March 4, 2020

An Issuer Playbook for Navigating COVID-19

The increase of COVID-19 cases outside China has shocked markets

0

2,000

4,000

6,000

8,000

10,000

12,000China ex. Hubei Global ex. China

Number of countries with at least 1 case of COVID-19 Number of active confirmed cases of COVID-191

Performance over the past several days (02/21/2020 – 03/03/2020)

73

0

10

20

30

40

50

60

70

80

(11%)(10%)

(4%)

(2%)

(12%)

(0%)

STOXX 600 S&P 500 Hang SengIndex

SSE Index WTI oil price Gold price

(47) bps

+27 bps

+126 bps

10-year U.S.Treasury

Investmentgrade spread

High yieldspread

Equity markets2 Commodities Credit markets3

Source: J.P. Morgan’s DataQuery, Bloomberg, World Health Organization, National Health Commission of PRC

Note: Data as of 03/03/2020; 1 Active confirmed cases = total confirmed cases – total deceased / recovered; 2 Represents price return over the period; 3 Investment grade refers to the JULI index, High

yield refers to the J.P. Morgan Global HY Index

1

It remains to be seen whether markets are appropriately pricing virus risk

19.4x 19.4x 19.5x 19.4x 19.2x

18.6x

18.0x 18.0x

17.2x 17.1x

17.9x

17.4x

15.0x

16.0x

17.0x

18.0x

19.0x

20.0x

21.0x

2,900

3,000

3,100

3,200

3,300

3,400

3,500

3,600

2/14/2020 2/18/2020 2/19/2020 2/20/2020 2/21/2020 2/24/2020 2/25/2020 2/26/2020 2/27/2020 2/28/2020 3/2/2020 3/3/2020

S&P 500 price (LHS) Implied NTM P/E (RHS)

$174.0 $173.8 $173.8 $173.7 $173.7 $173.6 $173.5 $173.4 $173.3 $173.2 $173.0 $172.9

S&P 500 P/E ratios have declined rapidly, but the impact to earnings remains uncertain

S&P 500 EPS

estimates

10

15

20

25

30

35

40

45

40 45 50 55 60 65 70 75

VIX

Index

IG credit spreads2

VIX Index vs. IG credit spreads1

In contrast to equity markets, credit spreads have widened less than what may be implied by equity volatility

10

15

20

25

30

35

40

45

270 290 310 330 350 370 390 410

VIX

Index

HY credit spreads3

VIX Index vs. HY credit spreads1

Data points for

2/27/20 – 3/3/20

Data points for

2/27/20 – 3/3/20

Source: Bloomberg

Note: Data as of 03/03/2020; 1 Represents data points over the last year (03/01/2019 – 03/03/2020); 2 CDX IG CDSI generic 5-year credit spreads; 3 CDX IG CDSI generic 5-year credit spreads

2

Chinese markets recovered as coronavirus cases peaked; will the U.S. markets follow a

similar pattern?

Daily infections in China ex Hubei and Chinese market performance Daily infections globally ex China and U.S. market performance

2,550

2,600

2,650

2,700

2,750

2,800

2,850

2,900

2,950

3,000

3,050

3,100

0

100

200

300

400

500

600

700

800

900

1,000

Daily infections (China ex Hubei) SSE IndexDaily number

of cases

Index

level

2,700

2,800

2,900

3,000

3,100

3,200

3,300

3,400

3,500

0

1,000

2,000

3,000

4,000

5,000

6,000

Daily infections (Global ex China) S&P 500Daily number

of cases

Index

level

Source: Bloomberg, World Health Organization

Note: Data as of 03/03/2020

We would expect global

trends to mirror China,

but timing is unclear

3

It seems too early to know if the impacts of COVID-19 will be short-lived or ultimately have

longer-lasting consequences, up to and including a recession

1.1%

3.1%

9.8%

8.6% 8.4%

6.6%

4.0%

2.8%

2.4% 3.1% 3.4% 3.8%

4.6%

0%

2%

4%

6%

8%

10%

12%

The market was already expecting the Fed to take action… …but a widening budget deficit may limit overall stimulus

