JPMorgan Chase’s investment bank has set up a unit to compete with growing competition from direct lenders, committing a “significant portion of capital” to hold leveraged loans on its balance sheet.
JPMorgan is funding the loans and intends to hold them to maturity rather than guarantee the debt for syndication, a practice where the bank is already a dominant player.
“We were still catching this fish, it was just that we were throwing it away – now we want to keep it,” Kevin Foley, head of global debt capital markets at JPMorgan, told the Financial Times in an interview.
He said JPMorgan had committed “a significant amount of capital” to the effort, without providing further details. The bank began making loans in 2021 and closed about 20 deals, ranging in size from $50 million to around $500 million, Foley said.
“It’s modern relationship lending. We have to adjust,” Foley added. “We have a team of six people dedicated to direct lending in banks, markets and commercial banks.”
The move by JPMorgan, the largest U.S. bank by assets, is an early signal of how banks could realign their leveraged lending operations to curry favor with customers and recoup market share lost to the benefit from direct lenders such as Apollo, Ares and Golub Capital.
These lenders are funding an increasing number of leveraged buyouts by private equity firms. The direct lending industry had grown to more than $500 billion in assets under management by the end of 2021, up from less than $50 billion a decade ago, according to data from Preqin.
Several banks, including JPMorgan, have raised outside funds through their asset management arms to invest in private credit. But the loans Foley’s team is working on are funded by the bank rather than investors.
JPMorgan typically provides acquisition financing for leveraged buyouts through leveraged loans and high-yield bonds, which the bank underwrites with the intention of selling primarily to other investors. According to data from Refinitiv, for more than a decade the bank has been one of the top two players in the U.S. leveraged loan and high-yield debt markets.
This form of financing is generally less expensive for the borrower because debt is available to a wider range of buyers, and it remains the option of choice for most buyouts. However, it is more subject to market fluctuations and the terms may be less reliable.
It can also leave banks taking mark-to-market losses on loans they have agreed to underwrite but are struggling to sell. Lenders including JPMorgan are facing losses on tens of billions of dollars in bridge loans backing leveraged buyouts that were agreed before crashing markets made it harder to shift debt to specialist funds .
As an alternative, so-called direct lenders, which raise billions of dollars in outside funds from investors, promise funding that is less dependent on the broader market and with a greater degree of certainty that the borrower will receive funds.
These companies typically lend to small businesses – which often struggle to access the leveraged syndicated loan market – that traditional banks have abandoned following post-financial crisis regulations.
They are also gradually doing bigger and bigger business. In a notable example last year, $2.6 billion in debt financing for Thoma Bravo’s $6.6 billion acquisition of Stamps.com was provided entirely by private lenders, including Ares, Blackstone and PSP Investments.
The new JPMorgan unit is part of its efforts to deepen its offering to so-called middle-market enterprise customers and responds to customer demand, according to Foley.
“Size was not a constraint. It’s more the opportunity that presents itself. We are ready to do bigger deals,” he added.
One of the hurdles that regulated banks such as JPMorgan have faced in competing with direct leaders is that they must heed guidelines from banking regulators on leveraged lending. This recommends – but does not require – that banks do not lend to companies with a debt-to-earnings ratio greater than six times.
As non-banks, direct lenders are not subject to the same constraints, which helps them fund particularly high-leverage buyouts, such as tech deals for companies that promise high leverage. growth but which have not yet generated significant profits.
“We can do most loans, but we’re still disciplined in our approach,” Foley said.
Additional report by Antoine Gara in New York