Private Credit Growth Not Cannibalizing High Yield Market: JPMorgan
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Despite the impressive expansion of private credit, which has seen assets under management soar to $1.2 trillion in the U.S., JPMorgan argues this growth is not coming at the expense of the high yield market.
A note published by the bank on Friday acknowledges a 25% contraction in the U.S. high yield market since mid-2021, but attributes this trend to factors other than private credit's rise.
"The high yield market has shrunk largely driven by rising stars far outpacing fallen angels," JPMorgan observes. Since 2021, almost $300 billion of high yield credits have migrated to investment grade status, compared to just $40 billion moving in the opposite direction. This shift reflects a broader trend towards higher credit quality within the high yield market.
JPMorgan highlights the retreat of banks from lending to lower-quality issuers as a primary driver of private credit's expansion. This pullback, spurred by increased bank regulation, has created space for private credit funds to fill the financing gap.
The note further points out that private credit is increasingly becoming the preferred source of funding for smaller companies and niche businesses that may not meet the size and quality requirements of the public high yield market.
"As a result, U.S. HY is now more concentrated amongst larger companies/issuers, whereby private credit provides a key source of financing for smaller companies and more niche business models," the bank states.
JPMorgan concludes that a diversified approach across the credit spectrum, incorporating both public high yield and private credit, offers investors the best opportunity to manage risk and capitalize on the distinct characteristics of each market segment.
"Private credit is not without risk; stress is rising in private credit given its floating rate nature while high yield tends to be more fixed rate," says the bank. "That said, it is not cannibalizing the traditional high yield market, but rather supplying important financing to companies that may not be equipped both in size and quality to issue in the public HY market of today."