Michael Arougheti, co-founder, CEO and president of Ares Management Corporation
Adam Jeffery | CNBC
The explosion in private credit has raised a range of concerns, but the strongest one recently is that the industry is not experiencing a massive recession. So when there’s some kind of crisis, what does that mean for borrowers?
Asked about the migration of assets into the non-bank sector during JPMorgan’s investor day earlier this week, Chairman and CEO Jamie Dimon said, “We’re going to compete. We’re going to be fine.” But he added, “The question they should be asking is, what does this mean for the United States of America?”
“When (obscenity) happens, a lot of people who receive private credit are going to be in trouble,” Dimon said. “In a crisis, banks tend to work with borrowers and middle-market lending… In the mark-to-market world of private credit, as trustees they have to book at par.”
In other words, he said, “Private credit didn’t respond to high interest rates, it didn’t respond to the recession, it didn’t respond to high interest rate spreads.”
We don’t know how these workouts are going to… work.
The next day, the chief executive of one of the largest private credit firms defended the industry and its performance in times of stress. When CNBC was asked about Dimon’s recent comments, Ares Management Chief executive Michael Arougheti responded: “Wrong.”
“We have been investing in private markets for 30 years; a loan is a loan, whether it is on a bank balance sheet or in a private credit fund,” Arougheti said. “Since we founded the company, Ares has invested $1,500 in private credit markets. billion and our loss rate was one basis point. So everything we’ve seen over the last 30 years suggests that the risk that people are taking is not correct in trying to argue that our market exists.
ARES, 1 year
Ares executive chairman Tony Ressler, who sat next to Arougheti in an interview with CNBC, said the growth in private credit will “actually reduce systemic risk.”
“These assets are going onto the balance sheets of companies that are not highly leveraged and are not financing themselves through short-term liabilities or customer deposits,” Ressler said.
private credit default rates
January, United States Federal Reserve Examines default rates for private credit and how they compare to traditional bank loans (leveraged loans and high-yield bonds). The Fed cited KBRA DLD data showing that “despite their senior debt structure, private credit loans have relatively lower default recovery rates (or, in other words, higher losses upon default) compared to syndicated loans or high-yield bonds.”
We got the latest data from KBRA DLD on Thursday, which showed a mixed picture for the implied recovery. The average post-default value for direct loans is about 53.1%, lower than 57.5% for syndicated loans but higher than 46.3% for high-yield bonds
The Fed attributed the shortfall in part to private credit risk skewing more toward industries with lower collateral or tangible assets, such as software, financial services or health care services.
But the faster private credit grows, the more closely it becomes linked to traditional banking. JPMorgan Investor Day executives said the company, the largest private credit portfolio financier, already has dedicated capital on its balance sheet to provide capital to corporate borrowers in the form of direct loans. The company is also developing a co-lending program to increase the amount of capital it can deploy in the space.
So if an eventual recession does manifest itself in the economy, you know something that will probably shock everyone. Some borrowers will feel the hit more than others.
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