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00:00:24:22 - 00:00:25:21
- Welcome, everyone, to the
00:00:25:21 - 00:00:29:00
Q1 2025 Mizuho Markets Mindset.
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We've done a lot of these in the past.
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I think this group
00:00:31:20 - 00:00:35:05
hasn't been together
since early Q2 of 2024,
00:00:35:05 - 00:00:38:17
and at the time, the discussion
was a lot around inflation,
00:00:38:17 - 00:00:40:20
what was the Fed going to do,
00:00:40:20 - 00:00:43:14
when they were going to
start cutting, how deeply?
00:00:43:14 - 00:00:45:20
We had a keen eye on the 10-year,
00:00:45:20 - 00:00:47:13
which had moved around recently.
00:00:47:13 - 00:00:49:03
And then, we had a market backdrop,
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which was beginning to migrate to risk-on,
00:00:52:03 - 00:00:55:23
with an anemic M&A backdrop.
00:00:55:23 - 00:00:58:10
And a lot of the things
are the same today.
00:00:58:10 - 00:01:00:15
And so, I wanted to do
a compare and contrast,
00:01:00:15 - 00:01:03:08
and then get the input from my colleagues.
00:01:03:08 - 00:01:07:02
The Fed did ultimately
move 100 basis points
00:01:07:02 - 00:01:09:04
in the latter part of 2024.
00:01:09:04 - 00:01:10:03
Sitting here today,
00:01:10:03 - 00:01:14:00
we see little to no further cuts in 2025,
00:01:14:00 - 00:01:16:17
so that won't be as much wind at our back
00:01:16:17 - 00:01:18:12
as we think forward into the market.
00:01:18:12 - 00:01:21:03
The 10-year’s been on
a rollercoaster ride.
00:01:21:03 - 00:01:23:12
Back in April last year, it was 4.5%,
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dipped down to the mid-threes,
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and now we're sitting
back at 4.5%
00:01:26:13 - 00:01:28:09
So, we'll continue to watch that.
00:01:28:09 - 00:01:31:02
The market environment
is definitely risk-on.
00:01:31:02 - 00:01:32:00
The phrase I see more
00:01:32:00 - 00:01:34:14
and more is ‘animal spirits are alive’
00:01:34:14 - 00:01:37:19
and investors are definitely
leaning into transactions,
00:01:37:19 - 00:01:39:13
and so that's helpful for issuers.
00:01:39:13 - 00:01:41:16
And then, finally, we
have a new administration,
00:01:41:16 - 00:01:43:17
and they're rolling out their policies
00:01:43:17 - 00:01:46:18
and the market is trying to
digest and anticipate those.
00:01:46:18 - 00:01:49:14
And the one thing we're
really watching is inflation
00:01:49:14 - 00:01:52:08
might become the centerpiece
of this discussion.
00:01:52:08 - 00:01:53:21
So, Phil, I'll turn to you
00:01:53:21 - 00:01:57:04
and ask you how are you
stacking that all up
00:01:57:04 - 00:01:59:00
and how's that impacting your market today
00:01:59:00 - 00:01:59:22
and going forward?
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- Yeah, thanks, Jeb.
00:02:00:20 - 00:02:03:20
So, look, I think 2024 was a great year.
00:02:03:20 - 00:02:04:22
So, $300 billion.
00:02:04:22 - 00:02:07:08
In terms of volume up 60%,
00:02:07:08 - 00:02:08:12
that takes us back in line
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with what I would call more normalized.
00:02:09:23 - 00:02:11:10
So, not the wave of COVID
00:02:11:10 - 00:02:13:07
and not the anemic '22,
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but a good year.
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We think '25 will be similar
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in terms of issuance volumes.
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I think really, the key factors there,
00:02:21:07 - 00:02:22:18
there's about $190 billion
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of maturities due '25, '26.
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There's another $200 billion in '27.
00:02:27:15 - 00:02:30:13
Some issuers will reach
forward and address those.
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And then, obviously, the
big delta will be M&A
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and we're already seeing
those green shoots.
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I think the remarkable
thing about last year,
00:02:36:23 - 00:02:39:14
that 100-basis point rollercoaster
00:02:39:14 - 00:02:42:00
in treasuries was really interesting.
00:02:42:00 - 00:02:44:07
All of the headlines were about rate cuts.
00:02:44:07 - 00:02:45:23
The reality is when the Fed cut,
00:02:45:23 - 00:02:48:10
that actually triggered
the treasury sell off.
00:02:48:10 - 00:02:49:14
So, that's when we saw treasuries
00:02:49:14 - 00:02:52:00
go from the mid-threes to the mid-fours,
00:02:52:00 - 00:02:55:19
and yet our market
continued to print paper.
