Debt Capital Markets

What’s The Deal? | What is the outlook for European leveraged finance markets?

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Daniel Rudnicki: What's the outlook for European leveraged debt market? On the 8th of September, we've concluded the latest edition of the European High Yield & Leveraged Finance Conference in our offices at 60 Victoria Embankment. It's the largest event of its type in Europe. We had this year, 80 presenting companies, 1,490 attendees, and 2,740 organized touchpoints. I'm Daniel Rudnicki Schlumberger, the Head of Leveraged Finance at JPMorgan. With me today, I've got Andrew Crook, the head of leveraged finance sales, and Daniel Lamy, the head of JPMorgan European credit strategy research. Gentlemen, thank you very much for being here with me today.

Andrew Crook: Thank you, Daniel.  

Daniel Lamy: Thank you. Pleasure to be here.

Daniel Rudnicki: Now, I'd like, Daniel, to ask you the first question. It seems we have an emerging consensus amongst research investors that results in our portfolio companies, and the outlook generally, in particular, for default is more benign than was previously feared.

Daniel Lamy: I certainly think that's true. We have been more optimistic on the default rate outlook, I think, the most this year. If you look at corporate operating performance for the past two years, we've seen consistent net upgrades. The increase in leverage that took place after the start of the pandemic has fully unwound itself. Leverage across the companies that we track is back to levels seen at the end of 2019. And more importantly, the pass-through of higher interest rates has been relatively slow. The average coupon in the European high-yield market two years ago was 3 1/2%. Right now, it's only just over 4.1%. And so although we're entering most likely into a more challenging economic period in Europe, the level of distress and default is going to take time to pick up. We're expecting default rates in Europe to normalise, but not to move that high. At the end of 2022, our measure of default rates was a little under 1/2%. It's moved up more recently to 2%. We think it gets to 3% by year end, and then stays roughly that level, or potentially even falls back slightly next year. We have a forecast in the European high-yield bond market for 2024 of 2 1/2%. And I think the important thing to realise is that although leverage is starting to tick up a little bit, and we think that can continue with some of the outsize profits from last year in areas like commodity producers fades, interest coverage ratios are still very high. So c ompanies can quite comfortably afford to meet their interest expense, and the credit deterioration that people have been looking for, we think will take a lot longer to really materialise.

Daniel Rudnicki: Andrew, rather good news for investors and lenders, there seemed also to be a growing developing consensus on rates expectation.

Andrew Crook: I think that's true, Daniel. I think rates expectations have been a core tenet of investor considerations for so long. Investor’s accuracy on their rates call, even for credit, particularly for credit, has been a key determinant of performance. And as you've said, I think that is perhaps changing as other considerations move to the foreground. It was interesting, however, with Stephen Dulake and Bruce Kasman kicking off the conference, several investors noted a sterner rates sentiment amongst J.P. Morgan thought leaders. That was food for thought for investors.  Bruce particularly talked about how inflationary pressures are not yet done, how labour costs can be expected to remain high as unemployment remains low, and that the fading of COVID tailwinds that had been a CB tightening offset may actually start to fade. What does that mean? The Fed might get stuck at 3%, that will require further hikes. Those hikes will compress margins, and that will catalyze the end of the expansion. I think investors understand the narrative to state the obvious, however, increasingly, they think that that's only one piece of the narrative, and that it's potentially unlikely 2023’s business, and that credit is an expensive asset class to be short. So in summary, the immediate threat posed by rates perhaps isn't enough to justify selling. Government bond yields are already high on a post-GFC basis. Subsequent hikes if they do take place, won't take place immediately. And I think a couple of other points of worth making as well, as Daniel has widely reported through his credit weekly note, rates vol. hasn't recently had the impact on spreads, that perhaps historically it has. And with Treasury yields above 4%, which is typically the point above which spreads do become particularly sensitive, that equally hasn't happened this time around. So if there is a broad expectation that we've paused, it's an important consideration. Another point that investors have made is that performance in credit subsequent to that pause is typically very strong. Nelson Jantzen, our head of US high-yield strategy, he's written about this multiple times, in the last five episodes in the last 30 years where the Fed has paused subsequent high-yield bond total returns are actually pretty positive thereafter on a six and 12 month basis. And investors are mindful of that as well. Then the last point I'd make, we are moving from a macro-focused world to a more micro-focused world. Bruce himself touched on that when he talked about very robust fundamentals, as Daniel mentioned, low corporate leverage, lots of cash on balance sheet, especially for IG issuers. Then interest coverage, although it's deteriorating, it's doing so from a very robust base.

Daniel Rudnicki: So Daniel, where does that leave us for short-term activity? How are we doing with the refinancing wall we were staring at, at the beginning of the year?

Daniel Lamy: I don't think there really is much of a refinancing wall. If you look at 2024 maturities, those are below €30 billion, of which the bulk is BB-rated paper, which is the highest rated part of the high-yield market, and so should be the easiest to refinance. In fact, most BB corporates have already quite a lot of cash on balance sheets, so may not even need to issue new bonds in order to redeem those maturities. There's been a lot less progress made on the 2025 bond maturities. Since the end of 2021, there's only been 9 billion of redemptions of 2025 maturity, so very low. We think that that activity is going to pick up quite soon. The amount of bonds coming due in 2025 is €65 billion, which sounds like a lot, but again the bulk of it is higher rated issuers. There's just under €30 billion of single-B and CCC paper, which will be more challenging to refinance, but there's time. If you think that even these 2025 maturities have to be dealt with by the end of next year say, to keep rating agencies comfortable that the companies aren't cutting it too fine, that still leaves you 15 months or so for €30 billion of paper. If we were going back a few years, let's say to 2021, we wouldn't even be worried at all about that kind of volume. So I'm quite optimistic that the maturity wall is not a problem. Now, in the leveraged loan market, companies have actually been even more proactive in pushing out maturities because there's been a little bit more pressure to do that while CLOs who are the largest holders of those loans are able to participate in amend and extend transactions, i.e. to push out the maturity of those loans. We've seen €29 billion of amend and extend transactions already this year, and the maturity wall in the leveraged loan market has been dealt with actually much more quickly than in the high-yield bond market.

Daniel Rudnicki: So an active refinancing market, probably more to do. Are we going to have, Andrew, a receptive investor and lender base for new leveraged loans and high-yield bonds?

