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 direct lenders, committing a “significant chunk of capital” to carry leveraged loans on its steadiness sheet.

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

“We were always catching this fish, it was just that we were throwing it back — now we want to hold on to it,” Kevin Foley, JPMorgan’s head of world debt capital markets, instructed the Financial Times in an interview.

He mentioned JPMorgan had dedicated “a significant chunk of capital” to the trouble, 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.

“This is modern-day relationship lending. We have to adjust,” Foley added. “We have a team of six dedicated to direct lending across banking, markets and commercial banking.” 

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

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

Several banks, together with JPMorgan, have raised outdoors funds via their asset administration arms to put money into personal credit score. But the loans Foley’s workforce is engaged on are funded by the financial institution slightly than buyers.

JPMorgan sometimes gives acquisition financing for leveraged buyouts via leveraged loans and high-yield bonds, which the financial institution underwrites with the intention of primarily promoting to different buyers. 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 keeping with Refinitiv knowledge.

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

It may depart banks nursing mark-to-market losses on loans they agreed to underwrite however battle 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 tougher to shift the debt to specialist funds.

As an alternate, so-called direct lenders, which elevate billions of {dollars} in outdoors funds from buyers, 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 sometimes lend to the smaller corporations — which regularly battle to entry the syndicated leveraged mortgage market — that conventional banks pulled away from following post-financial disaster rules.

They are additionally regularly doing greater and larger offers. In one notable instance final yr, $2.6bn in debt financing for Thoma Bravo’s $6.6bn acquisition of was supplied fully by personal lenders, together with Ares, Blackstone and PSP Investments.

The 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 purchasers, in keeping with Foley.

“Size hasn’t been a constraint. It’s more the opportunity set. We’re willing to do bigger deals,” 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 corporations at a ratio of debt to earnings that exceeds six occasions.

As non-banks, direct lenders aren’t topic to the identical strictures, serving to them fund significantly extremely leveraged buyouts, reminiscent of offers within the expertise sector for corporations that promise excessive development however have but to generate vital income.

“We can do most of the loans, but remain disciplined in our approach,” Foley mentioned.

Additional reporting by Antoine Gara in New York