Slow-motion bust coming for private credit
The bear case argued is that private credit is headed for one of the largest busts in US financial history, though it will unwind slowly due to its opaque, illiquid nature.
The argument
The guest argued that Wall Street's greed led to excessive capacity, moving the trade from institutional to retail investors. While banks believe they are protected by senior positions and AAA collateralized loan obligations (CLOs), they will still face losses as subordinated tranches get wiped out and unused commitments are pulled back.
The thesis, stress-tested
✓ What validates it
- ✓Further markdown of private loans by major banks
- ✓Increased litigation between lenders and off-balance-sheet special purpose entities
- ✓Pullbacks in the $2.8 trillion of undrawn commitments to non-depository financial institutions
▸ Risks discussed
- ▸The slow-moving, private nature of the assets delays price discovery
- ▸Contractual inability of investors to sue sponsors
- ▸Subordination of retail and qualified investors to senior bank lenders
Hear it yourself
"Private credit's gonna unwind very slowly because it's private. You can't see what's going on. And this is an episodic tale of greed and stupidity on the part of Wall Street that I think could be one of the biggest busts in in US financial history."
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