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For me, spreads were
really the shock absorber
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for the system that enabled the high-yield index
00:03:01:07 - 00:03:03:18
to show less volatility than treasuries,
00:03:03:18 - 00:03:06:06
and for issuers to see good execution
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through that volatility.
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- I like the way you use ‘shock absorber’.
00:03:09:02 - 00:03:12:14
I think about it, I feel
like the leveraged loan
00:03:12:14 - 00:03:14:19
and debt investors on the high-yield side
00:03:14:19 - 00:03:17:04
with these all-time kind of lows
from a credit spread
00:03:17:04 - 00:03:18:00
-Yeah.
perspective,
00:03:18:00 - 00:03:20:09
really have doing their job
00:03:20:09 - 00:03:24:23
trying to get more M&A activity
and new paper to market.
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Jackson, I'm curious on your side,
00:03:27:03 - 00:03:29:22
you've seen 100 basis
points down in the base rate
00:03:29:22 - 00:03:32:10
and you've also seen the
credit spreads come down.
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How does that manifest
itself in your market?
00:03:34:12 - 00:03:36:23
- Yeah, the Fed did have an impact
00:03:36:23 - 00:03:38:21
on the Leveraged Loan Market for sure
00:03:38:21 - 00:03:40:04
last year with the cuts.
00:03:40:04 - 00:03:41:16
It actually ended up,
00:03:41:16 - 00:03:44:10
I think creating almost
the perfect environment,
00:03:44:10 - 00:03:48:04
where both borrowers benefited
from 100 basis points
00:03:48:04 - 00:03:49:17
of lower interest burden.
00:03:49:17 - 00:03:52:05
And investors were still attracted enough
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to the returns of the
floating rate asset class.
00:03:55:15 - 00:03:57:06
So, it didn't get too low
00:03:57:06 - 00:03:59:16
and it wasn't too high, it was almost just right.
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And that led to a number
00:04:01:13 - 00:04:02:20
of records in our market.
00:04:02:20 - 00:04:05:18
We had $1.3 trillion of volume,
00:04:05:18 - 00:04:07:17
including repricings.
00:04:07:17 - 00:04:08:20
Repricing's alone were over
00:04:08:20 - 00:04:10:23
$600 billion of volume a record.
00:04:10:23 - 00:04:13:20
We had CLO refis and resets another record.
00:04:13:20 - 00:04:17:12
All of this was facilitated partially by the Fed cuts,
00:04:17:12 - 00:04:22:00
but also by just the lack of
new money supply in our market.
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There was not much M&A
or LBO use of proceeds.
00:04:24:22 - 00:04:27:18
Most of the deals were opportunistic.
00:04:27:18 - 00:04:30:13
And that has led to a real demand
00:04:30:13 - 00:04:32:20
when we do see new money deals.
00:04:32:20 - 00:04:36:00
In Q4, in December, Mizuho was lead left
00:04:36:00 - 00:04:39:14
on a Term Loan B
transaction for CVR Energy.
00:04:39:14 - 00:04:43:06
We saw firsthand how much
demand there is for paper
00:04:43:06 - 00:04:45:17
when it's new money,
and it went very well.
00:04:45:17 - 00:04:47:07
And I expect slowly,
00:04:47:07 - 00:04:49:10
you'll start to see that
more and more in '25.
00:04:49:10 - 00:04:52:10
- Historically, we've seen
these repricing windows,
00:04:52:10 - 00:04:56:18
it feels like it's been open
since October consistently.
00:04:56:18 - 00:04:58:15
Not that we want it to end,
00:04:58:15 - 00:05:00:13
but what do you think
are some of the catalysts
00:05:00:13 - 00:05:03:03
and how much more legs do we
have to the current window?
00:05:03:03 - 00:05:04:21
- I think we're going to
still be in the window
00:05:04:21 - 00:05:07:17
for a bit longer, another few months.
00:05:07:17 - 00:05:09:20
Don't see it stopping immediately,
00:05:09:20 - 00:05:12:16
barring some macro event in the world.
00:05:12:16 - 00:05:14:19
We've reached the point
where we have some borrowers
00:05:14:19 - 00:05:17:02
at their second or
third bite at the apple,
00:05:17:02 - 00:05:19:08
repricing for a second or third time.
00:05:19:08 - 00:05:23:06
Would expect to see that
stop sometime as we get into
00:05:23:06 - 00:05:26:01
and closer to Q2 for a couple reasons.
00:05:26:01 - 00:05:28:00
Firstly, we're reaching a point on spreads
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where they can't get much lower
00:05:29:19 - 00:05:33:01
for the CLO math to work
for that buyer base.
