The booming private credit sector is inspiring a rich lexicon of alarm. For some time, market watchers have described the alternative asset class — which has grown to around $3tn globally — as a “ticking time bomb.” Recent turbulence has added to the colourful language. After the collapse in September of US car-parts maker First Brands and auto-lender Tricolor Holdings, which had both taken loans from nonbank financial institutions, JPMorgan chief Jamie Dimon warned that “when you see one cockroach, there are probably more.” Andrew Bailey, governor of the Bank of England, said last month the bankruptcies could be a “canary in the coal mine”.
Analysts are taking note. To extend the roach analogy, they are asking whether recent problems in private credit are isolated pests or signs of an infestation. For now, calm prevails. The tremors in the US auto industry are being blamed largely on company-specific factors. There is some comfort that, despite rapid growth, private credit still accounts for a small fraction of outstanding corporate debt in America. Lending is often channelled through funds with limited redemption risks and moderate leverage, according to Fitch Ratings. In the US, broader economic conditions — from falling interest rates to healthy corporate balance sheets — are also expected to provide support.
But even if the risks of an imminent systemic shock appear limited, recent warnings have at least drawn attention to several troubling trends that investors and supervisory bodies should watch closely.