Bloomberg reports how Fund managers in this red-hot asset class are often valuing their loans more generously than others do—This should have Regulators starting to worry.
Flawed Valuations Threaten $1.7 Trillion Private Credit Boom
The meteoric rise of private credit funds has been powered by a simple pitch to the insurers and pensions who manage people's money over decades: Invest in our loans and avoid the price gyrations of rival types of corporate finance. The loans will trade so rarely — in many cases, never — that their value will stay steady, letting backers enjoy bountiful and stress-free returns. This irresistible proposal has transformed a Wall Street backwater into a $1.7 trillion market.
Central bankers' rapid-fire rate hikes over the past two years have strained the finances of corporate borrowers, making it hard for many of them to keep up with interest payments.
Suddenly, a prime virtue of private credit — letting these funds decide themselves what their loans are worth, rather than exposing them to public markets — is looking like one of its greatest potential flaws.
Data compiled by Bloomberg and fixed-income specialist Solve, as well as conversations with dozens of market participants, highlight how some private-fund managers have barely budged on where they "mark" certain loans even as rivals who own the same debt have slashed its value.
Values for the same debt held by different funds have ranged from 79 cents on the dollar, to 46 cents—deep in distressed territory. Another private bond was valued on the same date between 85 cents and 49 cents.
An equally perplexing sign is the number of private funds who own publicly traded loans, and still value them much more highly than where the same loan is quoted in the public market.
While nobody cared too much when central bank interest rates were close to zero, today financial watchdogs are fretting that the absence of consensus may be hiding more loans in trouble.
See the whole article on Bloomberg here: https://www.bloomberg.com/news/articles/2024-02-28/how-private-credit-market-boom-is-hiding-potential-valuation-problems
