 50%, at least from our economists, was a much higher percentage chance of a recession. So I think what we've got now and the difference to this year is the trajectory of rates, whether it's straight from the mouth of the central banks or the way the markets are trading on the forward curve. Trajectory of interest rates is definitely downward over the course of the year. We can argue and people will about the speed and the pace at which those rate cuts will come and how the market will trade those. But Also now we have this sense that consensus is building around. If it is a recession, it's going to be fairly mild and there's a good chance that we avoid recession, particularly in the US. Those are two big psychological barriers I think to transactions getting done. We still have a residual issue in terms of the difference in opinion on multiples, buyers and sellers, and we've seen that certainly over the course of 2022 and 2023. I'll turn it to Daniel in a second for his views on the sponsor activity. This could be the year where we finally see people meeting in the middle. So bridging that gap on valuations now that there's a little more confidence amongst the buyers that the economy could be okay and rates could come down, and the seller is now seeing that we're just not going to go back quickly to where we were two or three years ago. And I don't know if you're getting that sense, Daniel, from the sponsor community in particular that there's more pressure to do transactions during 2024. It would be interesting to hear your views on that.

Daniel: I think we're going to see a lot more M&A-related transactions in 2024 after a pretty lackluster 2023. If you look at the two sources of primary transactions that leverage loan and high-yield market, you've got M&A-related transactions that should get gradually better, but it takes time for auctions to mature. Then there's the refinancing. We've already started seeing in the refinancing space a flurry of transactions hitting the market. I think we should talk about that for our audience because in the US, in New York, it has been a flood of new transactions.

Ben: Yes, no, I agree. I think what's changed very rapidly and, frankly, has surprised us and the lenders is the pace at which we've gotten into a repricing market. So the bulk of last year's volume in Europe, anyway, on the loan side over 70% and on the bond side over 50%. The volumes that we saw, gross volumes in the region last year, those were refinancing trades. The bulk of those on the loan side being just amends to extend transactions where you push out the tenor of your loan by two to three years, and on the high-yield side more pound for pound, euro for euro refinancings of existing bonds, whether by exchanges or ultimately through just cash in, cash out. So that was the bulk of the volume last year. What we didn't see until this year outside of a couple of exceptions in early Q4 last year, were repricings. Which are more of a loan flavour, but those where you've got a loan at E plus 550. You come back to the lenders and say, you know "Bad news today, that loan is now going to have a 450 margin, do you want to hold on to your position or not? That started as you say in size in the US right out of the gates at the start of the year. Europe was a little slower to get started but we've had you know half a dozen of those transactions now launched just in the span of the last several days. We're trying to catch up to what's going on in North America. That I think has surprised us a little bit in terms of how quickly that's come and how aggressively that's come. But I do think for the course of the year now, we would expect to continue to see that base load of extension transactions, refinancing transactions, but now also this latest wrinkle of repricing transactions. Back to you, Nat, as we've got a couple in market and others away from us, what are you seeing and how are the lenders reacting to that new phenomenon?

Natalie: Sure. I mean, Obviously, the lenders prefer a nice new money transaction with a nice juicy spread rather than having margin taken away from them. Although I'd say generally the response has been fairly mature in terms of the fact that a lot of these loans were put in place at a time when market conditions were a bit weaker and the reality is there might be a little bit of whinging around the edges. They want to hold on to the paper and while they in one breath say, "We really wish you guys weren't launching repricings." On the other breath they say, "Do you think there'll be any new money for me to add?" So It feels like the European market environment is very healthy for the names that do have that little bit of excess spread in them. Talking about the refinancing theme, I think the loan market's done a more proactive job than the bond market in terms of pushing maturities out, as you said, last year. We saw huge volumes there. I think it's the high yield market where we're seeing investors questioning why we haven't seen more of that call refinancing activity, which of course if you look at the increase in costs given the interest rate moves, it's obvious issuers would want to wait. But Daniel, are you seeing that mentality shift now that we're into '24 and then also just given the dramatic moves we've seen in terms of where issuers can access? Are we feeling more traction on that side now?

Daniel: Yes. I think we're going to have a very busy year in terms of refinancing in many different guises. From the most simple maturity extension, we've got a lot of debt maturing in the next three years, €280 billion in Europe of leveraged loan and high-yield bonds are maturing in 2024, 2025 and 2026. That's a lot. That's 40% more than on the 1st of January, 2023. Straight refinancing, we're going to see more complicated transactions, potentially dividend recapitalization, debt issuance, funding dividend recapitalization, distribution to shareholders, a fund-to-fund transfer or continuation vehicles. Potentially we're going to see transaction looking to lower the cost of debt, for example, by refinancing second lien into cheaper or lower spread first lien debt if leverage is modest enough. Or why not even refinance a direct lending loan into the syndicated loan market? All these transactions are being considered. We've got quite a pipeline ahead of us. Now, the real question as for a borrower or an issuer of debt is, should I go now or should I go later? Are we at the beginning of a continuous improvement in the cost of debt or are we just in a good window? I would be interested in both your views.

