00:00I am here at the JP Morgan leverage finance conference with someone who is a star here Catherine O'Donnell who
00:05is the head of North America leverage finance and has a ton of meetings. Catherine thank you so much for
00:10being with us. I want to start with the news of the day which is clearly the question around the
00:15war in Iran and what that sort of percolating into the Middle East is going to do for fundraising for
00:21companies being able to issue currently. Do you see a sort of hesitance to really start to come to market
00:27at this point. Obviously question of the day and it's
00:29a developing situation. We've been in heightened geopolitical tension for a while now and so I think it's something that
00:37as we've been counseling our issuer and borrower clients we've very much been saying get ready for the unexpected. I
00:45think this was somewhat unexpected somewhat expected there was talk of this leading up to this weekend and so I
00:51think as we're moving forward we're really saying to issuers be ready hit the market and as we look at
00:58what's actually happening
00:59very early days hard to predict what's going to happen. But we're seeing the markets take it in stride so
01:05far we've seen the VIX obviously spike come down off its highs. We're seeing leverage loan market open down about
01:13a quarter point for the double B stronger issuers.
01:16The single B down half a point to three quarters of a point and then in high yield off about
01:22a quarter point. So I think it's a situation we're watching very very closely and we're going to remain with
01:28the same advice which is in periods of volatility you need to pick somebody who's going to give you counsel
01:34who's going to be there to support you and it's critical that you pick the right window in order to
01:39get into market.
01:40Coming into the year it was sort of this belief that we would see record issuance and we have certainly
01:44seen really really rapid issuance the investment grade side. Have we seen a slowdown in the leveraged finance side of
01:52things due to some of these questions around private credit AI disruption etc. let alone the geopolitical questions that we
01:58have today.
01:59Yes. So as a matter of fact we've seen leverage loan volumes come down a little bit but we've actually
02:05seen high yield volumes up year over year. So we expect about a hundred and we expect about the same
02:11amount of issuance as last year in terms of what's actually going to come to market.
02:15But I think you're going to see a shift. So whereas last year it was more refinancing driven. I think
02:20this year you're going to see a pickup in M&A activity and you're also going to see a lot
02:24of growth capex.
02:26You saw that for example we were in market week before last with an issuance for tracked to fund AI
02:32data center growth. Those are large chunky issuances. I think you're going to continue to see that come to market.
02:38And then we're actually here with the EA management team this week doing pre-marketing. That's a large issuance that's
02:45going to come to market. So we have some big M&A driven activity that's coming to market although very
02:51manageable in the grand scheme of things.
02:52I know JP Morgan was really involved in the EA deal. Are there others like that with that kind of
02:57size that you see coming to market later this year. Do you think it's going to be more consolidated in
03:01some of the smaller mergers.
03:03Yeah. So just to put it into perspective the forward calendar right now in terms of underwritten M&A volume
03:09is at 87 billion. That's about 3% of the overall market volume that compares to leading into the GFC.
03:17We were at almost 30% just north of 30% of the market in terms of forward calendar.
03:24So when you think about the forward calendar and the digestibility of it from a market perspective it feels quite
03:31digestible. And then when you break it down further the actual quality it's not your standard LBO like B3B minus
03:38very heavy max leverage type of issuance.
03:41You have situations like EA where yes it's an LBO but it's more equity than debt right. And so you
03:48have a higher quality forward calendar as well which I think bodes well.
03:53In terms of back to your question of do we see more chunky M&A I think we do see
03:57as we think about forward M&A pipeline we do see a fair amount of chunky M&A and we're
04:03seeing a fair amount of discussion and activity as we look at potential M&A situations combined with sponsor exits
04:12and combined with sort of more structured activities on the M&A calendar.
04:16What you're talking about is in stark contrast with what we're hearing about in terms of the jitters around BDCs
04:21and private credit and concerns about what kind of disruption tied to AI could lead business models sort of like
04:29the yellow pages and leading to some significant defaults.