Andrew Crook: I think hopefully, as music to your ears, Daniel, the answer is yes. I think we've seen investors grow in their willingness to underwrite and commit capital to an increasingly diverse set of use of proceeds over the course of the year. I think the tone more broadly from investors is reasonably constructive. Now, it is caveated with an expectation of performance for the remainder of 2023 being largely driven by carry and roll-down, rather than spread tightening. With all-in yields where they are, that's not necessarily to be sniffed at. I think the positive tone is driven by a number of factors. Daniel there talked about the maturity wall and the role that that's having in the perceptions around default rates or views on default rates. I pushed and provoked investors on Daniel's 3% call for high-yield bonds this year and 2 1/2% for next year. I struggle to find anyone willing to challenge us on that view and push for higher default rates or an expectation of higher default rates. Maturity wall or lack of and fundamentals are two key drivers of that. Yes, we do have a wall in 2025. Yes, €28-29 billion of that is single B or CCC rated. However, as Daniel said, almost by stealth the A&E process has extended not just middle of the fairway credits in the loan space, it's done so for some other more challenging and esoteric issuers as well, which I think has been well received. We've made the point several times about fundamentals, but combined the expectation from investors is that default rates are going to remain well anchored. I think fundamentals we talked a bit about as well, it was interesting to hear your fireside chat. Listening to your guests, they were talking about their portfolio companies within the business and they were talking about private equity investors, they were talking about top line and EBITDA growing on a double digit basis. They were talking about very material equity cushions. I think that's part of a positive narrative as well. I think the lack of primary, which I think we all hope changes, has been a tailwind as a technical. Let’s hope that we can satiate investor demand there. We've also had a shrinking market which is something that isn't lost on investors. As Daniel said in a number of research notes, the European high-yield bond market shrunk the best part of 15% since 2021. And then fund flows at worse have been benign. We've had a small inflow year to date. Retail flows have been relatively sticky, even in periods of negative total return. Again, that's something that investors acknowledge. Feedback from investors as well, is that positioning isn't particularly stretched. They do have cash, but that said, 5% cash is the new fully invested. They do have cash to deploy, and they are already in waiting. Then I think some of the other challenges that had been part of the narrative, for example, China, and we heard it at the conference actually. There is a lot of news out there, whether it's the notion of real estate debt that defaulted, whether it's the performance of the high-yield index since mid-2021. It's increasingly hard to envisage in investors' minds what that next piece of news flow is that catalyzes a downdraft. Bruce as well said he's more concerned about Europe than he is China now. I think on balance, broadly constructive. The other thing I haven't touched on, and this is something that investors acknowledge is playing a role in extending the credit cycle. It's the role played by private credit and direct lenders, good and bad. I think they've played a role in extending the cycle. They started with esoteric credits that perhaps were poorly suited to public markets. There's been an expansion in the type of credits that they would consider, but all-in, that as well has been supportive as a technical. So all-in investors pretty excited about the paper that, hopefully, you and the team are set to deliver over the remainder of this year.

Daniel Rudnicki: Overall, we've been describing a very positive and supportive short-term environment. What are your worries? What could spoil the broth longer term?

Andrew Crook: Daniel, you go first.

Daniel Lamy: [laughs] Thank you very much. I think my biggest medium-term worry is around government debt and deficits, given that we've come through a period of significant challenge where governments have had to borrow a lot through the pandemic, through the energy crisis in Europe. If you look at the amount of debt outstanding, but also the size of deficits, those are very large. It wasn't a coincidence. I think that when we came out of the financial crisis in 2009, it was quickly followed up by a sovereign crisis. I'm not predicting necessarily that the same happens again, but we have to be mindful that we are in uncharted territory regarding government debt and deficits. 

Daniel Rudnicki: And many of our panelists mentioned that. What about you, Andrew?

Andrew Crook: I have had my thunder stolen by Daniel somewhat there, but I agree. Government indebtedness is one. We started the summer with a US downgrade. There's a huge amount of investor concern in terms of the amount of government debt, and how leverage is no longer a corporate, or solely a corporate and private sector issue. I think election cycles and the potential implications of election cycles is a risk factor that's broadly acknowledged. A number of investors said that had been on their mind, which is the reemergence of populism. We had this period whereby the Western world was exporting democracy and how that no longer is a thing. I think key themes around populism and the lack of accountability, the lack of trust, the lack of credibility, and the potential implications in terms of political volatility,  that's a touchpoint with investors as well. In raising some of those investor concerns, it's clear from my responses that they are all relatively big-picture concerns, and by definition, they're longer-term concerns as well. For the remainder of this year, just to reiterate, I think the focus for investors is going to be increasingly micro rather than macro.

Daniel Rudnicki: Thank you, Andrew. That concludes our podcast, great environment, but longer-term uncertainties remain.

Andrew: Indeed. Thank you, Daniel.

Daniel Lamy: Thank you.

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What's The Deal? | Will Debt Markets Find Their Way in 2024? 

Ben Thompson: Welcome to today's podcast. I'm Ben Thompson. I run the Leveraged Finance Capital Markets business for JPMorgan in EMEA based in London, and I'm very happy to have as our guest today, the Global Head of Public Assets at Barings, Martin Horne. Martin, thanks for joining us today.

Martin Horne: It's a pleasure, Ben.

Ben: Before we dive into a discussion of the markets and the high yield and leverage finance conference, it'd be great for the audience to get a little bit of background on your experience and then as well a quick overview of the size of the global platform for Barings and the kind of strategies that you would pursue.

Martin: I guess the early part of my career was spent like so many in our industry jumping around trying to find the thing that you actually wanted to do. I started on a classic bank, grad scheme, moved for a relatively short period of time into an investment-grade unit that specialised in tax-based financing solutions. It was all very structured and specialised. Then I unusually jumped into one of the big four accounting firms in their corporate finance department debt advisory. Which was useful for me where I am now because it involved advising on securitizations of various forms, record labels, student accommodation, and ultimately leveraged finance which was something that really appealed to me. So jumped back to a bank in an arranging function, one of the German investment banks, and classically did what you've been doing for many years Ben, and arranged debt financing solutions largely for private equity-backed buyouts. And then in 2002, I was approached about this institutional job and I didn't know much about the institutional market. Frankly, it didn't exist in any substantive form in Europe. It had been around in the US for a good decade but Europe was late to the party as ever. And it just appealed to me. It appealed getting into an industry in a relatively early stage, getting into a business in a relatively early stage. I was fairly risk-on as I had no dependents at that time so I jumped into what was a relatively small private equity firm and its institutional debt business. Ultimately, that got bought out by Babson Capital. Babson Capital merged with various other asset managers and became Barings. In that kind of lifespan, I ended up being head of European LevFin, and then global head of LevFin, and then global head of the public fixed-income business. Then ultimately, now global head of the public markets business which incorporates a small specialist equity business as well. It spans from investment grade to high-yield EMDM rates, sovereign currencies. And the idea is that when we walk into a room with a client, we don't just sell them what we have, we ask them questions on what they need and we should be able to find solutions for them. It's all about providing solutions to whatever particular problem the clients are trying to solve at that point.

