In our February 3rd , we discussed the recent woes negatively impacting private credit funds. The concerns began last year with the bankruptcies of Tricolor and First Brands and continue to mount, as evidenced by the share prices of some private credit managers shown below. Adding to market worries is fresh news of a $1.3 billion shortfall at private credit investor Market Financial Solutions (MFS).
MFS creditors allege that as much as £1.2 billion in loans were backed by only £230 million of “true value” collateral. In healthy asset-based lending, collateral typically exceeds loan value by up to 20%. Allegations are that MFS was double pledging collateral, i.e., using the same collateral for different loans.
In an environment such as the one we have been in, where banks, direct lenders, and investors compete aggressively for yield, prudence is often an afterthought. Whether losses for MFS ultimately prove catastrophic or manageable, the episode reinforces an important lesson: liquidity can mask risk for long periods, but once confidence in collateral is questioned, leverage works in reverse with astonishing speed.
It’s worth noting that, as investors grow antsy about the situation with direct lenders, credit spreads are slowly widening, driving a bid for risk-free US Treasuries.
The Week Ahead
It should be a relatively quiet week with most fourth-quarter earnings reports out of the way and little economic data until Friday. On Friday, the BLS will release the February jobs report. The market is only expecting growth of 65k jobs despite last months suprising 130k addition. The weekly reports argue the true number of new jobs in the aggregate is close to the 65k consensus, not last month’s report. for January are also due on Friday. Wall Street is expecting +0.1% increase. Considering is running close to 2.5% annually, that equates to negative real growth.
The FOMC doesn’t meet again until March 18th. Currently, expectations for a are low, as shown below. However, a new round of CPI data next week and this week’s employment report could impact those odds.
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