Implied recession probabilities have spiked Key takeaways

While central banks have begun to take action to blunt the

economic impact of COVID-19, there may be little stimulus can do

to remedy uncertainty

Unlike other recent market moving events (e.g., trade), COVID-19

won’t be swayed by market pressures

While we hope for a quick resolution to COVID-19 uncertainty,

firms should prepare for a more prolonged downturn to ensure

financial resilience

12% 12% 12% 12% 12% 13% 16%

23% 24%

36%

44%

31%

39%

0%

10%

20%

30%

40%

50%

10% 9% 10% 8% 6% 8% 21% 23%

35%

85%

153%

100%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Implies 100% chance of

1 cut, and 53% chance

of a second cut

Source: J.P. Morgan’s DataQuery, Bloomberg, Federal Reserve Bank of St. Louis Economic Research

Note: Data as of 03/03/2020

Probability of the number of Federal Funds Rate cuts for the 3/18/20 meeting Deficit to GDP ratio for the U.S.

Probability of recession within 12 months based on S&P 500 and BBB spread

Fed cut rates

by 50 bps

4

Precedents may be informative, but uncertainty remains

Number of confirmed cases Comparing viral outbreaks

Velocity of the virus

Source: Reuters, World Health Organization, Center for Disease Control and Prevention; Note: COVID-10 refers to coronavirus disease, SARS refers to severe acute respiratory syndrome, and MERS

refers to Middle East respiratory syndrome. Data as of 03/03/2020 for COVID-19, data as of latest available for SARS and MERS; 1 U.S. Federal Reserve cut rates by 50 bps in response to coronavirus

outbreak on 03/03/2020; 2 Canada’s central bank cut rates in response to the SARS outbreak; 3 South Korea’s central bank cut rates in response to the MERS outbreak in 2015

90,870 +

8,096 2,519

COVID-19 SARS MERS

48 130

903

COVID-19 SARS MERS

3%

10%

34%

COVID-19 SARS MERS

Key takeaways

While precedents exist, the exponential rise of COVID-19 is unlike

severe viral outbreaks seen in the recent past

SARS began in 2002, but was short lived

Spread rapidly, but still not as fast as COVID-19

Tapered off in around 6 months and ended in almost 8 months

MERS began in 2012, but took much longer to spread

After 1 year, MERS only infected 108 people

Took 8 years for MERS to infect over 2,500 people

Number of days for the first 1,000 people to be infected

Comparing COVID-19, SARS, and MERS

Fatality rate

COVID-19 SARS MERS

Central bank

actions ✓ ✓ ✓

Widespread travel

restrictions ✓ ✓

Number of

countries affected73+ 29 27

Duration ? ~6 months 8+ years

321

5

Questions firms should be asking themselves

What happens if the virus continues to spread to other areas of the world?

What impact will this have on suppliers, customers, and employees?

What happens if this precipitates a global recession?

What happens if capital markets remain challenging for a prolonged period of time?

What happens if rates are cut and long term rates go even lower?

What happens if the dollar gets stronger as a safe haven?

What happens if the damage is more contained and there is a “v-shaped” recovery?

1

2

4

5

6

7

3

6

A playbook for navigating current volatility

Firms should prioritize keeping their greatest assets – their employees – healthy and safe

CFOs and finance teams should be proactive to ensure financial preparedness and stability during this time

Capital

structure

Liquidity

Risk

management

Supply chain

Capital

allocation

Revisit near- and medium-term capital market dependencies. What

are contingency plans?

Sensitize leverage metrics to account for different financial outcomes

Anticipate regional cash flow shortfalls and funding needs in different

jurisdictions

Assess the risk of near-term liquidity needs under downside scenarios

Monitor access to commercial paper (if applicable)

Evaluate downside case “bookends” that account for both a short-term

shock as well as a longer-term downturn into recession

Evaluate hedging opportunities for rates, currencies, and commodities

Consider pension implications of weak equity performance and low

interest rates

Assess the impact of recent events on vendors and suppliers

Consider building inventory in cases where disruptions are anticipated

Contemplate opportunistic return of capital if capital structure / liquidity

support it

Opportunistically tap capital markets during

windows of market stability to take advantage of

historically low interest rates, term out CP, and/or

near-term maturities?

Reallocate capital from discretionary expenditures

(e.g. share repurchases) to debt paydown?