Ben: That's terrific. Really appreciate the background there and I think you're well positioned, given how many things you've done across as many different types of credit products as you have in the years, because the markets have certainly been an interesting challenging place to be for the last really now it feels like running on four years, starting with COVID. Then on through the invasion disruption that's happened in a banner year in 2021. While it doesn't feel like we're quite back to truly "normal" in 2023, it does feel like the most normal year we've had, at least to me, since the COVID spring of 2020. But there certainly have been ups and downs. With your background and the breadth of the platform, and assuming you agree with my statement, how have you and your team been thinking about the market and where the best places are to be in that market right now, and how you're positioning your portfolios?

Martin: Yeah, it's interesting. When you refer to this year as normal, I kind of think about the last 12 months and I was asked to go and see a very big client of ours, just after June results were out. And I look back over the 12 months from June '22 through June '23. And in that time we had the LDI blow up. We had inflation in double-digit territory in most of our jurisdictions. We went through a winter that everyone was widely expecting to have huge industrial shutdowns. We had Credit Suisse go bust. We had a regional banking crisis in the US. We had a debt standoff. And yet when I look back over all those events, the LDI debacle is still ongoing in terms of its ramifications for the institutional market. There was no risk appetite really whatsoever during those periods because so many things just kept knocking us. The international debate was going on about how does the biggest growth in global yields that we've seen in 30 years really affect economies? And there's still a huge bifurcation of perspectives on how this plays out from soft landing to really bad. You can see that in the way that yields are jumping up and down with every data point that we hit on. So how do I think about life? I look at the market right now and see the high-yield market actually returned 10% over that period with all of those events. And the messaging or the mood music that I'm sensing from clients right now is, "Income is everywhere. That creates various technicals that we have to be aware of. Don't lose me money in this period of time." And there is still a risk aversion in a lot of jurisdictions that we're seeing play out in terms of clients' perspectives. That means, I think, in terms of portfolio positioning, when I think about our franchise, our high-yield franchise, which is the riskier end, we used to make a lot of stock by buying assets somewhere in the '80s. Seeing it migrate to par and getting more of those decisions right than wrong and that's how we outperformed. I don't get the sense that you're getting paid to do that right now. I get the sense that you're getting paid to take the yields opportunities that are there, build a diversified portfolio, know what you don't know. And there's an awful lot what we don't know about the future direction of global economies and position to provide the clients with a predictable level of income that is available to them, that you don't have to reach for it anymore. So I think that's going to build a level of conservatism about certainly what our franchise does, and we'll see how the rest of the market behaves.
Ben: Picking up on that, Martin, as you talk about that search for yield and at the same time predictable returns, have you felt any skew and I know it's a little bit outside of your remit potentially, but have you felt a skew of the end investors as they try to decide whether they'd rather be buying products in the distributed market versus the private credit market, which is getting a lot of attention in the headlines these days?

Martin: Yeah. The bounce has shifted slightly away from privates. Privates have been a really good asset class and contingent to be a really good asset class for investors. You picked up on it in your introduction. We've had so many points of volatility. When you look at five-year performance of most active managers right now that takes in Q4 '18 and you remember that was a bit of a sell-off, the 2020 COVID issues, the '22 rate movements and whatever we're calling '23. So you've had so many market gyrations during that period that actually having an asset class that it just kind of marked near par parrish pays you a level of income. You can put it away in your portfolio and as long as you don't see too much distress, that's kind of really work for clients. And you've seen it's notable that some of the big private equity companies are all kind of espousing the virtues of private debt right now as the next it pays good fees and clients like it. They've seen it perform pretty well through a number of kick points on cycles. The private debt market should pay you a premium to the public markets and that's not so clear anymore. I think in layers of uncertainty, it's a little tougher the fundraising environment in the private market than it used to be. And what you generally have happened during periods like that is the good franchises will hold out and you will find investors are very, very selective around backing the big names that have proven to be more resourceful, more resilient, better credit pickers, and most of the narrative we get from clients about the private markets about picking the right manager. I don't think it's as easy as it used to be, the premium to publics is more questionable and I think yield is easy to come by. Privates real hook if you like, it was a high-yield product in a low-yield environment. Now in a high-yield environment, that's going to change the way people think about the need to reach for risk.

Ben: It's very interesting perspective and the other perspective I'd like to drill into is because you look at the business globally in your role, how do you feel right now balancing the prospects for investing or lending in Europe versus the US? Is there an institutional lean one way or the other? Amongst your peers as well, do you feel that there's a bias toward the US over Europe or the other way around?

Martin: It's really difficult to give a clear and coherent answer to that and the reason being, if you put the positives and negatives of both sides of those jurisdictions against each other, the US is clearly in a better economic state, I'd say overall. You look at where inflation is right now, they've got very low unemployment, the consumer keeps ticking, albeit we're seeing some strain and stress on the edges. On the negative side of that, the US has always been much more risk-tolerant if you look at the average leverage levels in the US market, they're higher. The structural protections you get in US stocks are not good and you're seeing lots of people speculating around the state of restructurings and what happens in chapter 11 and how aggressive dip finances can be. Security and the advocacy around securities is not quite as clear in the US. On the flip side in Europe, more conservative generally speaking and we're certainly seeing some of this through our special operations and capital solutions teams where there's much more tolerance for higher level deals in the US and much less in Europe. mMakes it your job a bit tougher, I think. And you get less jurisdictional certainty, as you know doing a distressed transaction in France comes with a huge number of pitfalls you probably want to avoid but the structural protection is almost certainly greater. The inter-creditor rights have been somewhat sustained. I wouldn't go too strong in this point but certainly when we put a US dock next to a European dock and the protections you get, you're in a different place. All that rambling leads you to a point where it's not clear-cut. You're not necessarily getting a huge spread differentiation between one or the other. Yields are on top of each other, not quite but from a historical perspective they're certainly closer than they've ever been in our recent history. I think today's market is all about picking your situations in both and really taking your time to understand how you want to position your portfolio given all the macro uncertainties that are out there. 

Ben: Super, very helpful. Against that backdrop, what is the outlook for 2024? Broadly speaking, more positive, more negative, still have a ways to go. I would just love to get your insight and how you would suggest that your managers and others navigate what is still a somewhat an uncertain environment.

