Private credit lenders underwrote billions in loans assuming interest rates would stay at zero forever. Rates went up. The borrowers can't pay. This is being treated as a surprise.
Nobody underwrote for that, says the headline, which is another way of saying nobody did their f*cking job. These lenders handed out money to companies that couldn't survive a 2% rate environment and called it sophisticated alternative investing. They charged management fees for not reading their own loan documents.
The pitch was simple. Banks won't lend to these borrowers because of regulations and risk management and other pussy shit. We'll lend to them instead. We're smarter. We're flexible. We charge 12% interest which definitely doesn't signal that these companies are absolute dogshit credits.
Higher rates squeeze borrowers, warns the summary, as if rates doing exactly what rates do constitutes a black swan event. Rates went from zero to five percent. The borrowers who could barely afford zero cannot afford five. This required a graduate degree in finance to miss.
Private credit grew to $1.5 trillion by lending to companies that real lenders wouldn't touch. The business model was bulletproof as long as money stayed free forever and nothing bad ever happened. One of those assumptions failed. The lenders are now discovering that loan covenants written in crayon don't hold up in bankruptcy court.
Pension funds invested in this garbage because it had high yield in the name and their consultants said it was diversification. Those same pensions will now get their money back in seventeen years at sixty cents on the dollar and call it a learning experience.
The key test isn't whether private credit survives higher rates. It's whether anyone admits they were selling junk bonds with extra steps.
Photo by Markus Winkler on Unsplash
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