Engage with rating agencies to ensure that tapping

sources of liquidity to leave on balance sheet

doesn’t result in ratings actions?

Look for embedded gains in derivatives for a

possible source of liquidity?

Lock rates, FX, and commodity costs?

Reduce pension funding to regulatory minimum to

preserve cash flow?

Extend financing / payable terms to more vulnerable

suppliers?

Seek payment term extensions from customers?

Consider changing pace of share buybacks to either

preserve flexibility or to be opportunistic?

Evaluate investment opportunities at new valuation

levels?

Preparation Potential actions

7

~30% m/m increase in # of trades and notional traded

~85% week / week increase in notional traded

Most activity: swaps to fixed, rate locks

10-year Treasury

Risk management themes across asset classes

Corporate Hedging Activity1Market Moves – 1-month range

~37% increase in corporate volume from last week

Jan to last week Feb

Focus has been on hedging EM exposures,

opportunistic entry points, and adding optionality

Daily open market activity ~1.5x YTD average during

week of 2/24

~40% of 2020 ASRs were executed week of 2/24

(~30% of total YTD notional)2

Consumer hedging is 2.5X larger YTD than average

monthly hedging in 2019 (in unit terms)

Energy producers focused on opportunistic hedge

restructuring to monetize in-the-money positons

Rates

FX

Equities

Commodity

1. Re-evaluate unhedged risks in current market backdrop

2. Determine risk tolerance levels

3. Seek internal approvals for risk management strategies

Call to action

0.91% 1.68%Range: ~75 bps

USD Index

96.98 99.91Range: ~3%

S&P 500

2865 3392Range: ~15%

WTI Crude

44.2 54.5Range: ~$10

1 Based on JPM Corporate Derivative execution only2 Based on JPM activity and public filings

Note: This material was prepared by an Associated Person with responsibilities for the marketing and sale of swaps and other

derivatives. All questions related to swaps referenced in these materials must be directed to US.swaps.marketing@jpmorgan.com

8

-6,000

4,000

14,000

24,000

34,000

44,000

1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/111/112/1 1/1 2/1

IG Total Flows

HY Total Flows

The recent hiatus in primary issuance is not unique relative to other

periods of market volatility…

80

100

120

140

160

180

200

Jan-18 Apr-18 Jul-18 Oct-18 Feb-19 May-19 Aug-19 Nov-19 Mar-20

IG Index Spread

Source: J.P. Morgan’s DataQuery as of 2/28/2020

(T+bps)

Investment grade borrowing costs dropped to all-time lows despite the volatility

+159

+181

+108

…with overall supply/demand dynamics supported by

IG credit’s status as a safe haven asset for investors

Source: J.P. Morgan’s DataQuery as of 2.28.2020

($mm)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Jan-18 Mar-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Feb-20

IG Index Yield HY Index YTW

2.84%

6.81%

Borrowing costs have diverged in light of recent volatility, as IG credit risk premiums have not fully offset the move lower in UST yields

Source: J.P. Morgan Dataquerry as of 2.28.2020

(%)

3.68%

6.02%

2.99%

5.79%

2.5%

3.5%

4.5%

5.5%

6.5%

2/1

4

2/1

6

2/1

8

2/2

0

2/2

2

2/2

4

2/2

6

2/2

8

> 7 days primary market hiatus

9

nCoV Globally Confirmed Cases

3,2263,003

1.518%

0.999%0.9%

1.1%

1.3%

1.5%

1.7%

2,900

3,000

3,100

3,200

3,300

3,400

1/31 2/7 2/14 2/21 2/28

S&P 500 UST 10yr.93k cases

12k cases

Macro

Since Friday 2/21

LL Avg

Price($1.43)

% at or

above

par(37.01%)

Fund

Flows($2.8bn)