Martin: Yes, I think as with so many things in our recent history, there is no precedent to where we are because the rate movement we saw should tell you things could get pretty bad. But the unemployment level we're seeing in a lot of jurisdictions actually seems to be underpinning a level of economic performance that none of us were expecting when we got to the start of this year. I saw some reasonable research that tells you that a rate movement takes six or seven quarters to come through and really start to erode a company's earnings. And again, that kind of fits with what we're seeing in the current earnings profile. The forecasting that we're seeing from most businesses, which means we're going to find out how deep this can go in the next few quarters. All of that leads you to be somewhat cautious about 2024. There's also a decent level of refinancing that will have to be done in '24 and we've kind of avoided that. The new issuance market has been pretty light, people aren't going into the market unless they need to. They don't want to necessarily hook in these yield costs for too long a period. Certainly, in the lower rated end of our marketplaces, I think 2024 is going to be largely dictated by one, an economic outcome that is still highly bifurcated from not that bad to actually could be something that we're going to be concerned about. It's going to come up against a 2024 refinancing needs that we can't avoid any longer.  History tells me to just get slightly more positive that markets generally find a way. 2020 was a great example of that, where you had the largest industrial shutdown since World War II, and yet, we found a way to fund businesses on basically zero earnings. We put cash at the top of a capital structure and saw them through. History tells me that we'll probably find a way to meet most of these refinancings. A big question mark in my mind is, how much of the private equity landscape will just be let go because it doesn't make economic sense for the PE sponsors to kind of follow through with any kind of refinancing assistance. There will be those names where they just look at it and economically think this doesn't make sense for us anymore to hand over the keys. That will lead to inevitably a spike in restructurings and defaults, whether or not it means investors lose a lot of money from it, that's a different question because there's ways to approach those markets. But it's certainly going to keep us on our toes and there's certainly a range of results that you could see from '24.

Ben: Thanks very much for that, Martin. And shifting now to the conference which will be held here next week in London, it seems like a great time to get all of the participants in the European leveraged finance market together. Both issuers and borrowers and lenders and investors to come together to discuss and chop through some of the things that you were just touching on around the trajectory of results and the challenges that we might see in 2024 in the financing markets. So with that as backdrop, I know you've attended this conference many times yourself as have many members of your team. Can you just give us your perspective on the importance of this conference to the European leveraged finance community. We'll be having over 1200 investors and lenders attending as well as almost 90 presenting companies? Can you just give us your perspective on the value of that to the community?

Martin: There were a couple of really relevant bank-facilitated conferences and JP is definitely one of those and there's two things that will be somewhat obvious. One is, your access to the big lenders, the big companies, and to compare and contrast what managers are telling you. When we think about the macro issues that we faced certainly in 2022 where Central Banks lost their way, is that they kept looking at the theory that made sense to them and stopped listening to people that run businesses. And that was this team transitory really getting it wrong in terms of where inflation was. These conferences are the ability to listen to people that actually do the work, see the demand curve, think about how they're going to invest their capital or not in CapEx, what their inventory levels are being set up for this demand profile that they're seeing. It's crucial that you take advantage of these. Compare and contrast the messages you're getting jurisdictions will give you different results, I'm sure, and certainly, some of these bellwethers are going to be crucial to setting our expectations. The other part of it that is really important is to understand what your peers are thinking because it doesn't really matter if you disagree with them or agree with them. They are going to set a tone and they are a force for the way that capital will be deployed over the coming years. Having that access to your peer group and making sure you understand their thought processes and how they're going to approach things like this refinancing what we all know is there. That's going to be crucial for us going forward and can really set the tone for the market in '24.

Ben: Super. With that, Martin, I'm out of questions, but I would like to thank you very much on behalf of JPMorgan for joining us on the podcast today and look forward to seeing you and many of your team at the conference next week.

Martin: It's a pleasure, Ben.

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What’s The Deal? | Tech Financing: A Goldilocks Scenario?  

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Kathleen Darling: Hello, and welcome to the podcast. I'm your host today, Kathleen Darling, a member of our debt capital markets team. I'm excited to have with me today David de Boltz, a managing director with our leveraged finance capital markets team, covering technology, to discuss the current financing activities being seen in this sector. David, great to have you.David de

Boltz: Thanks, Kathleen. Delighted to be here.Kathleen Darling: Before we start, can you walk our listeners through your background and roles held at JP Morgan?

David de Boltz: Yeah, absolutely. So I've been at the firm now for over 12 years, across multiple different roles, London, Luxembourg, New York. And since 2017 I've worked within the leveraged finance capital markets team in EMEA, covering technology, media, telecom and automotive sectors. And then purely switched to focusing just on the technology sector in New York for the last couple of years. If you think about the technology sector, it's around 15% of the leveraged finance markets, but from a selfish perspective and what I cover, I think it's the most exciting and fast-growing part of the leveraged finance space. And we work with companies across the spectrum, so think about it from early stage, negative free cash flow names, all the way up to pre and post-IPO, and all the way through to mature, large 20 billion plus tech companies looking to access the capital markets.

Kathleen Darling: Fantastic. To kick off, can you give an overview of what activity is being seen in the US leveraged finance markets related to technology? Specifically, it would be helpful to understand the market dynamics unfolding now.

David de Boltz: Yes, absolutely. So to understand where we are now, it's worth quickly recapping the year what we've had in the technology space. So we came into the year with a clear pivot from the VC world all the way up to the public companies that the tech sector needed to pivot away from a growth at all costs to bottom line profitability. With the expectation we had of rising rates, the debt market was taking a very bifurcated approach between what we say, the haves and the have nots. And that really came down to the positive free cash flow companies, to put it very simply, having access to the markets, and the negative free cash flow companies, obviously having more difficulty coming into the market. And then we had the regional banking crisis bubble up, with tech at the very epicenter of that with the Silicon Valley Bank. And as a result of the volatility, we saw rating downgrades across the technology space. And just to put that into some kind of perspective, we saw a very sharp move in the cost of borrowing from technology companies from around the mid 8% all the way up to over 10% in only a two to three week period. So it's an incredibly sharp uptick in the cost to access the markets. And it was really split between the haves and the have nots, if they could access the markets in its entirety. So naturally at this point, we saw direct lenders actually take a significant market share away from the banks in the tech space specifically. And many of the tech private transactions were financed away from the banks in Q1. And again, to give you some perspective of the magnitude of that, 65 technology deals were financed by the direct lenders in the first half of the year alone, which is obviously an incredibly busy part of the market. But bringing you right up to the present day, demand from institutional lenders has actually snapped back so significantly that banks are now willing to enter into firm commitments with the expectation of being able to syndicate the term loans to institutional lenders. And the actual average price of technology loans has increased nearly three points since effectively late March. And that is a huge movement in the markets. 

Kathleen Darling: That's really interesting, can you tell us more?

David de Boltz:  It's down to two points. Point number one is the macro. The combination of this so called recession being less severe than previously expected. And then inflation under much more control. And then you have central banks pivoting, or the clear pivot coming in the coming months. So you have that on the macro side. And in the second side is really the technicals. You have the technicals in both the loan market and the high yield market. And when we talk about the technicals, we really talk about the supply and the demand in balance that we're starting to see from the market participants.  The fixed income markets is a self-healing market, with interest payments, coupons received. And they really have not had that much to spend that cash on. And to give you perspective on that, the total financing activity this year is 70% refinancing. So very little new opportunities for institutional lenders to go and lend into. And what that means is with cash naturally building up, and supply being so low compared to where we've been in previous years, that's really creating this Goldilocks scenario, where ultimately that cash needs to be spent. And so we are seeing that any new opportunities that we're bringing to the market right now are being incredibly well received compared to only two, three, or even four months ago now. 

