So far it seemed like a phenomenon circumscribed in Yankee land. Instead the seeds of a potential crisis of the credit to private individuals they also seem to exist in the Old Continent and in particular in Switzerland: according to Financial Times me too'Swiss Partners Group reported the possibility that the private credit default rates will grow in the next few years, up to doubling. Partners Group Chairman Steffen Meister told FT that institutions will find themselves having to bear all the disadvantages of the economic crisis caused by artificial intelligence.
Meister's comments come at a time when worries of investors regarding a nearly $2 trillion industry are worsening, both due to the worsening of credit quality and the strong exposure to software companies, whose business models are threatened by the rapid advances ofartificial intelligence.
Meister told the FT that in the last ten years annual defaults in private credit have averaged 2,6% and that default rates have been “so low” that private lenders have managed diversified portfolios of loans, and then resort to leverage again.
The Alarm Bells: From JPMorgan to Cliffwater to BlackRock to Black Stone
The memory of the episodes from last year in which they were seen failures of the auto parts manufacturer First Brands and Tricolor subprime lenderThe fallout has intensified attention on a market that had grown rapidly, attracting significant institutional investment and growing corporate lending in recent years.
News about the sector has been piling up in recent days. The most recent US case concerns JPMorgan Chase who this week announced that he has reduced the value of some loans to private credit funds after examining the impact of the market turbulence that has affected the software company, reported Wednesday Reuters. Credit institutions like JPMorgan they act like banks for private credit funds, providing them with liquidity by using their loans as collateral. A reduction in the value of these assets will limit the amount the bank can lend to these funds and, in a vicious circle, further increasing the pressure on a sector already struggling with a series of huge withdrawals by the retail investors, scared even by the new ones subscription standards.
Already last October Jamie DimonJPMorgan Chase & Co.'s chief executive, JPMorgan Chase & Co., warned that more "cockroaches" would emerge in the once-thriving but opaque private lending world, where pricing is typically not disclosed. Since then, some investors in the sector have ignored concerns about default rates and the potential for broader risks.
The banks of Wall Street have been the most convinced financial supporters of the private credit sector, lending approximately $300 billion to credit funds at the end of June, according to a report by Moody's October ratings, based on data from the Federal Reserve Board of Governors. The report showed JPMorgan had private credit exposure of $22,2 billion.
pimco, which has $2.300 trillion in assets under management and was one of the first to point out the subprime mortgage crisis in the 2008 crisis) reported this week that the growing tension in the private credit market is the result of years of rough credit rating standards. “We are at the showdown,” he said. Christian Stracke, the company's president, spoke on a March 10 podcast with Gregory Hall, head of global wealth management in the United States, as reported Bloomberg. “It is not just a crisis of confidence, but a crisis due to a poor insurance risk management".
This week Cliffwater LLC announced it faced redemption demands of more than 7% from its flagship $33 billion fund, it said. Bloomberg Tuesday.
Last week also BlackRock had said it had limited withdrawals from a major bond fund after asurge in refund requests, while Blackstone revealed that its private credit fund, known as Bcred, faced a surge in withdrawals in the first quarter, after alarm was raised in previous days by Blue Owl Capital Inc.
According to UBS, private credit defaults are hovering between 3% and 5%, and signs of stress, such as interest-paid-in-kind financing used to help struggling lenders meet their debt obligations, are nearing post-pandemic highs.