Natalie: Well, one thing I would say on that front is, if you look at what the market's pricing and you talked about how robust the view of where rates cuts are going and how that could end up being a disappointment. If you just look at the Euro five-year swap rate-- So If you look at six-month, which is what it's off of, that's still close to 4%, and five-year swaps are 265. So they're pricing in 135 there. You can capture that when you go to market today if you're doing a five-year deal. So It does feel like right now you have very low spreads. Interest rates have come down. I know there's the expectation that they come down further. On the loan side, if you look at where we're pricing new transactions on a spread basis, it's very attractive, and OID has come down massively. And We're all learning in real time that, you know what, if things get even better with your loan, you can come back later and reprice it at par. Why not go today, especially when you look at where OID has gotten to? I don't know, Ben, if you agree or disagree with that.

Ben: Yes, no, I do. I think the trickier question because again, if you're doing a loan transaction today, you can capture the falling rate either by just waiting for your base rate to fall out from under you if the forward curve is correct, or to your point, you can do a derivative trade right now to capture that forward reduction that the curve is showing. To me, the bigger question is on this high-yield side, because if you look at that component, Daniel mentioned the 40% higher level, which gets you to 280 billion of refinancing required across Europe, across loans and bonds in the next three years forward from here. 175 of that plus or minus is bonds, and the other 100-odd is loans. A lot of that loan bit is about 60% of that 100 billion in loans is 2026 maturity. So the loan market per se doesn't really have an extension need. The high-yield side, on the other hand, that 175, that's a big number that's got to get taken care of. And to your point before, Nat, the bias on the part of the issuers in some cases is, well, I'm going to two-handle, three-handle a piece of paper now, and I'm going to come out now much better than I would have a couple of months ago, but maybe that doubles in terms of my cost-cost of financing. That's really a reason to stop and think and say, "Well, do I really want to go now." Particularly if base rates do come down and I could issue safely in 12 months and capture that lower base rate. But the risk you take to your point exactly is spreads are really tight levels now across the asset classes, and if those start to move wider just because more volume comes or because we do start to hit some of these economic issues.

Natalie: The scenario where your-your rates go down the most is one where your spreads widen.

Ben: Correct. Correct.

Natalie: It should be relatively offsetting from that perspective.

Daniel: Actually, our credit stretches are expecting by the end of the year high-yield spreads to increase more than the five-year bond would decrease.

Ben: Yeah. Absolutely. So our view is bankers being typically fairly cautious by their nature. I think your advice to clients is whether you're capturing the falling rates by issuing a loan. If you're wrong on spread to your point, Natt, then you can come back in 6 to 12 months and reprice tighter if that option exists. You can capture the falling rate curve by staying floating, or you lock in fixed now, and most of the deals that we were doing up to this point have been five non-call too in the high-yield format, so you're locked in for two years. Do you really think things are going to get so much better in the capital markets in the next two years that you're really going to look at yourself and regret locking in now versus taking the chance that whether it spreads going higher, as Daniel was saying, the economy getting worse or just a lot more issuance, which is by its very nature going to drive things wider? Question why you would hesitate to do that now. I think some of that hesitancy though, as we've talked about, is the composition of the high-yield bond market in Europe tends to skew much higher rated in terms of credit quality, and as a result, I think those types of issuers are more inclined to think no matter how bad the markets get, they'll have access, it just could be more or less expensive. That allows them, I think, to take a slightly more complacent view about waiting as long as possible on their existing tightly priced debt.

Natalie: We have seen an increase in partial refinancings to your point around that gives you multiple entry points into the market. We're working on a number of those transactions where the issuer or borrower doesn't want to put all their eggs in this basket. That's, I think, another theme that we'll likely see given that the market's far more attractive than it was over the last 18 months, but rates, you're still looking at doubling, tripling your coupon on the high-yield side.

Ben: Yeah

Daniel: I guess the conclusion is don't be complacent. It's a great market. Let's enjoy it while it lasts. It is probably still a market of windows. So thank you very much. If you've got any question, comment, suggestion for the podcast, don't hesitate to give us feedback through your J.P. Morgan contacts.

Natalie: Thanks, Daniel.

Ben: Thanks, Daniel.

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

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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.

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

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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.

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