"Private Credit" more crooked than Private Equity?

Investment Analysis Clubs Macro Economic Trends and Risks
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{{ That’s when things started getting scary. Fifth Third, a regional bank, said it had lent Tricolor $200 million, nearly all of which it now expected to write off as a loss. Same at JPMorgan Chase, which reported it was out $170 million that it will presumably never see again. At Barclays the figure is nearly $150 million. They’ll survive the loss, but the incident cast into sharp focus a risk that had otherwise lurked in the shadows, growing year by year: a cascade of bankruptcies that triggers a widespread financial crisis.

Tricolor and First Brands had also borrowed from a breed of nonbank financial firms known collectively as private credit, whose workings are much more opaque. How badly were those firms hit? How many of their other borrowers are overleveraged in this way? What will happen if they, too, falter? For now, at least, there’s no way to know. }}

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intercst

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The nonbank firms are part of the “Shadow Banking System” which isn’t regulated. The Federal Reserve Bank of Chicago publishes a weekly National Financial Conditions Index (NFCI) which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems. I post a link to this every week in the Control Panel. There’s a lot of detail in this report. Currently, financial conditions are looser than average and trending looser.

Since the Shadow Banking System isn’t regulated it’s impossible to know how interconnected the borrowers and lenders are and how overleveraged some of them may be. We only know that “loose” financial conditions imply easy borrowing and lots of leverage.

Wendy

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Fifth Third, not even one of the major US banks, has total assets of over $210 billion, more than a thousand times the Tricolor loss.

DB2

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I remember that back in 1998 I followed the advice of a financial guru who has long since passed away. He was warning that there would be a market correction from the Russia default on billions of dollars in loans. In late (fall) 1999 he gave a sell signal and we went to cash. We stayed in cash for 3-4 years I believe. It particularly sticks in my mind because I had JDSU (remember that one) and it went from something like $180 down to $4. The market indexes dropped over 50% if I remember correctly. These banks are losing a lot more on these bad deals than Russia defaulted on. I present this only as a cautionary message because these are huge losses for these financial institutions and they have a tendency pass their losses on to the clients or someone else…doc

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Bob, that doesn’t sell magazines, though, does it?

The nice thing about private credit as it will succeed or fail on it’s own merits. Cascading failure to other area will be mitigated by reorganizations, resecuritizations and new deals with terms that kick the can down the road or provide “new opportunities” for fees and management kickbacks.

As a member of several PC deals, I am a partner in many CRE units across the country.

I have no say in when/how those deals finish
I have no say in when/how I get dividends or capital back
I have complete control to refuse additional capital requests (I have declined requests on about 40% of my properties)

Of my deals, ~25% have exited for a nice profit (2021 and prior)
30% are long term tax shelters with more than 10 years run rate
55% are neutral/negative cashflow and struggling.

I’ll probably break even on the whole illiquid portfolio - but I bet the managing partners and their associated service vendors profit!

Should have just bought the S&P.

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Yes.

Financial markets are holding “up” rather well, but what troubles me deeply despite the seeming stability of the indices is that the structure of the markets — the rules and information flows — are falling into disorder, threatening chaos.

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