NEW YORK: Jamie Dimon has been warning for weeks – months, even – that the credit cycle will eventually sour.
Now, his bank is about to test investors’ appetites.
JPMorgan Chase & Co is gearing up to help issuers sell billions of dollars in junk bonds and leveraged loans, with deals to fund the buyouts of Electronic Arts Inc (EA) and Sealed Air Corp poised to start next week.
More merger and acquisition (M&A)-driven transactions are in the works, including one for software firm Qualtrics International Inc.
Those offerings alone total more than US$30bil in debt.
The JPMorgan bankers running these deals have heard what their chief executive officer (CEO) has said: Some firms are doing “dumb things” to boost profitability – spotting one “cockroach” in the market means there are probably more.
They’ve also seen the United States war with Iran, which has pushed up oil prices and stoked fears about rising inflation.
Meanwhile, the artificial intelligence “scare trade” has beaten down software sector valuations.
Despite all of that, they’re coming to market with confidence that investors will look through those risks, refuse to be spooked by headlines and see value in their offerings.
Some investors may be eager to buy up new deals, especially if choppy conditions create chances to snare debt at cheaper-than-anticipated levels, according to Wayne Dahl, a managing director and co-portfolio manager at Oaktree Capital Management.
“When large deals come, sometimes they will come at a discount, and that can often lead to opportunities for investors,” he said.
EA, for example, is expected to offer loan investors the chance to buy some loan debt at a discount of 98.5 to 99 US cents on the dollar, but if market conditions worsen, underwriters may have to cut the price further to entice more buyers.
An influx of so-called dry powder could help issuers find buyers.
Two of billionaire Elon Musk’s companies are repaying roughly US$17.5bil to debt investors, giving them more money to spend on new deals.
Callable bonds, tenders and maturing securities mean that there is “always cash coming into these markets”, Dahl said.
Before JPMorgan started marketing debt for EA’s buyout, the lender gathered the biggest firms in leveraged finance to Miami Beach for face time with Andrew Wilson, the video-game maker’s CEO.
Those investors are expected to buy more than US$500mil in EA debt apiece.
That hasn’t just reduced how much the banks need to sell to the rest of the market next week, it also speaks to another aspect of the leveraged capital universe – large investors want new debt and at size, according to Michael Levitin, a portfolio manager at MidOcean Partners.
“If you’re an institutional investor, you need liquid, scalable exposure,” he pointed out.
And beyond EA, Sealed Air and Qualtrics, buyers of bonds and loans are unsure when the next big leveraged buyout will come if the war persists and slows down the M&A market.
Still, not all credits are created equal.
The Qualtrics deal, for example, is finding less favour among investors compared to the proposed EA and Sealed Air transactions, according to sources.
The banks that underwrote these transactions alongside JPMorgan are testing the market with EA and Sealed Air first before tackling syndication efforts for other deals, said the sources.
It’s unclear when the war will end and a prolonged conflict may spur inflation and curb consumer spending.
For now, timing is key.
Market uncertainty, meanwhile, could worsen. — Bloomberg