Kathleen Darling: You mentioned there needed to be a pivot away from growth at all cost, given the changing landscape in the macro and interest rate environments. Can you expand on this point? If it's the case that investors and lenders are still factoring in a potential recession, how has this mindset impacted the willingness to put money to work? Is the preference still to deploy capital for higher quality, profitable tech names?

David de Boltz: Yes, you're absolutely right, Kathleen. So investors in high yield bonds and lenders in leveraged loans are still very much concerned around the aforementioned potential recession that we could see over the next 6 to 12 months. But they're also incredibly focused around the Companies that have over levered capital structures, who potentially have refinancing risk, or may need to come back to the market in the near future and raise more capital. So over the last three months alone we've seen 34 downgrades to CCC across both high yield and leveraged loans. And respect to leveraged loans especially, CLOs are actually trying to navigate proactively away from the capital structures that are starting to see pressure, to go down into the CCC territory. And actually what you see is a mini flight-to-quality amongst leveraged loans. The flight-to-quality that we typically see is sometimes from equities into gold, or from high yield into investment grade. But it's a lot more nuanced than that in the leveraged finance side. What we actually see in loans is the navigation from B3 rated loans all the way up to B2, which sounds very small but it's a massive difference in how CLOs can actually treat that capital as part of their lending thesis. And that's where we're seeing a large divergence right now in price. So the haves versus the have nots, you're seeing a huge divergence in price between those names that are performing, and ones that are not. With respect to the leveraged finance markets, I will say those companies who were negative free cash flow who probably didn't have access to the leveraged finance markets in Q1 or the early part of Q2. They're starting to now have access once again. So lenders and investors from hedge funds, to real money mutual funds, they're now starting to see what other opportunities there are to put some cash to work, and that ultimately leads to them going down the quality spectrum. And to the negative free cash flow tech names that's actually potential... we're gonna start to see that coming back into market again.

Kathleen Darling: Refinancings. We have started to see a theme of lenders willing to lend at par, or even above par, for high quality names. Can you talk about what is driving this? And if you expect this trend to continue now that north of 50% of loans are trading in the secondary market above 99? And to put this into context for our listeners, we have not seen this trend since April of 2022.

David de Boltz: Absolutely. So this really emphasizes the previous question. There is a trend developing around the higher quality companies, where they're seeing a significant amount of cash and demand effectively chase all of the same opportunities. So you think around the demand in the system and the lack of new names coming to the market. Ultimately, that leads to the cash all chasing the same opportunities and this Goldilocks scenario right now where the mini repricing wave is just starting. And we've seen a number of tech borrowers actually borrow and cut their spreads on their leverage loans in the most recent weeks, which again, as you mentioned, hasn't been seen for quite a while in the loan market. The more exciting outcome of the secondary levels improving so significantly is that many companies can borrow for small add-ons, whether that's to fund general corporate purposes, or to even just replenish RCF drawings, when previously the upfront costs associated with coming to the market were so significant that the companies were shying away from coming to the market at all. So very much right now, the change in price is given not just repricing opportunities, but borrowers can now come back to the market and raise various different forms of lending activity, which is, again, three to four months ago, a very different place to where we are right now. 

Kathleen Darling: Moving from refinancings to M&A, the current underwriting M&A pipeline remains pretty subdued, with approximately 50 billion of committed financing. As we think about strategic and sponsored capital that is looking to be put to work, can you talk about what M&A financings you're starting to see? As well as the appetite for larger underwritten holds?

David de Boltz: So, to put that 50 billion into historical context, at this point last year the streets underwritten bridge book, so the total amount of underwritten risk on the banks, stood at over 100 billion. We've cut that in half. And that really isn't a significant number, and that's not difficult for the market to digest. So very much it's okay. And given the fact pattern, it is our view that the market is firmly open again for transformational M&A and LBOs once again. We're actually starting to see activity really pick up in the background. And we actually, as a bank, underwrote over 8 billion of financing in the payment space in the last couple of weeks. So were really starting to see that activity pick up once again. And I would say the demand for transformational large cap M&A, is definitely back on the table. And lenders and investors are all very excited to put that cash to work in these large companies. I think what we're starting to see, finally, is a match between the buyers and the sellers on the M&A side, which is then funneling into much more activity in the leveraged finance markets. And ultimately what people want to see is that supply and demand balance kind of rebalance effectively, so we're not gonna see this repricing wave continue. Everyone's very excited to see this.

Kathleen Darling: Last question, David, as we would be remiss without inquiring, artificial intelligence. We are certainly seeing the impact in the stock market, with seven tech issuers tied to AI leading the charge in returns. Are we seeing the AI impact in the debt markets as well? Or are we still in too nascent of a stage to gauge this?

David de Boltz: Yeah. This is almost the first question that we're starting to see from lenders and investors, whether it's in an update call, or whether it's at a conference, AI seems to be on the touchpoint of everyone's lips right now. And everyone wants to know what companies are doing about it, whether they are effectively trying to mitigate those risks form just being disrupted, their business model. Or now we're starting to see them actually think about their opportunities and how they're gonna take advantage of this. We're even actually seeing it added to the risk factors in the offering memorandums as well. So there's no shying away from the topic, but for now the market is very focused on a lot of what ifs, rather than taking investing views based on the AI wave. Venture capitals are still working out which horses are the right ones to back, whether that's in the infrastructure, the date centers, et cetera, or the actual providers. So we may see some new subscription style models coming out in the near future. And we're not gonna see these Companies come to the leveraged finance market in the short term, but I think it's safe to say in the medium term we're gonna see a wave of the AI backed technology firms coming to the leveraged finance markets pretty soon.

Kathleen Darling: David, this has been a great conversation on what we're starting to see in the technology sector as it relates to the leveraged finance market. I think we'll very much be interested to see where this trend continues going forward. So thank you for joining us.

David de Boltz: It's going to be an exciting few months. Thanks for hosting, Kathleen.

[END OF PODCAST]

What’s The Deal? | M&A and LBOs: Financing Trends Across the Leveraged Capital Markets 

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Kathleen Darling: Hello, and welcome to What's the Deal. I'm your host today, Kathleen Darling from JP Morgan's debt capital markets team. I'm excited to be joined by Todd Rothman, managing director of our North American high yield and leveraged loan capital markets team, to discuss the 2023 activity being seen across M&A and leveraged buyouts. Todd, welcome to the podcast. 

Todd Rothman: Thanks Kathleen, great to be here, really appreciate you having me.

Kathleen Darling: It would be great if you could share with our listeners your background at JP Morgan, both in the US and abroad.
Todd Rothman: Sure, so I'm a lifer at JP Morgan. This July will mark 24 years. I started my career in our Global Syndicated Finance business in New York, ultimately moved to London in 2010 for what was supposed to be two or three years, ended up staying 11 and a half years. Came back to New York about two years ago now. I started my leveraged finance career on the origination side, I moved to the capital markets desk about seven years ago. Earlier in my career as an associate, I actually spent a year in our Natural Resources IB Coverage team where I focused more on equity and M&A. So those are areas that are dear to my heart as well.

