5 ms·

Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "e

by cs702 7mo ago

Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.[a] tick-tock, tick-tock, tick-tock... --- [a] https://news.ycombinator.com/item?id=47351462 https://news.ycombinator.com/item?id=47351462

RobRivera 7mo ago
What kind of trouble is brewing from the migration of partner capital committment to credit based on NAV? What is the risk, probability of actualizing the risk, and the outcome of actualized risk? The ticktock ticktock routine reads like baseless fearmongering to me.
- cs702 7mo ago
  My understanding is that many private credit funds have been very lax about conducting basic due diligence on the creditworthiness of borrowers. For example, take First Brands, a multi-billion-dollar company which filed for bankruptcy last year. First Brands had pledged the same assets as collateral for loans from multiple private-credit funds. Those loans were being carried at a fantasy NAV of 100 cents per dollar, until suddenly they were not. Did none of these lenders submit UCC filings so other lenders could check which assets had already been pledged as collateral? Did none of these lenders ever check to see which assets had already been pledged? Did all these lenders make loans based on blind trust? Failing to check and verify that assets have not been pledged as collateral to other lenders is an amateur mistake. It's reckless, really. The equivalent in home-mortgage lending would for a mortgage lender never even bothering to check that a homeowner isn't getting multiple first-lien mortgages simultaneously on the same home, then forgetting to put the first lien on the property title. My take is that for many private credit funds, NAVs are basically fantasy.
  - bombcar 7mo ago
    Once you get outside of things that are highly standardized (like home loans to individuals) you quickly find out that no matter how regulated, finance is done on a handshake.
    - cs702 7mo ago
      That's true, but only to a point. Due diligence is not uncommon, especially with more traditional forms of credit. I resorted to the mortgage-lending analogy so others could quickly grok what multi-pledging means.
  - RobRivera 7mo ago
    If lenders are in fact not performing due diligence and passing off good credit as bad...sounds suspiciously like a 2008-like era where noone cared about the credit worthiness but just wanted to generate lines of credit. Oh boy, if this is the case, oh boy. Lessons not learned indeed.
    - gymbeaux 7mo ago
      Remember, the lesson was that Daddy Government won’t let you fail. Barring any federal regulations, there’s no reason for financial entities to not repeat the exact “mistakes” that caused the 2008 (2007) Great Recession. The lesson isn’t being ignored- it’s being used as justification.
  - vmbm 7mo ago
    Do you know if First Brand's actions are considered fraud? Or was this entirely on the lenders to make sure they were in the clear regarding the collateral? Doesn't excuse the lack of diligence, but curious if there was some assumption of good faith that may have played a role in what diligence was or was not done.
    - cs702 7mo ago
      Only a court can decide if the actions are fraud, but they sure look like it to me. Fraud doesn't excuse the lack of due diligence.
sciencesama 7mo ago
But what will break the clock ?
- JumpCrisscross 7mo ago
  > what will break the clock ? So unlike money-market funds, these private-credit funds can gate withdrawals and extend and pretend by turning cash coupons into PIKs. So I don't actually see credit concerns directly driving liquidity issues for the banks that didn't hold the risk on their balance sheet glares Germanically. Instead, I think the contagion risk is psychological. Which is an unsatisfying answer. But if there are massive losses on e.g. DBIP and DB USA halts withdrawals, then the 2% stock loss Morgan Stanley suffered when it capped withdrawals [1] could become a bigger issue. [1] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-500-nasdaq-03-12-2026/card/morgan-stanley-private-credit-fund-hit-with-redemption-requests-IS8PSZh497HC5aF4CkGN https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...
  - boringg 7mo ago
    I believe the gated feature can be waived though it causes a precarious situation. It ends up with same psychology of a bank run -- people (institutions) concerned because they can't access funds or they think that the queue to exit a failing fund is too long - filled each quarter (i.e. by the time they redeem NAV has collapsed).
    - JumpCrisscross 7mo ago
      > the gated feature can be waived Or never invoked. It's a safety feature for the fund and, arguably, systemic stability.
      - boringg 7mo ago
        Totally - its supposed to prevent a collapse of confidence but at the same time can signal a collapse of confidence. Double edged sword.
  - 7mo ago
lokar 7mo ago
The only problem is allowing regulated US banks with an implicit gov guarantee to lend money to them.
boringg 7mo ago
There are limited ways to short these positions which would probably add some fuel to the fire.
- metrix 7mo ago
  I don't see it as adding fuel to the fire. I see it as helping the market price companies correctly
  - boringg 7mo ago
    Its a balancing act.
strangattractor 7mo ago
You can always tell when there is a problem. When things are fine the companies keep the profits to themselves. When things start to get dicey - foist it off onto retail investers. Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI
- chii 7mo ago
  It's why as a retail investor, never buy things that would otherwise have not been available to you (but was to those "elite"/institutional investors previously). Think pre-IPO buy-in. Investors in the know and other well connected institutional investors get first dibs on all of the good ones. The bad ones are pawned off to retail investors. It's no different with private credit and private equity. These sorts of deals have good ones and bad ones - the good ones will have been taken by the time it flows down to retail.
  - deleted 7mo ago
    [deleted]
  - rd 7mo ago
    This can't be a to-die-on rule though. Retail would've never bought GOOG, or TSLA, or AAPL if that were the case. Maybe I'm just being pedantic.
    - wmf 7mo ago
      Even for good assets there's a price you shouldn't pay. People are joking(?) about triple-layer SPVs where you can get pre-IPO exposure but at higher-than-IPO price.
    - Analemma_ 7mo ago
      Google and Apple didn't go through ten funding rounds like today's startups do. Apple had one angel and three rounds, Google had one angel and literally just an A round after that; then retail investors could capture all the upside. Now there's way more time for private investors to pick the bones clean before it gets dumped on the public.
xenadu02 7mo ago
Funny enough Chinese State owned banks have been doing much the same for quite some time. No one ever defaults, loans are extended as long as it takes. Presumably the threat of being called into the next party meeting to explain yourself is sufficient motivation for the people running the business to pivot as many times as it takes until they find a way to make money. Worst case the state swaps someone else into leadership. I say this to say... who knows? I guess if you shuffle deck chairs fast enough everything works out fine (?)
- solatic 7mo ago
  The larger you are, the larger the rounding errors are, the more money that can disappear due to a failure and explained away or extended or written off or whatever euphemism you want to pick. But the sum of rounding errors is less likely to itself be a rounding error. It works until it doesn't, and Evergrande collapsing with $300 billion in Chinese real estate debt will be a case study for years to come.
  - ethbr1 7mo ago
    Isn't the real underlying risk here concentration, as opposed to diversification? If you have unlimited capital and time horizon, because you're a nation with the power to tax and print money, then you can keep this game going for a long time. The only thing that mandates it stops are if (a) too many of your loans are correlated with the same thing that crashes (e.g. energy, tulips, AI, etc) or (b) too many of your loans are tied together in a single entity (either because it combined multiple smaller entities or because it tied itself into all their financial arrangements).

