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JPMorgan Sees Central Bank Action Offsetting Risks to Junk Debt

JPMorgan Sees Central Bank Action Offsetting Risks to Junk Debt

Central bank stimulus aimed at minimizing the economic fallout from the pandemic will also limit any volatility in the market for high-risk debt triggered by a no-deal Brexit and a fiercely contested U.S. election, according to JPMorgan Chase & Co.

Kevin Foley, its global head of debt capital markets, said central bank support will lessen the impact of significant political risk events on Europe’s leveraged debt market and is fueling demand for higher-yielding assets.

Junk bonds and loans are trading at their early-March levels on average as the market recovers from the blow dealt by the coronavirus. The bank sees loans and bonds worth about 20 billion euros ($23.6 billion) waiting to be sold in the coming weeks--less than was on the roster this time a year ago--and doesn’t expect that to satisfy buyers’ demand.

“Is the market really going to change with a different U.S. party in power or with the U.K. out of Europe?” Foley said in an interview ahead of the bank’s European High Yield and Leveraged Finance Conference today. “Central banks are the main drivers right now. Their policies give the market the potential to be more resilient.”

Lower interest rates may prompt more companies to raise financing in the later months of the year. That cash could shore up balance sheets and improve liquidity to defend against a resurgence of the virus, or could eventually be used for M&A or other opportunities when economic conditions improve.

“Management teams are saying that even if they don’t need the cash to cope with an emergency, they can in time use it to reinvest in growth,” Foley said, noting that U.S. companies have been more active in opportunistic fund raising, but Europe is starting to move in the same direction.

JPMorgan Sees Central Bank Action Offsetting Risks to Junk Debt

High-yield bond issuance in Europe has just passed 50 billion euros, about 17% ahead of the year-ago period, according to data compiled by Bloomberg. Loan issuance, which relies more on private equity buyouts, is down as much as 30% on the year. M&A conversations are starting up again, however, including large deals such as a potential buyout of U.K. supermarket chain Asda Group Ltd.

How aggressively new financings are structured and how much demand they attract will depend on how lenders view a company’s prospects as it emerges from the pandemic. That will lead to sharply diverging fortunes within the leveraged issuer universe.

“It comes down to credit-specific choices,” said Foley. He gives the example of the travel industry which may have been heavily impacted but no one thinks will go extinct. “So, who will be the winners on the other side?”

Vaccine Promise

Away from political risks in Europe and the U.S., one of the longer term threats to the stability of the market in JPMorgan’s view is that a vaccine for the coronavirus takes longer to materialize than investors expect.

“The question is how long the momentum will continue,” Foley said. “If it all takes longer and the vaccine continues to be just a promise, at what point does that start to impact negatively on the capital markets?”

Going into next year that could drive volatility and make it harder for issuers to access the market. For now, investors are taking the optimistic view that the vaccine will come sooner rather than later, he said.

“Investors are saying, ‘Yes, we have risk but we expect a vaccine and I know that the central banks have my back.’”

©2020 Bloomberg L.P.