00:05:33:01 - 00:05:35:18
And also, as we've all been
talking about for months,
00:05:35:18 - 00:05:38:03
we do expect M&A volume to come back,
00:05:38:03 - 00:05:41:17
which will create new money
paper for investors to buy,
00:05:41:17 - 00:05:42:23
and will make it harder to
00:05:42:23 - 00:05:45:01
reprice every deal multiple times.
00:05:45:01 - 00:05:47:09
We've actually already seen an uptick
00:05:47:09 - 00:05:50:23
in requests from our clients
for M&A financing commitments.
00:05:50:23 - 00:05:53:06
It started to get busier in December,
00:05:53:06 - 00:05:54:12
it's continued into January.
00:05:54:12 - 00:05:57:20
And Mizuho is actively
deploying our balance sheet
00:05:57:20 - 00:06:00:11
for our clients for LBO
and M&A commitments.
00:06:00:11 - 00:06:02:10
And we expect all of that to help drive
00:06:02:10 - 00:06:04:00
what will be our forecast
00:06:04:00 - 00:06:07:06
for $450 billion of volume for 2025.
00:06:07:06 - 00:06:08:09
- I guess when you think about it,
00:06:08:09 - 00:06:11:16
with over half the market still trading over par,
00:06:11:16 - 00:06:14:19
it's a catalyst for issuers to continue to go,
00:06:14:19 - 00:06:17:03
especially when there is an
alternative use for funds
00:06:17:03 - 00:06:19:02
so they can force through transactions.
00:06:19:02 - 00:06:21:07
Phil, from your perspective,
00:06:21:07 - 00:06:24:15
how are you thinking about innovation
00:06:24:15 - 00:06:26:21
or different structures that
you're seeing in your market
00:06:26:21 - 00:06:29:08
as we've moved more to
that risk-on mentality?
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- Yeah, really two or
three things stick out.
00:06:32:00 - 00:06:34:23
Jackson mentioned the uptick in M&A.
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The alternative is dividends.
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We've seen a big, big
pickup in dividend activity,
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and so when sponsors are
looking at potential exits,
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M&A, IPO, they can also dividend,
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hold onto the asset for longer,
but see a return of capital.
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So, I'd expect to see that continue.
00:06:51:03 - 00:06:54:04
The other exciting
development has been hybrids.
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Yeah, historically,
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that's been IG issuers issuing
sub-investment grade hybrids.
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We were involved in
Venture Global and Rakuten,
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which was sub-investment grade issuers
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issuing those products.
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Demand was very strong for both of those
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and they have continued to trade well.
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So, we'll see more of that.
00:07:10:21 - 00:07:13:14
And then, I think just
given the two speed economy,
00:07:13:14 - 00:07:15:07
US versus Europe, UK,
00:07:15:07 - 00:07:18:21
you're going to see more
multicurrency just given,
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sort of the different
direction of those businesses
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and ContourGlobals in market today.
00:07:22:16 - 00:07:24:10
So, those would be my three.
00:07:24:10 - 00:07:25:06
- Now, Jackson,
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it feels like we broke the mold
on dividend deals last week.
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Maybe you want to touch on your market?
00:07:30:14 - 00:07:31:16
- Yeah, no, absolutely.
00:07:31:16 - 00:07:36:19
One of the trends we see
continuing is the emergence
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of more and more dividend deals
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and mega dividend deals at that.
00:07:40:04 - 00:07:41:03
Last week,
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Clarios did a $4 billion
plus dividend transaction,
00:07:44:06 - 00:07:46:05
one of the largest in
the market's history.
00:07:46:05 - 00:07:47:22
That trend is likely
00:07:47:22 - 00:07:51:07
to continue throughout
the first half of '25.
00:07:51:07 - 00:07:52:14
And the other trend that we've seen
00:07:52:14 - 00:07:56:00
that's been interesting is just
how with spread tightening,
00:07:56:00 - 00:07:58:05
even single B rated
companies have been able
00:07:58:05 - 00:08:00:01
to benefit from getting into the low
00:08:00:01 - 00:08:02:08
to mid-200s on their coupons.
00:08:02:08 - 00:08:05:01
- So, thank you for your
time today, we appreciate it.
00:08:05:01 - 00:08:05:21
As you can see,
00:08:05:21 - 00:08:08:06
this is a very constructive
market environment.
00:08:08:06 - 00:08:12:01
I do believe it's going to continue
to be a market of windows,
00:08:12:01 - 00:08:14:11
just given some of the macro overhang
00:08:14:11 - 00:08:16:20
and as different policies
get put out there.
00:08:16:20 - 00:08:18:16
But we encourage issuers
00:08:18:16 - 00:08:22:06
to opportunistically approach the market.
00:08:22:06 - 00:08:24:02
And thank you very much
for your time today.