Sponsors, spreads and stress testing: Navigating 2026’s rate reset

Brian Tramontozzi · J.P. Morgan

Leveraged loan yields will catch up with high yield quickly as the Fed starts tightening.

Tramontozzi says the market is only now starting a Fed tightening cycle. Absolute loan yields have not risen as much as high-yield yields so far. He expects loan yields to catch up with high yield in short order, so the gap should close soon.

“we are just experiencing now the start of a fed tightening cycle. And so while absolute yields have maybe not risen as much in the loan market, I think we all expect that to catch up with the high yield market in short order.”at 1:44

Brian Tramontozzi · J.P. Morgan

Leveraged finance has no maturity wall, because strong liquidity let issuers extend runways and reprice debt.

Tramontozzi says there is no maturity wall in the leverage market, a result of strong liquidity from 2024 to the present. Investor cash balances have been robust, CLO creation has been strong, and mutual fund inflows have been positive. Issuers used these conditions to extend their runway and reprice their debt, so near-term refinancing pressure is limited.

“So the good news about the leverage market is we don't have a maturity wall facing us... We've enjoyed strong liquidity. Investor cash balances have been robust. CLO creation has been strong. Mutual fund inflows have been positive.”at 3:46

Brian Tramontozzi · J.P. Morgan

Triple-C spreads blowing out while higher-quality spreads hold signals distress that could foreshadow broader trouble.

Single-B and double-B spreads have held roughly constant year to date, while triple-C spreads have widened by over 300 basis points. Tramontozzi reads this as the market penalizing companies with tight cash flow and interest coverage, whether from a slowing economy or weak coverage. He compares it to 2022, when the lowest-quality names saw yields rise the most, and says this could be a sign of things to come, so it should be watched closely.

“single b and double b spreads have held relatively constant year to date, whereas triple c spreads have increased by over 300 basis points. And what that tells me is companies with tight cash flow coverage, namely triple C rated credits, the market is penalizing them”at 4:45

Brian Tramontozzi · J.P. Morgan

Companies needing capital are rushing to market now to remove risk, while the window is open.

September set a record for high-yield new issuance, with a $54 billion month that was mostly M&A-driven. That absorbed a lot of market liquidity and helps explain why spreads widened as much as they did. Tramontozzi says issuers take advantage of open windows, and with rates, spreads and the VIX all volatile, companies that need capital are going to market early to take that risk off the table.

“Conditions are very uncertain. We are always facing volatility... companies that have a need to raise capital today are certainly very seriously going to market on an accelerated basis to take that risk off the table.”at 10:15

Kim Hernas · J.P. Morgan

Evergreen and retail funds are stretching sponsor holding periods well beyond the usual three to five years.

Hernas says the rise of evergreen vehicles and retail funds has changed the investment horizon. An exit timeline that used to be three to five years out could now be much, much longer. That changes how sponsors think about financing their funds and assets, and how they manage risk at entry and exit.

“So we've seen a rise of evergreen vehicles, retail funds. That means that where an exit timeline might have been for an investment historically three to five years away, now it could be much, much longer.”at 2:23

Kim Hernas · J.P. Morgan

Sponsors now combine GP, fund and asset financing to unlock liquidity, rather than treating them separately.

Hernas says sponsors used to treat financing at the GP, fund and asset levels as three discrete conversations. They now think about all three interchangeably and look for ways to combine the value held at each level, from the GP balance sheet to fund investments to individual assets. This coordination is how sponsors unlock value and find liquidity, including through back leverage.

“for sponsors, they're thinking about financing across the GP, the fund, and the asset, and sometimes interchangeably. So where those were three discrete conversations, we're now having more conversations on how do I unlock value”at 2:59

Kim Hernas · J.P. Morgan

Deal-contingent hedging is rising around acquisitions and exits to protect modeled investment value.

Hernas says sponsors have increasingly used deal-contingent hedges, which are tied to a specific acquisition or the exit of an asset. The aim is to protect the value assumed in the sponsor's models. This has become more prevalent in the market and more top of mind for sponsors.

“we've certainly seen an increase in what we'll call kind of deal contingent hedging or hedging that exists, which is very specific to either an acquisition or an exit of an asset. How do I protect the value that I've assumed in my models around an investment has become certainly more prevalent in the market”at 6:15

Brian Tramontozzi · J.P. Morgan

Deficits are inflationary, so an elevated rate environment is likely for the near term.

Tramontozzi argues that deficits are inflationary by nature. From that he concludes that lenders and borrowers should prepare for an elevated interest rate environment for at least the near term or the foreseeable future. Higher base rates feed directly into the spread-widening and cost-of-capital concerns he raises elsewhere.

“Deficits are inflationary just by their nature. And so I think we're preparing to face an elevated interest rate environment for at least the near term or foreseeable future.”at 13:07

Brian Tramontozzi · J.P. Morgan

AI and energy infrastructure capex is keeping the economy out of recession; a pullback would widen spreads.

Tramontozzi says the strength of the market has depended on there being no recession. A large part of that comes from capital spending, especially on AI and energy infrastructure. Any meaningful negative change in that spending could widen credit spreads. He does not expect this to happen, but says he is more cautious than in a long time about spread widening, deficit spending and infrastructure capex.

“no recession. And a lot of that is a function of capital spend, infrastructure spend, in particular around AI and energy infrastructure. Any meaningful negative change to that, I think we could see spreads widen as well.”at 13:14