CLO

issuance$4.7bn

$97.45

$96.04

44.52%

1.80%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

$95.80

$96.00

$96.20

$96.40

$96.60

$96.80

$97.00

$97.20

$97.40

$97.60

$97.80

$98.00

1/31 2/7 2/14 2/21 2/28

JPM LL Avg. Price% Trading at or Above Par

6.09%

6.49%

472bps

572bps

420bps

440bps

460bps

480bps

500bps

520bps

540bps

560bps

580bps

600bps

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

1/31 2/7 2/14 2/21 2/28

JPM HY YTWJPM HY STW

Coronavirus fears have weighed on leveraged finance markets

Hig

h y

ield

bo

nd

sL

evera

ged

lo

an

s

Coronavirus concerns have dominated the market,

leading to an emergency 50bps Fed Funds rate cut from

the FOMC on Tuesday Morning. S&P500 finished down

(3%) after climbing ~5% on Monday. Since February 21st,

the S&P is collectively off 10% and the VIX has spiked

116%

The dovish outlook on rates drove the 10yr UST yield to

0.999%, its first sub-1.00% level in history

The high yield market has widened alongside other asset

classes since 2/21 (collectively 64bps wider), but in light of

rates movements, YTW and STW have tightened 33bps

and 10bps, respectively, this week

To put the magnitude of recent volatility in context, the

96bps move in yields last week compares to a ~140bps

peak-to-trough move in the HY index in the entire 12

months prior

Strong leveraged finance technicals (only ~$35bn in the fwd M&A calendar) will contest escalating fundamental concerns (coronavirus, US election) to drive

market sentiment in and out of issuer’s favor. It is increasingly important to stay nimble to take advantage of windows of opportunity as they present themselves

Source: J.P. Morgan, Bloomberg, LevFin Insights, Informa Global Markets

Note: All market and issuance data as of 3/3/2020 closing levels

Since Friday 2/21

SPX (10.02%)

10yr UST (47)bps

VIX 115.57%

WTI (11.61%)

The leveraged loan market came off a record issuance

month in January to what is now an extremely light new

issue calendar

The % of loans trading at or above par has fallen to less

than 2% from 39% two weeks ago and 61% in mid-

January, driven by a $1.43 decline in the average price on

the JPM LL Index since February 21st

The softer market has led to a pullback in opportunistic

activity, and the rate outlook has re-introduced the concept

of a 1% LIBOR floor

Since Friday 2/21

HY YTW 64bps

BB YTW 48bps

B YTW 74bps

CCC

YTW127bps

HY STW 126bps

Fund Flows ($8.7bn)

10

Pre-Feb. 14 Post-Feb. 14

Source: Bloomberg, Dealogic, FactSet as of 02/28/20

Note: Issuance data excludes offerings <$50mm; 1 Excludes bought offerings

S&P 500: Valuations remain above long term averages, despite recent market sell-off

Since Feb. 19

S&P 500 subsector price performance

2.3%

6.4%

1.9%

6.2%

8.2%

6.3%

3.0%

(1.5%)

11.8%

0.8%

1.8%

(9.8%)

4.8%

Consumer Staples

Real Estate

Healthcare

Comm. Svcs.

Utilities

Consumer Disc.

Industrials

Materials

Info. Technology

Financials

Transportation

Energy

S&P 500

(10.1%)

(11.0%)

(11.1%)

(11.3%)

(11.6%)

(12.6%)

(12.7%)

(13.0%)

(14.0%)

(14.5%)

(14.7%)

(16.6%)

(12.8%)

Jan. 1 – Feb. 19

400

800

1,200

1,600

2,000

0

15

30

45

12/31/19 01/13/20 01/24/20 02/05/20 02/18/20 02/28/20

S&P 500 volume (mm)VIX2019 avg. VIX2019 S&P 500 avg. vol.

Market volatility & trading volume, 2020YTD

14x

15x

16x

17x

18x

19x

20x

21x

12/31/18 03/25/19 06/18/19 09/11/19 12/05/19 02/28/20

NTM P/E Long term average NTM P/E

S&P 500 NTM P/E multiples, 2019 – 2020YTD

15.4

551mm

40.1

16.0x

17.1x

$32

$16

$24

2018YTD 2019YTD 2020YTD

# of deals:

File / offer discount (FO1):

% above / within (IPO):

Offer / 30-day:

Mkt adjusted offer / 30-day:

94

(7.3%)

77%

+11.1%

+12.6%

7

(8.0%)

100%

(4.9%)

+3.9%

11

(7.0%)

80%

+7.8%

+12.6%

54

(8.2%)

75%

+6.2%

+3.0%

79

(7.2%)

81%

+5.7%

+11.0%

$3.4

$1.8

U.S. equity issuance ($bn)

2020 weekly average

11

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