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Here’s an interesting Bloomberg piece on how JPMorgan keeps sending out lists of private credit loans it’s keen on buying, and keeps getting rebuffed by the industry.
Bloomberg’s Ellen Schneider and Carmen Arroyo say the lists have become a running joke — private credit firms are resolutely holding JPMorgan at bay and “have little intention of sharing the profits with those banks now that private credit is a multitrillion-dollar industry and the talk of the financial world”.
However, Alphaville has a sneaking suspicion the real reason why JPMorgan’s attempts to trade private credit loans are being stymied is actually this paragraph:
They have another strong motivation, too: The fear that if JPMorgan, or any of the other banks following in its footsteps, is successful in creating a vibrant trading market for the loans, it could shatter the perception — or mirage, as critics would argue — of price stability that they’ve spent years selling to investors. The value of the loans, the pitch goes, won’t ever get whipsawed around, and dragged down, by the vagaries of the broader markets because they are privately held assets. But if they trade regularly, price levels get marked, day after day, and private credit suddenly doesn’t look all that different than its public market counterparts.
Some people have long assumed that as private credit grows and matures, transparency will increase and the loans will eventually begin trading more frequently.
But the opacity and illiquidity aren’t bugs; they are the asset class’s essential features.
The main reason why private credit’s risk-adjusted returns look so enticing to institutional investors that have chucked over a trillion dollars at it in recent years is the lack of volatility. The lack of trading and public data permits more . . . finessing around valuations and allows the industry to put up returns like this:
Yes, we are supposed to believe that in a year when equities and bond markets were getting brutalised — with every major segment suffering double-digit losses — private credit somehow magically eked out positive returns.
Proponents say that the floating rate nature of private credit loans means they do better in a rising interest rate environments. They argue that just because public markets are manic-depressive doesn’t mean they need to move their marks around in similar fashion.
Both are true! But the temptation to mark ~cough~ optimistically ~cough~ is intense. Moreover, tighter monetary policy also makes debt burdens far more onerous to bear — and there are plenty of signs that there’s been a lot of distress in private credit since 2022.
However, this stress can be masked by quietly extending loans, simply adding interest payments to a loan’s principal, or by using some of all that money raised to extend new loans to keep the show on the road.
The last thing you want is then to someone to trade a slice of that loan at a lower price, and force you to mark it down. As Bloomberg’s story notes (with our emphasis):
Many shops also want tight control over who owns the debt, and often look to stop banks from selling it to firms they don’t have strong partnerships with — a trend that’s become increasingly common in the leveraged loan market as well. Some sponsors and lenders have gone so far as to ask JPMorgan to remove their loans from the runs it sends out, according to the person familiar with the matter, who asked not to be identified discussing private conversations.
This meshes with what Alphaville has also heard, with some big private credit managers apparently threatening to put any bank that dares to make public quotes on their loans in a “penalty box”, refusing to business with it. This seems to be what has afflicted JPMorgan’s efforts in private credit.
Not that JPMorgan has a good handle on private credit pricing either. Bloomberg’s story highlights the case of Pluralsight, which the bank’s traders quoted at over 90 cents on the dollar last summer, at a time when it was quietly restructuring is debts and creditors had marked the loan at 50 cents on the dollar.
Pricing glitches are endemic to the market. The one small ray of sunlight, however, is offered by “Business Development Companies”, which are akin to listed private credit funds. These have to publicly report the valuations of the loans they hold, and as a result you’d expect that they’d be similar. But as Barclays highlighted in a report last year, valuations are often all over the place.
Transparency and trading might eventually come to private credit. But private credit firms are going to fight against it tooth and nail.
Further reading:
— How is private credit weathering its first big rate hiking cycle? (FTAV)
