Debt LPLink’s Post

Private credit funds have lower leverage than banks, and capital lockups mean they have little to no risk of a maturity mismatch event. But the International Monetary Fund is concerned that the opaque market is hiding greater risks that could supercharge a financial downturn, with losses spilling into public markets to drag down banks and institutional investors. Read more in my report for PitchBook/LCD: https://lnkd.in/ebvAdeiG

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” The Bank of England is concerned about financial institutional risk associated with the rapid growth of private capital markets. A PE or Private Credit market crash would trigger a liquidity event which spawns crisis, but also massive opportunity. It will be yet another consequence of regulation and mispriced money in the wake of the 2008 GFC! #markets #investing #economy #privatecapital

In a new International Monetary Fund blog with Charles Cohen, Caio Ferreira and Nobuyasu Sugimoto we discuss how the rapid growth of the $2 trillion #privatecredit market could heighten financial vulnerabilities given opaqueness, high degree of interconnection within the #financialsystem, and limited prudential oversight. https://lnkd.in/eMT8hZqM

The private credit industry’s expansion into the wealth market is increasing liquidity risk and conduct risk, the International Monetary Fund (IMF) has warned. In its latest Global Financial Stability Report, the IMF outlined the risks it sees from the fast-growing $1.7tn (£1.5tn) private credit market. Typically the preserve of institutional investors, the private credit market has tapped into the wealth channel in recent years to diversify its sources of funding. https://lnkd.in/epQmsnFP

The International Monetary Fund's Financial Stability Report is being published chapter-by-chapter. Thankfully, an area of high interest for us is coming out early: #privatecredit Key takeaways 🔹 The chapter assesses vulnerabilities and potential risks to financial stability in corporate private credit, a rapidly growing asset class—traditionally focused on providing loans to midsize firms outside the realms of either commercial banks or public debt markets—that now rivals other major credit markets in size. 🔹 Private credit creates significant economic benefits by providing long-term financing to firms too large or risky for banks and too small for public markets. However, credit migrating from regulated banks and relatively transparent public markets to the more opaque world of private credit creates potential risks. 🔹 Firms borrowing private credit tend to be smaller and riskier than their public market counterparts, and the sector has never experienced a severe economic downturn at its current size and scope. Such an adverse scenario could see a delayed realization of losses followed by a spike in defaults and large valuation markdowns. 🔹 The chapter identifies vulnerabilities arising from relatively fragile borrowers, increased exposure of pensions and insurers to the asset class, a growing share of semiliquid investment vehicles, multiple layers of leverage, stale valuations, and unclear interconnections between participants. 🔹 Assessing overall financial stability risks of this asset class is challenging because the data needed to fully analyze these risks are unavailable. Despite these limitations, such risks appear contained at present. 🔹 However, given private credit’s size and role in credit creation—now large enough to compete directly with public markets—it may become macro-critical and amplify negative shocks to the economy. 🔹 The rapid growth of private credit, coupled with increasing competition from banks on large deals and pressure to deploy capital, may lead to a deterioration in pricing and nonpricing terms, including lower underwriting standards and weakened covenants, raising the risk of credit losses in the future. 🔹 If the asset class remains opaque and continues to grow exponentially under limited prudential oversight, the vulnerabilities of the private credit industry could become systemic. Radek Jezbera Jitendra Singh Jaitawat

Dear friends, hope you are already enjoying your summer break, or packing to go. In my book, spending time with the family is the best way to recharge batteries and getting ready for the rest of the year. For those of you working, or with time on your hands to read about markets, for my last publication before the summer break I wanted to share our latest Performing Credit Quarterly. This time, I found particularly relevant the graphics that illustrate the bifurcation in US economy as a result of the concentration of wealth. Also, there is an interesting comment on the impact of individual investors gaining access to private markets.   Besides, you will find a perspective on the key trends and risks in credit markets, and particular focus in high yield, senior loans, IG, EM debt, global convertibles, structured credit, and private credit.   Hope you have a wonderful month of August. Pedro.  

Plender's latest piece in the AFR is a must-read for anyone who wants to understand the potential threats to the global financial system. In the article, Plender argues that government debt could have catastrophic consequences for financial markets worldwide. Imagine a world where US Treasuries (or other G10 Government Bonds) were no longer seen as safe assets - the impact on the financial sector and the real economy would be devastating. Check out the full article here to learn more: https://lnkd.in/gK9vKD-K #ᴍɪᴋᴇᴅᴜɴᴄᴀɴ #ᴍᴀᴋᴇitʜᴀᴩᴩᴇɴ #LBFalumni #SkyHighTower🚀

Thanks Robin Wigglesworth. Obviously nothing to see here, right? 😉 Jack Farley and I talked at length about the rise of private credit and the risks we don’t understand yet on his podcast Forward Guidance. Links to the podcast here: https://lnkd.in/g-BKV9aU #privatecredit #systemicrisk #banking Education, not financial advice.

A lot to unpack here, not least of which is the irony of the regulatory body who sets the interest rate environment finger-pointing over the precarious nature of the cost of borrowing. I've said it before but will double down. It's completely unhealthy for the financial services sector to play the blame game across asset classes. Public and private markets can have a symbiotic effect on the economic growth engine, and efforts are better served to foster that rather than looking for scapegoats. https://lnkd.in/eXu6nKge