Pandemic Turmoil Is Driving Borrowers to Private Credit, JPMorgan Says
The bank’s head of private credit sees the psychological aspects of the coronavirus pandemic possibly reshaping some industries over the longer term.
JPMorgan Chase & Co.’s private credit team is seeing a stream of new business emerge from the financial disruption that is still rippling from the outbreak of the novel coronavirus.
Borrowers suddenly have temporary financing needs as their traditional sources of capital have dried up, according to Meg McClellan, J.P. Morgan Asset Management’s head of private credit. For example, real estate developers and a startup company in the health care sector have all recently approached the firm for financing after difficulty obtaining it elsewhere during the pandemic, McClellan said in a phone interview.
Within real estate, the borrowers had been shut out from the commercial mortgage-backed securities market. They talked to J.P. Morgan Asset Management about securing new loans maturing in two or three years, which would help bridge them through the crisis until longer-term financing in the CMBS market is again accessible, according to McClellan.
The loans are backed by “very high-quality” properties and multifamily real estate, with yields ranging from 500 basis points (5 percent) to 700 basis points, she said. These bridges are “incredible from a risk-reward perspective,” making them a good investment while helping borrowers finance themselves temporarily.
Beyond real estate, difficult debt markets have led a small health care company seeking $15 million to $25 million to recently turn to JPMorgan for private credit, according to McClellan.
“Typically, they would maybe go to a venture debt fund,” she said. “But they’re trying to find alternate sources of financing because they need to raise for some immediate expansion and investment plans.”
Before the deadly outbreak of Covid-19 — the disease caused by the novel coronavirus that has prompted businesses to shut down to slow its spread — J.P. Morgan Asset Management had been “very defensive” about direct lending to companies, according to McClellan.
Worried the booming industry had become too crowded, JPMorgan’s global head of alternative investments, Anton Pil, told Institutional Investor last year that he was generally avoiding direct lending in corporate credit. Pil saw such deals as too risky relative to the yield at the time.
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“We saw probably six months ago that the credit cycle was long in the tooth,” said McClellan, who became head of private credit in January. Her position was created as part of JPMorgan’s push to expand its private credit business, which spans across real estate, infrastructure and corporate debt as well distressed investing.
“No one would have predicted that the pandemic, and this horrible tragedy, would be a catalyst to end that cycle,” McClellan said. “Now, as we’re thinking through it, it’s really a question of, where has there been temporary disruption?”
McClellan thinks the psychological aspects of the coronavirus pandemic may linger long after stay-at-home orders are lifted, potentially reshaping some industries.
“How quickly does travel pick back up?” she said. Tourism and retail sectors may see slower recoveries, she suggested, while people’s view of office space may also change post-pandemic.
Unlike the Federal Reserve’s “broad-brush” measures taken last month to prop up public markets amid the turmoil, McClellan sees private markets having “the luxury” of a more targeted approach to supporting companies in the crisis. She said her group can help get individual “companies up and running again” when their usual lenders have stepped back in the tumult due to their own liquidity concerns.
Meanwhile, J.P. Morgan Asset Management is working with borrowers in its own portfolio to preserve their long-term value in the pandemic. The asset manager may provide forbearance on some loans or renegotiate deal terms, McClellan said. Some borrowers may need more breathing room as they renegotiate rental agreements to avoid bankruptcy in the temporary economic shutdown.
Those sorts of discussions tend to be more challenging in public markets, where there are many debt investors in a single deal, according to McClellan.
For its part, J.P. Morgan Asset Management has seen a “relatively smooth transition” to client outreach using conferencing technology in place of onsite visits — even with the now typical dogs, kids, and others in the background, according to McClellan. She said the group’s institutional clients have begun contemplating new allocations in the wake of the extreme market volatility in the first quarter.
Some institutional investors are now thinking about how to enter private credit, after staying away before the downturn due to late-cycle concerns, according to McClellan. Others are asking about alternatives to public fixed-income investments, she said, evaluating opportunities in asset-based lending such as high-quality real estate debt.
“The big catalyst for shifts in portfolios is ultimately going to be where we land on developed-market interest rates,” she said, predicting low yields may continue to spur investors to look inside private credit markets for bigger returns.
In the meantime, as cancelled trips get replaced by virtual meetings, J.P. Morgan Asset Management has been working to increase its communication with clients globally amid the pandemic, according to McClellan.
“The pace has picked up,” she said. “And the types of conversations we’re having has clearly changed quite a bit around risk and portfolio positioning.”