Everyone is warning about private credit
Everyone has an opinion on how, or why, the booming private credit markets will unravel.
Andrew Bailey, governor of the Bank of England, has warned of “alarm bells” in private credit after a series of high-profile defaults such as car parts roll-up First Brands.
JPMorgan chief Jamie Dimon recently predicted more credit blow-ups after his bank lost hundreds of millions of dollars financing defunct auto lender Tricolor Holdings. “When you see one cockroach, there are probably more . . . everyone should be forewarned on this one.”
Not to be outdone, UBS chair Colm Kelleher, on Tuesday, offered the newest private credit warning, which was provocative enough to yield a separate alert from an industry titan.
Kelleher said at a prominent Hong Kong conference that the private capital-owned insurers were using ratings shopping on their fast-growing loan portfolios to create a “looming systemic risk” to global finance.
The former Morgan Stanley finance chief was highlighting smaller rating agencies that are increasingly being used by private equity backed insurance companies to get high ratings on their private assets. He compared it to the ratings shopping on subprime loans before the 2008 financial crisis.
“What you’re seeing now is a massive growth in small rating agencies ticking the box for compliance of investment,” said Kelleher.
His comments were quickly rebutted by Apollo Global chief Marc Rowan as it reported strong third-quarter earnings.
“Colm is just wrong,” said Rowan on a conference call, stating that Apollo’s insurer Athene does not use Egan-Jones, a small agency that has rated thousands of private loans, and predominantly has assets rated by the three large rating agencies, Moody’s, S&P Global Ratings and Fitch.
Yet Kelleher’s comments triggered a separate credit warning from Rowan, but directed elsewhere.
The multi-billionaire architect of Apollo’s strategy to match insurance liabilities with high-octane private credit assets said a bust could come from jurisdiction shopping as late entrants to the nexus of private credit and insurance seek regulatory arbitrage.
Rowan pointed to insurers’ increasing push towards the Cayman Islands and other potentially lax regulatory climes, versus Bermuda, where Apollo’s insurer is situated.
“I continue to believe, as I’ve said previously, that we have offshore jurisdictions of significant size that have not produced the kind of regime that is consistent with US ratings and US state based regulatory reform. And we continue to highlight Cayman Islands because it is the largest, but there are others.”
“So, Colm is not wrong at this point in the credit cycle to say that there are systemic risks piling up,” Rowan added.