Kathleen Darling: That's great. Turning to this, the M&A pipeline was quite dismal in the back half of 2022 and through the first quarter of 2023, as we saw uncertainties from geopolitical events, Central Bank rate policies, US regional banking turmoil, and just an overall economic slowdown, which really put an element of uncertainty into markets. As some of these factors begin to abate, can you talk about the activity you're seeing in the leveraged finance capital markets for both M&A and leveraged buyouts?

Todd Rothman: Sure, so I think before we dive into what the world feels like today, it's helpful to take a quick step back into what the world looked like in 2021, pre-Russia/Ukraine. So, if we go back to the 2021 period, that's when we hit a post-financial crisis peak with 105 billion dollars of underwritten loans and bonds in the US market, 141 billion dollars globally. Now, if we roll the clock forward to today, those numbers are roughly 43 billion dollars for the US, 52 billion dollars globally. And if you strip out some of the more corporate style 364-day bridges in there, the amount of paper that's actually going to come to the institutional debt markets is a lot lower than that. So, comparing that to the amount of cash that's sitting on the sidelines, it's really a blip on the radar that isn't going to make a dent. The good news for companies who raise capital today for M&A, whether it's LBOs or on the corporate side, is that we are continuing to underwrite new transactions in the modern world that we're living in. Whether it was the regional banking crisis earlier this year, or any of the other macro events that have taken place. I think the big difference that we've seen in 2023 versus what the world looked like pre-Russia/Ukraine is really the structure of what those deals look like. So, the LBOs that we've seen so far in 2023, common themes have been equity checks that have been north of 40%, credit profiles that are more defensive in nature that the buy side can take a view, will be a lot more recession resilient depending on what your view is on a potential recession later this year or next year. Lower leverage, versus was a credit really could support, versus where some individual credits had been rated historically. And then ratings are the other factor, whereas in the past we would do a lot of LBOs with B3 ratings, today it's really been strong single B or worst case mid-single B, that we're solving for.

Kathleen Darling: Todd, thanks for covering the landscape over the past two years. Maybe can we talk a little bit about what's next for 2023?

Todd Rothman: So, in terms of what we're looking for to see momentum change in the way of M&A financing and LBO financing activity, I think there's really two things that management teams, boardrooms, and the buy side are really looking for. One of those is a better feel for the form and the timing of any type of recession, whether that's later in 2023 or in 2024. And the second thing is a clearer path on the actual horizon for when rates stop hiking, when we actually see rates flatten out, and when people can genuinely believe that rates are going to start getting cut. Putting those two things together is really what we need to get more equilibrium between what buyer and seller valuation expectations are. That'll also lead to more robust financing activity that's possible to fund those larger transactions.

Kathleen Darling: On a previous episode with Brian Tramontozzi, we spoke about cash balances remaining strong. Do you expect more of these cash reserves to be deployed for M&A, or do you still think there's an underlying cautious tone from both investors and lenders?

Todd Rothman: So, similar to what I talked about in terms of underwriting activity, I think the buyer side's operating under a similar set of parameters. So, I think that the money is out there to fund new transactions. I think really what we're seeing is the buyer side pick their spots for the credits that they like, the deals that they feel have been well-structured. So, cash balances in the high yield market remain quite strong, just under four percent. The loan market technical has gotten a little more challenging, but again, for the right deals we've seen that market show up in good size as well. Part of what's driving that is what we've seen in terms of CLO issuance this year, which right now is down year over year, $54 billon this year. Last year, we were at $73 billion. When you combine that with the fact that you have a large portion of the CLO market that is continuing to roll past its reinvestment period, we are seeing the availability of dollars and euros shrink from where it has been previously. And that's part of why we really encourage investors and lenders do two things from an issuer and borrower standpoint. One is for those that need to raise capital, the strong advice is to go take advantage of the money that's available out there now and refinance debt that's coming due. Not just in 2023 and 24, but also in 2025 and 2026. Part of that as well, we often talk about new money transactions being, new M&A financings, new LBO financings. But what we're seeing in a number of these term loan refinancings in particular is that not every existing lender is capable or willing to extend their maturities and roll into a new deal. And so, some of the new money that is available on the sidelines today is being used as part of that refinancing activity. So, I think the message is that the loan market will continue to be challenging for larger size in the near to medium term. For the right credits, the market is absolutely there for folks. And I think what this means as well is that also accessing the bond market, also considering to access the European market for credits that aren't just US but more global in nature, are going to continue to be more important.
Kathleen Darling: You opened up the podcast saying 2021 was a notable year for M&A and leverage buyouts. With many of these transactions being funded majorly with debt, as rates have increased, resulting in more expensive capital, how are you seeing companies assess pro forma capitalization for these acquisitions?

Todd Rothman: As I talked about before in terms of what the prototypical LBO looks like in 2023, part of the way we're adjusting that very problem is lower leverage. So, a deal that might have been able to be levered at six, six and-a-half, seven times two, three, years ago, today we're doing that deal, a turn, two turns, three turns lower leverage, in part because of investor and lender caution given the economic uncertainty. But also, because interest rates are simply higher, companies can't support the same amount of debt that they were able to before. I touched on the loan market technical and how that part of the equation has been a bit more difficult this year. Part of the way we fill that void has been introducing secure bonds a lot more into the equation to help raise the amount of debt capital that companies are looking to put on the balance sheet. One thing we have not really tested yet, though, is the market for triple C unsecured LBO bonds. There have been a couple of successful refinancings of that ilk so far this year, but I think that's really going to be one of the key components to unlocking more LBO activity in terms of being able to get a little more leverage and be able to stretch a little bit more in valuation versus where the expectations are for people that are selling their company, whether they're publicly listed or held privately today. This year we've seen very little in the way of junior capital, whether it's subordinated bonds, unsecured bonds, second lien loans, that have come to market. In fact, only $5.1 billion of unsecured paper has been underwritten so far this year, which is about 18% of total volume. That's down substantially from where things stood pre-Russia Ukraine.

Kathleen Darling: Great. And where exactly does private credit play in here?

Todd Rothman: So, we talked about secured bonds and also accessing the euro market as a way to find incremental capital to fund leverage buyouts and corporate M&A. Private credit has been another avenue that's been utilized. I'd say that's been a bit more prevalent in the middle market space. We have seen it in a couple of larger scale LBOs that have come to market. What's interesting, though is as the market has improved over the course of 2023, we've actually seen financial sponsors see the merits of refinancing those private credit deals in the broadly syndicated loan market due to their lower costs, being more scalable in nature over the course of time, and ultimately more borrower-friendly terms.

