NEWS

According to Bloomberg, JP Morgan has set aside $10bn of its own capital “to back its foray into the lucrative world of direct lending”., which is said to be valued at $1.4 trillion.

The news was reported by “people familiar with the subject”.

Additional capital could be deployed if necessary, said one source.

The bank will advance up to half a billion dollars for individual transactions.

Down the line, JP Morgan may also tap funds from its asset management unit for direct lending, says one source.

ANALYSIS

Makes Sense

Not unreasonably, the authors of the Bloomberg article regarded this quiet move by JP Morgan – the bank had no official comment – will cause competition with “established private-credit heavyweights such as Blackstone, Inc., Apollo Global Management Inc., and Ares Management”.

(The article suggested the move may be related to JP Morgan’s “missing analyst forecasts in some business units this month”).

Not mentioned by Bloomberg – but the reason for this article – is that JP Morgan will also be pitted against the public and private BDCs of these large asset managers, as well as groups like Golub Capital, Owl Rock, Sixth Street, and SLR Investment.

Divvying Up The Pie

In most cases, the Blackstone et. al. of this world underwrite the larger financings JP Morgan is targeting by dividing up their underwriting over multiple funds under their control and – usually – bearing some variation of their name.

In some cases, the public BDCs involved provide the bulk of the entire financing and sometimes only a fraction. This varies both by asset manager and by transaction and comes down to factors like the nature of the borrower’s business; investment capacity at the different funds; total financing required, etc.

Shrinkage

We imagine JP Morgan – already highly involved in financing large sponsor-led transactions in the syndicated loan market – has been motivated by the drop-off in the number of deals being done in this manner in 2022.

With end investors uninterested in buying leveraged loan paper because of the prospect of a recession, the syndicated loan market has been in the doldrums, and – presumably – underwriting and placement income have sharply declined.

No Going Back?

Furthermore, there is a possibility that the syndicated loan market may never bounce back to its prior level given the entry onto the scene of mega managers in recent years.

Previously, the private credit lenders did not have the heft to underwrite the larger deals that are the bread and butter of the syndicated loan market and their pricing tended to be higher.

As a result, the mega managers tended to finance smaller transactions with higher perceived risk profiles.

Better?

That has perceptibly changed in the last few years as the Fed’s low-interest rate regime; very low credit losses and a willingness to shave spreads have made the asset managers much more competitive.

Moreover, asset managers claim they can move faster than the syndicated loan market and with greater certainty of closure.

JP Morgan may have seen the writing on the wall and decided to “join ’em rather than fight ’em”.

CONCLUSION

One More

This move by JP Morgan is undoubtedly a modest negative for all the public BDCs we track which compete for the largest borrowers and the sort of mega-buyouts you’ll read about in Bloomberg or hear about on CNBC.

This gives the biggest PE groups one more lender to play against the others when structuring terms and pricing of new transactions.

Unstoppable

On the other hand, one could make the argument – as we have – that the shrinking of the syndicated loan market is a secular trend that will continue.

As a result – the mega managers and their associated BDCs – should continue to increase their market share in this segment of the market as they’ve been doing for years.

We’d guess that while JP Morgan is seen as a worthy, well-heeled, and well-funded competitor, the half-dozen mega managers will continue to regard one another as their principal threats for new loan mandates.

Half Forgotten

The undiscussed wild card in all of this is what happens if credit losses which have been modest and manageable for all the years in which this market shift has occurred – begin to materially increase.

Will JP Morgan – as a highly regulated entity – have the same freedom of movement as the asset managers to respond?

There are a variety of actions that can be taken when borrowers get into trouble – all of which asset managers/BDCs have taken when necessary to protect their interests: advancing new funds; swapping debt for equity; taking control of the business, etc.

Will regulators allow JP Morgan the same latitude or will major credit losses – should they occur – force the bank to turn tail and run?

Maybe given the size of JP Morgan this will not matter to the bank or its regulators.

On The Radar

In any case – and in conclusion – JP Morgan’s move into using its own capital for private credit is worth watching as it plays out over the next year or two.