by cs702 7mo ago

RobRivera 7mo ago

What kind of trouble is brewing from the migration of partner capital committment to credit based on NAV? What is the risk, probability of actualizing the risk, and the outcome of actualized risk? The ticktock ticktock routine reads like baseless fearmongering to me.

cs702 7mo ago
My understanding is that many private credit funds have been very lax about conducting basic due diligence on the creditworthiness of borrowers. For example, take First Brands, a multi-billion-dollar company which filed for bankruptcy last year. First Brands had pledged the same assets as collateral for loans from multiple private-credit funds. Those loans were being carried at a fantasy NAV of 100 cents per dollar, until suddenly they were not. Did none of these lenders submit UCC filings so other lenders could check which assets had already been pledged as collateral? Did none of these lenders ever check to see which assets had already been pledged? Did all these lenders make loans based on blind trust? Failing to check and verify that assets have not been pledged as collateral to other lenders is an amateur mistake. It's reckless, really. The equivalent in home-mortgage lending would for a mortgage lender never even bothering to check that a homeowner isn't getting multiple first-lien mortgages simultaneously on the same home, then forgetting to put the first lien on the property title. My take is that for many private credit funds, NAVs are basically fantasy.
- bombcar 7mo ago
  Once you get outside of things that are highly standardized (like home loans to individuals) you quickly find out that no matter how regulated, finance is done on a handshake.
  - cs702 7mo ago
    That's true, but only to a point. Due diligence is not uncommon, especially with more traditional forms of credit. I resorted to the mortgage-lending analogy so others could quickly grok what multi-pledging means.
- RobRivera 7mo ago
  If lenders are in fact not performing due diligence and passing off good credit as bad...sounds suspiciously like a 2008-like era where noone cared about the credit worthiness but just wanted to generate lines of credit. Oh boy, if this is the case, oh boy. Lessons not learned indeed.
  - gymbeaux 7mo ago
    Remember, the lesson was that Daddy Government won’t let you fail. Barring any federal regulations, there’s no reason for financial entities to not repeat the exact “mistakes” that caused the 2008 (2007) Great Recession. The lesson isn’t being ignored- it’s being used as justification.
- vmbm 7mo ago
  Do you know if First Brand's actions are considered fraud? Or was this entirely on the lenders to make sure they were in the clear regarding the collateral? Doesn't excuse the lack of diligence, but curious if there was some assumption of good faith that may have played a role in what diligence was or was not done.
  - cs702 7mo ago
    Only a court can decide if the actions are fraud, but they sure look like it to me. Fraud doesn't excuse the lack of due diligence.

sciencesama 7mo ago

But what will break the clock ?