Kathleen Darling: Going off the overall structuring that we're seeing for these deals, there's also the documentation element. Can you touch on the trends you're seeing there as well for deals getting done in 2023?

Todd Rothman: What we've seen from both BOND INVESTORS AND LENDERS this year really has been an increased focus on, how do I protect myself? We continue to be in an environment that has macro uncertainty, the risk of recession coming, an expectation that default rates are going to continue to rise in both the loan market and the bond market. And what you're seeing is lenders and investors really dig more into the documentation and figure out, what loopholes are there that could be used by a borrower or by an issuer that could potentially dilute the recoveries of a secured lender or bond investor today? Whether that's moving assets to unrestricted subsidiaries, whether that's raising capital at non-guarantor entities. And so, you've seen a lot of focus on the proverbial protections like for Chewy, J. Crew, Serta, and Provisions. And that's really been the focus that we've seen from the buy side.

Kathleen Darling: Todd, this has been great. We touched on a lot, from M and A, leveraged buyouts, documentation, overall structuring, and the trends that we're seeing from 2021 versus today. I think it'll really give our listeners a lot to digest, it was an absolute pleasure having you today on What's the Deal.

Todd Rothman: Kathleen, really appreciate you having me.

[END OF EPISODE]

What's The Deal? | Given rising recession risk, how will capital markets play out?

[Music]

Stephen Dulake: hello everybody. My name is Steven Dulake. I'm responsible for credit research to securitized product research and public finance research here at J.P. Morgan. I'm joined today by Kevin Foley, our global head of debt capital markets here at J.P. Morgan. And this is the latest tradition of what's the deal where we're going to focus on, recent market developments from a capital market perspective and what it means for companies, their balance sheets and their liability structures, going forward. We've seen interest rate volatility and market volatility previously, but certainly some of the scale of the moves that we've seen across various asset classes. What is the art of the possible and, and what can or can't you get done in capital markets today?

Stephen Dulake: And I guess the look back period here would be to, you know, naturally 2021, when it felt like capital market conditions were much more competitive. And the subtext to that I wanted to ask, um, in particular how tough or not it, it is right now for, cyclical businesses and digital growth companies, to raise financing. So over to you with that first question, thank you.

Kevin Foley: Thank you everyone for joining and listening to this podcast. 

Kevin Foley: When you look across both high grade and leverage finance, we've come off an incredible refinancing wave over the past few years, and you saw fortifying a balance sheets pushing out a maturities across  the markets and covering off record volumes. That there's not a lot of people that have to be in the market, right. There is a much more opportunistic and with rates moving, some people have locked in low rates that pushed out the maturity, not a reason to be out there.

Kevin Foley : You're gonna be more tied to M&A activity or investment projects that just have to be done right now. And you're just gonna accept that's where the cost of doing business is. We're seeing a lot of pressure, uh, and the loan market in terms of just the discounts. And that's heavily driven by the fact that secondary markets have traded well off. And if you can buy something at a discount, and you're looking that compared to a primary issuance, you're gonna wanna see a similar level of discount. And that's helped drive total return from a lender's perspective in the loan market in the bond market right event, usually gonna come down to total yield. We've seen the high yield index to give some context to listeners that the J.P. Morgan global high yield index, sits at almost nine and half percent today, the 52-week low on that was four and half percent.

Kevin Foley: The hardest thing for any lender or investor to price is a level of uncertainty is, what is the timing for the recession? How deep will the recession be? Do I have more downside and where secondaries are trading and that makes it the hardest environment for someone to go out and step into a new issue? Having said that we are getting stuff done, it is taking some surgery of tightening up terms. It is widening out on price, but people are deploying capital. To your question about credit quality and the nature of the credit.

Kevin Foley: Certainly, there is a favor towards stuff that people feel like they have a good of how it is going to cycle in a downturn. It's got history in the credit markets that helps, but they really do want to understand what is going to be the impact in a slowdown. And that's obviously favoring certain credits versus others. I think we're also seeing that come through of way people think about leverage, cuz some of the discounting that we're seeing in the primary market is based on here. This is just too much leverage. And their price is getting driven by the fact that they view maybe that's a quarter, half term, too much leverage given where we may be going into. So that is heavily driving investor behavior and lender behavior today. I think that is here for the foreseeable future.

Kevin Foley: We've got a fair amount of supply that's out there that still has to come to the market to clear, and we're going to work through that over the next three or four months, and that's gonna heavily dictate where other things will come. I think the other thing that's a little bit of a challenge right now is doing things in size. Because of these dynamics, when you start to get into your bigger size deals, obviously you can't afford to lose many in the market when you start to get to some of your jumbo deals. And that makes it tricky. So there's a lot of behavior there that I think we have ways to play out over the next few months.

Stephen Dulake: Thank you. I wanted to move on to ask you a little bit about the sort of private credit space and more from the perspective of the repricing of public markets that we've seen. And, in your opinion, to what extent does that raise the attractiveness of public markets relative to private markets when we've been in this world where there's been this huge focus and alternatives including, private credit markets. And does that also mean you think that some of the sort of in the broad sense is now becoming much more fungible or become much more fungible across the public and private arenas. 

Kevin Foley: Yeah, take the last one first, because there's definitely been increase of fungibility, uh, in seeing that money move around and we're seeing a lot of direct lenders come into our market. So, the waters get pretty muddy as you get a mixed, a cross section of investors pretty quickly. When you look at a lot of those who may define themselves as direct lenders, they've been lenders we've been partnering with, for years in buying stuff and broadly syndicated. And they just have different pockets. In terms of where we were at the start of the year. And all of 21 was direct lending in general, was wider pricing to where the broadly syndicated market was. And when people were choosing to go down the path of a direct lender route, they were forgoing the auction process and they were leaving money on the table, frankly. They were pricing on something wider for, perhaps there are the view of maybe simplicity, or less of a hassle, not so sure if speed would be an argument, but some may make that argument that it was a little bit faster.

Kevin Foley: What has happened over the past month is, as the broadly syndicated markets pricing has widened out that dynamic has flipped with private is actually cheaper right now, but I think that's a factor of, they've been slower to adjust their pricing. So I think that's a combination of things that will happen there as, some people may go explore private, that's going to take pricing down and wider. You're also going to see some of the direct lenders where saying they're seeing opportunities because of your point of coming over into the public markets. They're seeing better opportunity there and deploying capital there. I think that is a temporary dynamic that's working itself through. I still think we revert to what, what I'll call is the norm, where public is always going to be cheaper than private, if you look at pure supply demand dynamics. 

Kevin Foley : I think this is a unique situation right now, and I think it is gonna start to line up over time. And then as we get some stabilization in the market, we don't necessarily have to go back to where we were from a pricing standpoint, more just stabilization and less volatility. I think you start to see the broadly syndicated market, that auction function kick in again and come inside private again.

