Private credit’s woes continue

(soft music) - Good morning from the Financial Times. Today is Monday, August 17th, and this is your FT News Briefing. Strings in private credit are worsening, and the boss of America's biggest bank has a warning for the UK's new chancellor. Plus, US National debt is about to hit a grim milestone, but is their appetite to fix it? - For both political parties, it's not really a sexy topic to tackle once you're actually in governor. - I'm Victoria Craig, and here's the news you need to start your day. (soft music) The private credit industry is facing its biggest challenge in about a decade. Data crunched by the FT shows some of the largest funds are taking write downs on their private credit portfolios, and they're warning about problem loans. The FT's US Investment Editor, Eric Platte, has been combing through the data and joins me now to talk about what he's found. Hi, Eric. - Hey, Victoria. - So just quantify the scale of this challenge for me. What's happening? - Sure, so we've parsed non-accruals. They're effectively problem loans at some of the largest, publicly listed private credit funds. And what we're finding is that these loans that funds might not get repaid on or might lose money on, is rising really to the highest levels we've seen in about a decade when oil prices had crashed and energy companies that had borrowed were struggling. And it's really interesting right now because this is happening and it's a backdrop of a resilient US economy. And so there are real questions of what this means for the ability of these companies to service their debt if the economy slows or if interest rates continue to kind of weigh on their balance sheets. - It's really interesting, Eric, because if we remember back to last year, we were hearing all of this talk about how private credit was booming, it was sort of the place to be in the market. So this is sort of a marked turn from that. And I wonder what's caused it? Because as you point out in your piece, everyone's blaming everyone else, including you and others in the media. - Yeah, we have faced quite a bit of criticism from private equity executives and private credit executives who believe there's some fear mongering in the press. When really we are just pointing out the issues the industry is facing right now. And that's what this data shows. It's illustrating how companies that borrowed heavily and relied on private credit are starting to run into their own challenges. It works on a delay. Loans that private credit funds offer are generally six or seven years long until they mature. And so you have to go back to the year 2020 and 2021 when there was really like boom times in the private equity industry. They were scooping up companies, keeping loads of debt onto them. And much of that was financed by the private credit industry. And when you go back to that period, right? The stock market was trading at really high levels. So to buy one of these companies, you had to pay a ton of money. And interest rates were near zero. But fast forward to today, right? Interest rates are much higher. And there's this real question about the health of the software industry, which have been financed by private credit. And so the businesses just aren't worth as much. And that's created challenges where companies can't service their debt, they can't pay interest. And the private equity industry is literally handing the keys of some of these companies over to our lenders, which is not ideal for really either party. And we're talking about some of the biggest players in finance here. What are they doing to minimize the damage? Some have really backed away from underwriting new loans. Some are selling loans. They're saying, we don't want to be holding software right now. We're getting out. We'll take the loss. Others are really evaluating all their options. And the subtext here, talking to my sources, is creating too many headlines and too much risk. And it's not worth it because of the bigger picture that most of these firms are targeting. They want to be packaging up private credit loans and selling them off to insurers and pensions and sovereign wealth funds. It's not worth impacting that business for the smaller business that we're talking about here, which is underwriting corporate loans effectively. Now, some of these executives have told investors that these fears are overblown and that most of the loans that they've underwritten are performing well. But Eric, is there a risk that some of this concern will spread to other corners of the financial market or potentially even destabilize the financial system in a bigger, broader way? This is the real question. I should say, when I talk to sources, this doesn't, to them, bring alarm bells around systemic financial risk. And regulators have been spending a ton of time trying to understand the interlinkages between private credit and the broader financial system. And for the moment, at least, they are not pulling the fire alarm. I'm sure that will come as relief to some listening to this, at least for the time being. The FT's US Investment Editor, Eric Platte. Thanks so much for walking us through this. Thanks so much for having me. - JP Morgan Boss, Jamie Diamond, had a word with Britain's new chancellor about higher bank taxes. In a call to John Healey late last week, the FT has learned diamond-worned higher taxes, often drive jobs to other places. Sources briefed on the conversation, said the bank boss pointed to a material decline in finance roles in New York, which he