JPMorgan takes on direct lenders with leveraged loans unit

JPMorgan Chase’s funding financial institution has arrange a unit to compete with rising competitors from…

JPMorgan Chase’s funding financial institution has arrange a unit to compete with rising competitors from direct lenders, committing a “vital chunk of capital” to carry leveraged loans on its stability sheet.

JPMorgan is funding the loans and intends to carry them to maturity somewhat than underwriting the debt for syndication, a apply the place the financial institution is already a dominant participant.

“We had been all the time catching this fish, it was simply that we had been throwing it again — now we wish to maintain on to it,” Kevin Foley, JPMorgan’s head of world debt capital markets, informed the Monetary Instances in an interview.

He mentioned JPMorgan had dedicated “a big chunk of capital” to the hassle, with out offering additional particulars. The financial institution started making the loans in 2021 and has accomplished round 20 offers, with the scale starting from $50mn to round $500mn, Foley mentioned.

“That is modern-day relationship lending. We have now to regulate,” Foley added. “We have now a staff of six devoted to direct lending throughout banking, markets and business banking.” 

The transfer by JPMorgan, the biggest US financial institution by property, is an early sign of how banks may realign their leveraged lending operations to win favour with shoppers and claw again market share misplaced to direct lenders comparable to Apollo, Ares and Golub Capital.

These lenders are funding a rising variety of leveraged buyouts by non-public fairness companies. The direct lending business had grown to greater than $500bn in property underneath administration on the finish of 2021 from lower than $50bn a decade in the past, in accordance with Preqin knowledge.

A number of banks, together with JPMorgan, have raised outdoors funds by way of their asset administration arms to put money into non-public credit score. However the loans Foley’s staff is engaged on are funded by the financial institution somewhat than traders.

JPMorgan usually gives acquisition financing for leveraged buyouts by way of leveraged loans and high-yield bonds, which the financial institution underwrites with the intention of primarily promoting to different traders. For greater than a decade, the financial institution has been a top-two participant within the US leveraged mortgage and high-yield debt markets, in accordance with Refinitiv knowledge.

This type of financing is often cheaper for the borrower, because the debt is obtainable to a broader vary of patrons, and it stays the go-to possibility for many takeovers. Nonetheless, it’s extra vulnerable to market swings and the phrases might be much less dependable.

It could actually additionally depart banks nursing mark-to-market losses on loans they agreed to underwrite however wrestle to promote. Lenders together with JPMorgan face losses on tens of billions of {dollars} of bridge loans backing leveraged buyouts that had been agreed earlier than slumping markets made it more durable to shift the debt to specialist funds.

Column chart showing Direct lending grows to $500bn-plus industry

Instead, so-called direct lenders, which increase billions of {dollars} in outdoors funds from traders, are promising financing much less depending on the broader market and with a better diploma of certainty that the borrower will obtain the funds.

These companies usually lend to the smaller firms — which regularly wrestle to entry the syndicated leveraged mortgage market — that conventional banks pulled away from following post-financial disaster rules.

They’re additionally progressively doing larger and larger offers. In a single notable instance final 12 months, $2.6bn in debt financing for Thoma Bravo’s $6.6bn acquisition of Stamps.com was supplied solely by non-public lenders, together with Ares, Blackstone and PSP Investments.

The brand new JPMorgan unit is a part of its push to deepen its providing to so-called middle-market company prospects and is a response to demand from shoppers, in accordance with Foley.

“Measurement hasn’t been a constraint. It’s extra the chance set. We’re keen to do larger offers,” he added.

One hurdle regulated banks like JPMorgan have confronted in competing with direct leaders is that they’ve to think about leveraged lending steerage from financial institution regulators. This recommends — although doesn’t mandate — that banks don’t lend to firms at a ratio of debt to earnings that exceeds six instances.

As non-banks, direct lenders will not be topic to the identical strictures, serving to them fund notably extremely leveraged buyouts, comparable to offers within the expertise sector for firms that promise excessive development however have but to generate vital income.

“We will do many of the loans, however stay disciplined in our strategy,” Foley mentioned.

Further reporting by Antoine Gara in New York