Private Credit Growth Not “Cannibalizing” HY Market: JPMorgan 

JPMorgan has argued that the growth of private credit is not a threat to the high yield market. 

In a recent note, the bank conceded that there had been a 25% contraction in the U.S. high yield market since the middle of 2021, but said the trend was not attributable to the rise of private credit, which has seen assets under management in the U.S. explode to $1.2 trillion. 

“The high yield market has shrunk largely driven by rising stars far outpacing fallen angels,” JPMorgan observed. Since 2021, about $300 billion of high yield credits have migrated to investment grade status, while just $40 billion has moved in the opposite direction. This change is consistent with a larger trend in the high yield market towards greater credit quality. 

JPMorgan cites banks’ withdrawal from lending to lower-quality issuers as a main driver of private credit expansion. This retreat, prompted by tighter bank regulation, has created an opportunity for private credit funds to fill the financial gap. 

The bank also notes that private credit is increasingly becoming the preferred source of finance for smaller and specialty businesses that do not match the size and quality requirements of the public high yield market.   

The average new issue bond size in the public U.S. HY market has doubled since 2008, and while companies remain private for longer, private credit is an increasingly important source of capital for prospective micro- and middle-market businesses. 

“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 noted stated. 

JPMorgan finds that a diversified approach throughout the credit spectrum, which includes both public high yield and private credit, provides investors with the best potential to control risk and profit on the unique characteristics of each market area. 

“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,” said 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.”