attributed in part to the city's tax burden. Diamond was one of many bank executives who successfully lobbied against higher taxes ahead of the UK's budget last year. This time around, though, banks could be attempting target for Healey, given the sector's bumper profits and union calls to use some of that cash to ease household energy bills. The chancellor has not yet made his views on this matter known, but Diamond said a windfall levy on bank profits or a wider tax rise on wealth would be unwelcome. Sources say conversations with other bank bosses will happen this week. The cost to ship goods through many of the world's critical roots is soaring. Rates from maritime choke points, including the Red Sea, the Panama Canal, and the Rhine are at record highs. That is according to pricing agency Argus. The costly shipping prices are thanks to two things, war and climate change. The ongoing conflict in the Middle East, as we've discussed, has been a factor for months, and the Strait of Hormuz remains all but shut down. Meanwhile, it's costing more to ship goods elsewhere due to low water levels. The Panama Canal is suffering from that because of the intense El Nino weather system. And in Europe, Germany's Rhine, which is a critical river for the country's heavy industry, is perilously low, as droughts have swept Europe the summer, pushing freight rates to 14-year highs. Argus called this the quote, "single greatest disruption that the shipping market has seen on record, eclipsing the COVID pandemic and Russian sanctions." America's national debt could reach $40 trillion for the first time ever this week. This milestone is making investors demand a bigger premium to lend money to the government, and its piling pressure on the Trump administration ahead of critical midterm elections in November. The FT's US economic correspondent, Miles McCormick, joins me now to talk more about this. Hi, Miles. Hey, Victoria. So how significant is this $40 trillion milestone? So on one level, the number in itself isn't a magic number. But more importantly is what it says about the pace and scale of the national debt that America has accumulated. The last $1 trillion has been accumulated just in the last five months. So it's just kind of a staggering growth and overall level of debt. Yeah, it's a bit difficult to wrap your mind around some of those milestones. And like you say, a remarkable rise in the last five months. What is causing the debt to rise quite so rapidly? So it's a number of factors, first of the global financial crisis, and then as a result of COVID. But more recently, it's just been the general fact that the federal government is spending more money than it's taking in on big programs like Medicare, like defense spending, while introducing tax cutting measures that are curbing revenue. And because of the scale that the debt has now reached, one of the biggest outlays for the federal government has actually become interest payments itself, which are now one of the top three categories of spending by the federal government. And this is all becoming a bigger concern for investors. The US government had to pay the highest long-term borrowing costs in a quarter century last week. Miles, what is the concern on Wall Street about all of this? What this comes down to is that investors are demanding increasingly high yield to hold US long-term debt, because frankly, they're concerned about potential risk for it to ultimately hit a debt spiral, where you'd get kind of a self-reinforcing cycle where the debt will grow increasingly unmanageable due to the cost of servicing it. And that could lead to investors being less willing to have US bonds in their portfolio. This is really interesting politically, too, because President Trump and the Republican party have campaigned on promises to lower the country's national debt. How is this milestone likely to go over with voters in the next couple of months ahead of those crucial midterm elections? It's an interesting one, because as you say, the President did promise to get America's public finances in order. But since coming into office legislation that he's backed has increased the deficit and made it worse, even as he's brought about some cost-cutting programs through Doge, etc. But it's an interesting one politically in that aside from economists and investors and policy wonks, average Americans aren't that interested in the level of the national debt because the impact on them is at such a remove. So arguably, if the President was doing more to curb spending, that in itself could be more politically damaging, which I guess gets to the heart of this problem that for both political parties, whatever they might say in opposition, it's not really a sexy topic to tackle once you're actually in government. Miles McCormack, our US economics correspondent. Thanks for walking us through this. Thanks, Victoria. Before we go, the work day wardrobe is making a comeback. Return to office mandates more than six years after the COVID pandemic began are helping revive old school brands. Ralph Lauren and Tapestry, which owns Coach and Kate Spade, have been big winners of this while J. Crew and Gap Brands have fallen behind. We've got a great story on that nine to five revival and another that's loaded with tips for parents about how to find your post parental leave back to work style. You can head to our show notes to find free links to those stories and all of the others in today's podcast. This has been your daily FT News Briefing. Check back tomorrow for the latest Business News.