Stephen Dulake: Kevin, what I wanted to talk about how are you thinking about the interaction between declining stock prices and equity market multiples on the one hand and wider spreads and all in higher financing costs? How, how is that likely to inter influence management teams thinking private equity thinking and what are we likely to see, over the next six to 12 months as a result in, in capital markets?

Kevin Foley: So, a couple things in there. First, I'd say that the credit markets were definitely slower in responding to the pullback and the equity markets, right? When the start of the year, the equity selloff was heavily driven on your higher growth names. Maybe they were a beneficiary COVID to just your higher, multiple tech names that were just viewed as lofty valuations and pulling back on that. And that that's really where we kind of played. And it felt like in the first quarter and, credit was more resilient even with the tech names that we had in credit, they were more resilient because their view was there was such high multiples on that, those names that you still had a lot of equity cushion when you were looking at the leverage in the tech space in our markets. As it progressed, obviously if the selloff has broadened out, as the concern has shifted much more to the inflationary pressure, if their central bank's gonna be able to get that under control quickly, they're gonna be able to do that in soft landing or not, that has broadened out.

Kevin Foley: And we've had a significant valuation correction. What we are getting a lot more inbound because you're right, that people, whether it's a management team who's looking at, hey, my stock is undervalued, to sponsor saying, well, great stuff that I was looking at six months ago was a lot cheaper. I think the challenges there is a couple things. One, if you look at a sponsor who may be going into a company, they're still looking at what their 52-week high was on evaluation, whether it's a public or private company, and they're still working through the emotion of here, I'm not going to get what I thought I could get X number of months ago, and I've gotta adjust my expectations on valuation. We generally will think if you talk to our M&A colleagues, they'd say that kind of could be a six-to-nine-month process of kind of working that through.

Kevin Foley: We are starting to get some more inquiries from just a public publicly traded entities who a CEO is looking at. What's happened to their stock and say, my business is still performing well. The growth, projections still feel good, saying why can't I think about doing something because it feels like the market's not giving me full value. That gets into then all right, how much debt can you raise? And when you start to get into some of the constraints right now with the downward pressure on price, so working through that and saying here, what is the art of the possible? It is not the same art that we had a couple months ago in terms of size. I think that's a temporary dynamic. I do think as we start to settle in that size will grow.

Kevin Foley: So those opportunities will be there from a sponsor standpoint, who will tend to be doing a little more financial engineering about how they think about the capital structure and what leverage they can put on it. Valuations coming down is good from an opportunity to buy, but it also probably means leverage is coming down. And you're also looking at your cost of capital is going up. And so, how's that impact your returns. That also is a process to work through. There's still a fair amount of inquiry and we're having discussions and, I'd say is it the same level of activity that we saw a few months ago? No, but there are things still happening and then I obviously think you have to be more selective because it is going to be favor the more defensive businesses where people feel comfortable about how they're going perform in the credit markets, what can get done.

Stephen Dulake: Thank you. You alluded to, sort of change in, loan market conditions. And I sort of wanted to push you on that a little bit more in terms of how you are thinking about loans versus bonds or bridge books and some of the commitments that firms have made and the discounts they need to offer to bring those deals to market. There's obviously some conversation, around CLO warehouses, as you mentioned, constraining CLO formation. So how do you sort of wrap all those things together and assess loan market conditions and your ability to get things done in the loan market versus the bond market.  If you can share some of those flavors of those conversations that you're having with potential issuers right now?

Kevin Foley: So the loan market is facing the dynamic, as you mentioned, the CLO formation being muted, Because you're just not getting that new money coming to the asset class. What was viewed as an asset class that was the attractive because of rates going up is not seeing the same inflows because 60% of that market is CLO driven. So that's a key factor here, despite the fact that rates are still expected to go up, and this is your largest floating rate asset class to deploy capital. The other fact, that's having a, impact on loan pricing and putting downward pressure on issuance prices, not necessarily on a spread, meaning having to a heavy discount from that secondary market we talked about earlier about where those things are trading is putting down with pressure, but there's also an overhang of paper to come.

Kevin Foley: So there's 90 plus billion of underwritten paper on the street right now. It's probably concentrated with five or six deals that are 50, 60% of it. Those are some Sable deals that the market is going to look as litmus for where we are and where things can get done. You will see some people holding back from deploying capital from a lender standpoint of saying, I wanna see where some of that stuff gets done, because that's really gonna be a defining moment of where the market is in pricing. So I think there's a little bit of, let me hold back and see how things develop before I put a ton of capital the work. I think that's gonna be a good opportunity for me. So I'm gonna maintain the dry powder.

Kevin Foley (21:20): Those things are being a bit of an overhang. I think it puts a little bit of a lid on where the market, if we were to get a rally, it puts a little bit of lid on the market of how it can rally because that overhangs gotta come. We think that's largely going to play out over the next three to four months. The biggest one being Citrix, which is expected to come over the summer season, um, you know, Twitter is out there a little unclear exactly when the outcome, and there's a number of other deals that the market is anticipating. The other thing just related to the underwrite pipeline, when you look at that underwritten paper today, it represents two, three percent of the total outstanding market. So, it's a very manageable level. And if you think on average an investor, or lender's gonna kind of run it 5% cash balances, the market can digest that, that becomes a pricing exercise. You have to figure out price is to clear that, and that may not be a positive for banks who are holding that paper, but it will clear in a price and it will move on. 

Stephen Dulake: Thank you. My last question, I wanted to sort of hone in a little bit on the sort of cohort of, let's say big companies that have liquidity on balance sheets. And there's obviously a lot of, term d’jour is liability management and the extent to which these companies should be tendering for, they’re deeply discounted debt in some cases. And whether companies should think slightly differently about their deeply just discounted debt, and they should consider it as a little bit more of, um, an asset to have in, in their capital structure. So how do you see the balance between those two things?

Kevin Foley: Yeah it's an interesting dilemma because what I'd first say is for any of our issuer clients, we should be having the conversations about where your debt is trading and the ability to, pick up some of that in the open market and potentially retired at a significant discount. It will come into an interesting discussion of here. I, issued at something that was a very attractive rate, that arguably over time could look even better if we believe, where rates are going and say, do I wanna forgo this unique opportunity where things are selling at a discount and, retire some of that in lieu of just locking in that long term capital. And I think obviously that is gonna be in the, the eye of the CFO or treasurer capital markets person.

Kevin Foley: Whoever's making that decision of saying here, this is the right move for me longer term, but I think the bottom line right now is that you need to be looking at it because there are significant discounts there. Uh, at the very least you should understand your options. The discussion has to be had because the opportunity is there. Obviously we don't know where markets are going. This could be a fleeting opportunity, unless gonna be an opportunity that goes lower too. So we'll see. But I think that's something we should be having conversation with all our clients.

Stephen Dulake: Thank you, Kevin, thank you for your time. And that concludes, this edition of what's the deal. Thank you very much for joining us.

Kevin Foley : Thank you everyone.

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