The barrage of negative private credit news, now that the $1.8 trillion bubble has burst, is coming hot and heavy.
Following last night's report that Cliffwater, a private credit interval fund which according toRubric Capital"is the canary in the coal mine and will be the first domino in the bank run”was the latest fund to be hit with 7% in investor redemptions (and unlikeBlackRock, interval funds can not gate investors), this morning theFT reportedthatJPMorgan has "clamped down on its lending to private credit groups, with bankers looking to cut risk as concerns mount over the credit quality of companies in their stables."
According to the report, the bank informed private credit lenders that ithad marked down the value of certain loans in their portfolios, which serve as the collateral the funds use to borrow from the bank.The loans that have been devalued are tosoftware companies,which are seen as particularly vulnerable to the onset of AI and which account for the bulk of private credit loans made in recent years.
The news, which hit just around 1am ET, hit S&P futures which until that point were trading at session highs.
JPMorgan's decision will limit how much money the bank lends to private credit groups against those loans going forward, a sign traditional Wall Street banks are becoming increasingly nervous about the $1.8 trillion industry that has grown rapidly as non-bank lenders became top creditors to higher-risk borrowers.
The move was to be expected: JPM CEO Jamie Dimon has expressed an increasingly negative view of the private credit space, and told investors at the bank’s leveraged finance conference last week that it was being more prudent in lending against software assets. Troy Rohrbaugh, co-chief executive of JPMorgan’s commercial and investment business, told analysts at a February company update that the bank was becoming more conservative compared to its peers on the risks in private credit.
“As the world gets more volatile . . . this outcome should be expected,” he said, adding: “I’m shocked that people are shocked.”
One person briefed on the bank’s decision saidthe valuation haircuts did not trigger margin calls at funds but were done to pre-emptively reduce the amount of credit available to the funds.
“They have been more difficult the past three months,” the head of one fund said of JPMorgan’s willingness to provide back leverage. He added JPMorgan rarely got “rattled and this is the first time we’ve had a little issue”.
As we explainedat the start of February, investors are concerned AI will heavily disrupt enterprise software businesses, with scrutiny centred on the companies and their private capital financiers who poured hundreds of billions of dollars into the space. Publicly traded software stocks and debt have all plummeted this year. Private credit lenders, by contrast, tend to hold loans for the entire term and have not marked down their portfolios in lockstep. Private lenders have said enterprise software companies are still growing and expect their loans to continue performing, as investors backstop the borrowers.
Source: ZeroHedge News
