[Weekend Money] "Are Banks Fueling Private Credit Market Turmoil... and Benefiting?"

Regulatory Easing Opens Door for U.S. Banks to Re-enter Lending

"Banks May Scoop Up High-Quality Assets at Bargain Prices During Fund Runs"

There is an analysis suggesting that banks are fueling anxiety spreading through the private credit loan market. The reasoning is that banks can benefit by purchasing high-quality loan assets at bargain prices when private credit funds, unable to meet redemption requests, are forced to sell them.

KB Securities emphasized that, given this background, it is advisable to increase the allocation of U.S. bank stocks. The analysis is that as banks are being given opportunities to re-enter the private credit market, there is potential for earnings growth.

Major U.S. banks are already calling for regulatory easing, arguing that risks may arise at institutions like private credit funds that are not subject to financial supervision. Ilhyuk Kim, a researcher at KB Securities, stated, "In early December last year, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) officially withdrew their leveraged loan guidelines," adding, "Banks that have seized the opportunity to actively re-enter the leveraged loan market are criticizing the private credit market and exerting pressure by reducing loan limits for funds with a high proportion of loans to software companies."

The remarks of Jamie Dimon, Chief Executive Officer (CEO) of JPMorgan Chase, are a representative example. CEO Dimon previously warned about the private credit redemption crisis, saying, "If you see one cockroach, there may be more." JPMorgan and Goldman Sachs have recently begun selling products to hedge funds that allow them to take short positions in the private credit market.

Private credit funds facing redemption requests from investors are increasingly concerned that banks' reduction of lending limits could lead to repayment demands. In urgent situations, these funds may be forced to sell high-quality loans at discount prices. Researcher Kim predicted, "Banks are likely to have a strategy to accelerate their re-entry into the leveraged loan market by acquiring these loan assets."

Typically, private credit specialist asset managers raise funds from various investors, including banks and pension funds, to create private credit funds. These funds have provided loans to companies whose earnings before interest, taxes, depreciation, and amortization (EBITDA) are below 50 million dollars or whose credit rating is below BB, making access to the bond market difficult, as well as to companies acquired by private equity (PE) firms or software companies with stable subscription-based recurring revenue.

Of course, if private credit redemptions continue, it will be important for banks to appropriately pressure their current clients—private credit funds—to recover existing loans as safely as possible. However, the likelihood of banks incurring losses is considered low. As of the end of the first half of last year, most of the approximately 300 billion dollars in loans banks had extended to private credit funds were senior secured loans, making the probability of loan defaults low. Researcher Kim explained, "Despite various rumors surrounding the private credit market, it is highly likely that this is intentional confusion created by banks seeking to re-enter the mid-market leveraged loan sector."

This content was produced with the assistance of AI translation services.