Jeffrey Gundlach, head of DoubleLine, is ringing a new warning bell for the private credit market, intensifying concerns surrounding a sector that has experienced explosive growth in recent years. Gundlach, particularly critical in recent times, warns that the market strongly resembles the subprime mortgage bubble before the 2008 crisis, emphasizing that many investors may find themselves trapped and eventually suffer losses. As he mentioned at the Milken Institute conference in Beverly Hills, financial intermediaries promoted private credit products to retail investors primarily motivated by high commissions, without adequately explaining liquidity constraints.
"Semi-liquidity"… in name only
He was particularly sharp regarding the term "semi-liquid" used by companies in the sector. As he noted, these products are "liquid when you don't want your money and illiquid when you need it," highlighting a lack of transparency and limited investor information. Growing dissatisfaction is reflected in a wave of redemption requests, with investors attempting to withdraw money from funds that were until recently considered safe.
Pressure on valuations – Moves by Blue Owl and Apollo
At the center of the crisis is Blue Owl Capital, which proceeded with a share buyback of 85 million dollars while simultaneously lowering the valuation of its key funds. Its 14.1 billion dollar technology fund recorded a drop of approximately 5%, while Blue Owl Capital Corporation also fell by nearly 3%. At the same time, the company reduced the dividend, citing lower interest rates and weaker risk premiums. Losses were also announced by an Apollo Global fund, while MidCap Financial Investment Corp. recorded losses and a decline in net asset value amid pressure on investments related to the software sector and the impact of artificial intelligence.
Increase in bad debts and "cracks" in the model
Non-performing loans are increasing significantly, with MidCap reporting a rise to 167 million dollars from 48.5 million a year ago. Fund managers are now under increased scrutiny, as they are called upon to explain their valuations and their exposure to high-risk sectors such as technology.
"Bomb" from JPMorgan – Losses exceeding 500 million dollars
At the same time, a new source of risk is emerging in bank financing. According to Bloomberg, a group of banks led by JPMorgan is expected to record losses exceeding 500 million dollars in financing for Qualtrics. This is the largest "hung deal" of the year, as banks are forced to hold 5.3 billion dollars in debt for the Press Ganey Forsta acquisition. Deteriorating conditions in the software market and falling loan prices make the disposal of debt to investors particularly difficult, leading to significant accounting losses.
Chain reaction pressures in the sector
The case of Qualtrics is not isolated. Similar problems have appeared in deals linked to Deutsche Bank and UBS, confirming that the leveraged finance market is in a phase of readjustment. Investors are avoiding new issuances, preferring existing debt at lower prices, a fact that increases the cost of financing for companies.
Efforts to restore confidence
In this environment, Apollo is attempting to bolster transparency by planning daily valuations for its private credit funds by September, as stated by CEO Marc Rowan. This move is considered a step toward market standardization, although questions remain as to whether valuations reflect the true value of the assets.
Private credit in a phase of "revelation"
The private credit market appears to be entering a critical turning point, with rising pressures, questioning of valuations, and intensifying risks for investors and banks. As Gundlach warns, the lack of transparency and the delayed reflection of risks may lead to significant losses, bringing back memories of previous financial crises.
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