Another mid-sized lender filed for bankruptcy in the US, highlighting the growing strain in American credit markets which Andrew Bailey has likened to the subprime crisis that foreshadowed the Great Financial Crisis (GFC).
Primalend, a Texan provider of subprime financing to car dealerships, said in a filing on Wednesday that it had collapsed after months of negotiations with creditors over missed interest payments on its own debt.
“No debt is being called due or accelerated as a result of this process,” Primalend’s chief executive officer, Mark Jensen, said in a press release. “We deeply value our dealer-borrower relationships and look forward to continuing to serve the buy-here-pay-here industry as we move forward.”
The mid-sized lender said it would continue to fund and service loans to its customers while it looked for a buyer in bankruptcy court. But its collapse is just the latest in a string of debt-related issues affecting firms and banks; particularly those that serve US customers from lower socioeconomic backgrounds.
Private credit jitters spark fears of systemic risk
Last month, Tricolor – a subprime auto dealership and lender that specialised in providing US immigrants with car finance – took investors and creditors off-guard when it suddenly fell into liquidation. And the car parts maker First Brands also suffered an ignominious collapse after drowning in tens of billions of dollars in private credit-related debts.
Two regional lenders in America – Zions Bank and Western Alliance – compounded jitters when they revealed hefty fraud-related write downs last week. Combined with a similar disclosure from Jefferies over its exposure to the collapse of First Brands, the news sparked a sell-off in bank stocks around the world, which pushed the FTSE to its worst day since Donald Trump’s ‘liberation day’ tariff announcements.
The flurry of write offs and failures has caused investors to reevaluate their vulnerability to similarly risky debt, after a boom in private lending that had lasted several years forced banks and lenders into riskier higher-yielding debt.
The pattern of failures also led Bank of England Governor Andrew Bailey to draw comparisons with the subprime credit crisis in 2007, which eventually ballooned into the GFC of 2008.
Speaking at a House of Lords committee evidence session, Bailey said “alarm bells” were ringing over the succession of collapses linked to private credit, which in the past few years has ballooned into a $1.7 trillion (£1.28 trillion) sector.
The central banking chief relayed conversations he had had with senior industry figures who assured him that “everything was fine in their world apart from the role of the rating agencies”, redolent of the way banks had behaved in the run-up to the GFC.
“I said, ‘Well, we’re not playing that movie again, are we?’” Bailey told peers. “If you were involved before the financial crisis and during it, alarm bells start going off at that point.”
What is private credit, and why are people worried about it?
Bailey’s comments echoed similar remarks made by JP Morgan boss Jamie Dimon. The banking luminary warned that more ‘cockroaches’ were likely to emerge from the private credit space after the collapse of First Brands, which had over £20bn debt linked to private credit funds – often referred to as ‘shadow banks’ – on its books before it collapsed.
“When you see one cockroach, there are probably more,” he told an analyst call alongside his bank’s third quarter results.
But several private credit industry figures have sought to downplay the structural vulnerability their sector in the wake of the string of bankruptcies, arguing that Tricolor, First Brands – and now Primalend – were isolated defaults related to poor due diligence.
Mark Lipschultz, the man behind one of the sector’s biggest players, launched a withering broadside on Dimon in the wake of his ‘cockroaches’ comment, accusing the investment bank boss of blaming a competing sector for the banking industry’s own poor diligence. JP Morgan disclosed its own $170m loss tied to Tricolor shortly before Dimon’s call with analysts.
Speaking at a finance summit this month, Lipschultz, the founder of Blue Owl Capital, said: “There are people who have meaningful, parochial interests in the industry not continuing to grow and succeed.
“[Private equity giant] Blackstone’s market cap exceeds the market cap of most financial institutions in the world today. It’s not as if that’s not coming from someone, and of course those people don’t like it.”
UK lenders unaffected
Laura Cooper, senior macro strategist at investment manager Nuveen, believes the reality is somewhere in the middle, and a sign private credit is entering a “late-cycle phase where risk is rising unevenly”.
“The asset class has grown roughly 13 per cent annually since the 2008-09 crisis, maturing into a core institutional holding,” she said. “And that maturity brings greater complexity.”
Despite last week’s FTSE sell-off, results from British lenders that reported week would suggest there is no suggestion the string of defaults will harbinger a crisis similar to the GFC, which saw several of the country’s largest lenders taken into public ownership.
Speaking to reporters, Barclays boss CS Venkatakrishnan – known as Venkat – played down fears that the string of failures would translate to any systemic risk, despite the lender disclosing a £110m exposure to Tricolor. And when asked whether Dimon’s cockroach prophesy was likely to materialise he replied, curtly: “I’m no entomologist.”
Meanwhile issues at Lloyds – which reported a large but expected drop in profit at its third quarter earnings this week – were more down to hikes it made to its motor finance provisions, rather than any private credit-related write-offs.