The new circular trade in private credit
Private capital groups have a new opportunity to buy significant risk transfers tied to credit funds
A growing chorus of private capital executives insist there’s nothing to worry about in private credit.
Fears stemming from a few high-profile defaults in the loan marketplace are overblown and overhyped by the media, according to luminaries such as Apollo’s Marc Rowan and Blackstone’s Stephen Schwarzman.
DD is excited to point out that they now have a new way to express their confidence in their own cooking: buy significant risk transfers tied to the very credit funds they are sanguine about, from banks seeking to trim their exposure.
Japan’s largest bank, Mitsubishi UFJ Financial Group, is in talks with investors to offload its exposure to about $2bn of loans it extended to listed private credit funds, people familiar with the matter told the FT.
Specifically, MUFG has pitched a $200mn risk-transfer product that would protect the bank against losses if private credit funds failed to repay their debt.
The product, called an SRT, is underpinned by about $2bn of credit lines for business development companies.
For the bank’s part, offloading the risk offers it capital relief to free up more capacity for lending and dividend payouts.
“Bankers are under pressure to tell their bosses that they got their private credit exposure down because investors will ask in upcoming earnings calls,” one person familiar with the matter told the FT.
Private capital already has investments in SRTs tied to private equity capital call lines and other corporate credit. In recent weeks banks have sounded out investors about a variant of an SRT to offload risks tied to data centre debt.
The sceptical view is that the arrangement will just create a circular risk, given that the most likely buyers are firms that have massive private credit operations. It also underscores the growing interconnections between the banking system and the giants of private capital.
Indeed, Blackstone, Apollo and Ares are among those that banks have pitched on private credit SRTs, according to people familiar with the matter.
If firms with private credit operations do load up on these products, any adverse loss could hit them in multiple ways.
Blackstone faced this criticism in 2024 as it loaded up on SRTs underpinned by short-term loans used by private equity funds. “They are providing protection on themselves,” one large SRT investor told the FT at the time.
It will also be interesting to see how MUFG decides to deploy the cash freed up by the arrangement. Perhaps to make further loans to private credit funds?