JumpCrisscross 7mo ago
> what will break the clock ? So unlike money-market funds, these private-credit funds can gate withdrawals and extend and pretend by turning cash coupons into PIKs. So I don't actually see credit concerns directly driving liquidity issues for the banks that didn't hold the risk on their balance sheet glares Germanically. Instead, I think the contagion risk is psychological. Which is an unsatisfying answer. But if there are massive losses on e.g. DBIP and DB USA halts withdrawals, then the 2% stock loss Morgan Stanley suffered when it capped withdrawals [1] could become a bigger issue. [1] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-500-nasdaq-03-12-2026/card/morgan-stanley-private-credit-fund-hit-with-redemption-requests-IS8PSZh497HC5aF4CkGN https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...
- boringg 7mo ago
  I believe the gated feature can be waived though it causes a precarious situation. It ends up with same psychology of a bank run -- people (institutions) concerned because they can't access funds or they think that the queue to exit a failing fund is too long - filled each quarter (i.e. by the time they redeem NAV has collapsed).
  - JumpCrisscross 7mo ago
    > the gated feature can be waived Or never invoked. It's a safety feature for the fund and, arguably, systemic stability.
    - boringg 7mo ago
      Totally - its supposed to prevent a collapse of confidence but at the same time can signal a collapse of confidence. Double edged sword.
- 7mo ago

lokar 7mo ago

The only problem is allowing regulated US banks with an implicit gov guarantee to lend money to them.

boringg 7mo ago

There are limited ways to short these positions which would probably add some fuel to the fire.

metrix 7mo ago
I don't see it as adding fuel to the fire. I see it as helping the market price companies correctly
- boringg 7mo ago
  Its a balancing act.

strangattractor 7mo ago

You can always tell when there is a problem. When things are fine the companies keep the profits to themselves. When things start to get dicey - foist it off onto retail investers. Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI

chii 7mo ago
It's why as a retail investor, never buy things that would otherwise have not been available to you (but was to those "elite"/institutional investors previously). Think pre-IPO buy-in. Investors in the know and other well connected institutional investors get first dibs on all of the good ones. The bad ones are pawned off to retail investors. It's no different with private credit and private equity. These sorts of deals have good ones and bad ones - the good ones will have been taken by the time it flows down to retail.
- deleted 7mo ago
  [deleted]
- rd 7mo ago
  This can't be a to-die-on rule though. Retail would've never bought GOOG, or TSLA, or AAPL if that were the case. Maybe I'm just being pedantic.
  - wmf 7mo ago
    Even for good assets there's a price you shouldn't pay. People are joking(?) about triple-layer SPVs where you can get pre-IPO exposure but at higher-than-IPO price.
  - Analemma_ 7mo ago
    Google and Apple didn't go through ten funding rounds like today's startups do. Apple had one angel and three rounds, Google had one angel and literally just an A round after that; then retail investors could capture all the upside. Now there's way more time for private investors to pick the bones clean before it gets dumped on the public.

xenadu02 7mo ago

Funny enough Chinese State owned banks have been doing much the same for quite some time. No one ever defaults, loans are extended as long as it takes. Presumably the threat of being called into the next party meeting to explain yourself is sufficient motivation for the people running the business to pivot as many times as it takes until they find a way to make money. Worst case the state swaps someone else into leadership. I say this to say... who knows? I guess if you shuffle deck chairs fast enough everything works out fine (?)

solatic 7mo ago
The larger you are, the larger the rounding errors are, the more money that can disappear due to a failure and explained away or extended or written off or whatever euphemism you want to pick. But the sum of rounding errors is less likely to itself be a rounding error. It works until it doesn't, and Evergrande collapsing with $300 billion in Chinese real estate debt will be a case study for years to come.
- ethbr1 7mo ago
  Isn't the real underlying risk here concentration, as opposed to diversification? If you have unlimited capital and time horizon, because you're a nation with the power to tax and print money, then you can keep this game going for a long time. The only thing that mandates it stops are if (a) too many of your loans are correlated with the same thing that crashes (e.g. energy, tulips, AI, etc) or (b) too many of your loans are tied together in a single entity (either because it combined multiple smaller entities or because it tied itself into all their financial arrangements).