Private Credit’s Problems Just Got Real

Submitted by QTR's Fringe Finance

For most of this year, the private credit story I’ve written about (and warned about) has been about investors trying to get their money out. Now the loans themselves appear to be cracking.

The Wall Street Journal reported yesterday that defaults across several of the largest publicly traded private credit funds have climbed to their highest levels in at least five years, while watchlists of troubled borrowers are simultaneously expanding and investor returns are deteriorating. In other words, the private credit mess I’ve been documenting since last year is entering what could be a far more important phase.

Until now, defenders of the industry could make a relatively straightforward argument. Yes, investors were requesting redemptions, and yes, some funds were limiting withdrawals, but the underlying credit portfolios were supposedly fine. That argument is getting considerably harder to make.

According to the Journal’s analysis, the percentage of nonaccruing loans at funds overseen by Ares, Golub Capital, Blue Owl and Blackstone has reached its highest level since at least 2021. At Blue Owl Capital Corp., nonaccruals reached 2.8% during the second quarter, the highest level in at least five years.

Nonperforming loans at the other three funds examined by the Journal also reached five year highs, surpassing even the levels seen in 2023, when the Federal Reserve’s rate hikes were putting enormous pressure on leveraged borrowers.

And it isn’t just defaults. Private credit funds managed by Ares, Golub and KKR have also reported increases this year in the number of borrowers showing deteriorating performance. Their watchlists are now at their highest levels since roughly 2022 and 2023.

That matters because watchlists are effectively the waiting room for future credit problems. Not every company on one will default, and different managers use different criteria, but when nonaccruals are already rising at the same time the pipeline of potentially troubled borrowers is expanding, it becomes increasingly difficult to dismiss the deterioration as a handful of isolated accidents.

Even Golub Capital co CEO David Golub acknowledged the obvious, telling the Journal, “We are clearly in a credit cycle.”

No shit. And in my opinion, the defaults aren’t going to stop anytime soon.

This is important because it adds another leg to a story I have been following for almost a year. I started warning about...(READ THIS FULL ARTICLE HERE).