04:33I'm just wondering from your perspective if you think that there's going to be sort of a transfer of the
04:38risk that we're seeing in private credit to public credit markets or if you think it's sort of isolated or
04:43almost buffering some of the risk in public markets.
04:45Yeah so look obviously right now there's a huge focus on software before I took over my current job I
04:51was running our tech business in San Francisco on the leverage finance side and it's a little bit of a
04:57tale of two cities bifurcated market right now because when you look at the leverage loan market the leverage loan
05:02market obviously so private credit has the highest exposure to software.
05:07Leverage loan market has about 13% exposure to software and then the high yield market only has about 3
05:14.5% exposure to software so when you think about where that exposure is in the overall leverage finance markets
05:24it's relatively small as a percentage but then you can see definitely the impact.
05:29So you see the leverage loan market is actually year to date total returns down 32 basis points but if
05:36you strip out software performance on the year is actually up 28 basis points so you see a bifurcation and
05:43some real areas of consternation in software.
05:48Another stat around that is just when you think about loans trading above par which is how we often think
05:56about health of the loan market leading into the year we had like 65% of the market trading above
06:03par.
06:04That is now at 23% if you look at just tech and software that's less than 5% so
06:13you're seeing overall health of the market but there are points of consternation.
06:19Does that signal to you that this is a short lived blip that potentially could see these disruptions in small
06:26pockets and then it will be over and people will figure out who the winners and losers are.
06:30Or does that signify a different kind of dynamic that's going to be a slower kind of bleed over a
06:36prolonged period of time.
06:37I think that's to be figured out I think look over the course of time what we've found is you've
06:44seen periods of volatility we've had lots of periods of volatility whether it's the GFC at the beginning of my
06:50career early days of covid Russia Ukraine you see periods of volatility.
06:55And what tends to happen is you have consternation concern spiking rates of VIX etc and then you get into
07:06the new normal in terms of as people figure it out and get a better handle on where is risk
07:11going.
07:11I think sometimes you get into a little bit of a herd mentality in terms of okay this sector is
07:17selling off I need to be cautious I don't know what's going to happen.
07:20I think as people take a beat get a chance to re underwrite look at what does AI disruption really
07:26mean and where is that going to take this specific credit and companies get better about telling the AI disruption
07:34story.
07:34I think you will start to see there will certainly be credits that have more problems but I think you'll
07:40start to see a bifurcation even within software of the ones that are more AI proof if you will.
07:47It seems like credit markets have taken this in stride to such degree.
07:51I mean if what you're talking about it seems like things feel pretty bulletproof right now.
07:55Iran isn't going to shake things if a couple of defaults with software companies going to zero or the potential
08:02of that doesn't shake things just how solid do companies feel economically.
08:07I mean when you just talk about the broader universe does that sort of speak to a certain resilience in
08:12the economy or does that speak to denial.
08:15Call it denial call it I mean I think you could call it both.
08:19I think fundamentally when you get back to it though the overall health of the economy the overall health of
08:25the consumer and you just look at cash in the system fundamentally what our market comes down to our markets
08:30come down to is supply and demand and so as you see periods of disruption then you have this natural
08:37pullback in issuance usually when there's when there's disruptive periods and so the supply and demand balance tends to fix
08:45itself.
08:45Also when you think about on average our market is earning each market is about a trillion and a half
08:51two trillion dollars you've got an average seven ish percent coupon so cash builds very quickly in the system when
08:57there's low periods of issuance and that cash has to be put to work because you can't sit on cash
09:03and make the index in terms of return.
09:06So I think that and in volatility you see periods of opportunity to you can lock in you know interest
09:12rates that are attractive relative to the historical average.
09:16So I think as a whole the market remains very constructive I think it'll continue to remain constructive not hopefully
09:22oblivious because there are a lot of risks out there.
09:25But I think the fundamentals when you when you pair away some of the noise remain quite healthy Catherine O'Donnell
09:32thank you so much for taking the time today.
09:34I know it's very busy for you.
09:35That's Catherine O'Donnell head of North America Leverage Finance.
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