Top Wall Street executives have downplayed the likelihood of a private credit downturn sparking a wider economic crisis, despite a string of major lenders setting aside billions of dollars to manage potential defaults on their balance sheets.
Goldman Sachs boss David Solomon dismissed the growing chorus of voices warning that tremors in the private credit market could evolve into a systemic crash, branding the spate of recent defaults “idiosyncratic”.
“We’ve been in a very, very long, easy credit cycle – one of the longest I’ve seen in my career,” he told Bloomberg at a Saudi investment summit. “At some point there will be an [end to the] credit cycle, which will probably come at a period of time when the economy slows more acutely… but that’s different from a systemic crisis.
“I don’t see anything in the context of a handful of bad credit situations that’s leading me to say we have a systemic issue around the corner.”
Solomon’s comments echoed similar remarks by a host of influential dealmakers in the wake of the debt-related collapse of car parts maker Firstbrands and auto credit specialist Tricolor, including from the bosses of Blackstone and KKR.
And at the same event in Riyadh, Paul Taubman, the chief executive of dealmaking giant PJT Partners, put the recent flurry of costly defaults down to deals having been struck during the “free money” era in the wake of the Covid pandemic. “We’re spending a disproportionate amount of time restructuring that vintage of transactions,” he said.
Why are people worried about private credit?
The staunch defence launched by industry luminaries in the wake of the added scrutiny, which reached fever pitch last week after Primalend – another subprime auto lender – filed for bankruptcy in the US, came despite several major lenders putting aside billions for bad loans.
French lending giant BNP Paribas ringfenced €905m (£795m) for debt defaults, €190m of which it allocated for a “specific credit situation”, while HSBC announced provisions of $1bn (£750m) to manage upcoming credit losses as part of its third quarter update on Tuesday.
The latter’s chief financial officer Pam Kuar said HSBC’s balance sheet exposure to private credit was only in the “single-digit billions” on a call with reporters, but flagged the bank’s vulnerability to a wider credit downturn.
Fuelled by the era of low interest rates in the wake of the 2008 financial crisis, the private credit industry has ballooned to a $40 trillion industry. The spread between government bonds and corporate equivalent has fallen to record lows, which industry figures warn has pushed some of the sectors’ funds into ever riskier private loans to retain the high yield to which investors were accustomed.
That behaviour – and its rapid growth – has led to growing fears among lawmakers and regulators over the industry’s opaque nature, which often strikes debt deals that aren’t disclosed on companies’ balance sheet.
Bank of England governor Andrew Bailey warned last week that the failures of Primalend and Tricolor had echoes of the subprime mortgage crash that foreshadowed the Great Financial Crisis. And a committee of UK lawmakers responsible for examining financial regulation has launched an inquiry into growing role the sector plays in the international financial system..