Private Credit Woes Aren’t a Repeat of Financial Crisis, Bank of America Analyst Says
(Bloomberg) — Recent selloffs at firms affiliated with the private credit industry have blown Ares Management Corp. “out of the water,” according to BofA Securities Inc.
The decline in alternative asset manager shares was “essentially an overreaction to a few small data points,” BofA analysts led by Craig Siegenthaler said Wednesday. They added that this was a “major selling opportunity to acquire Ares.”
Ares shares are down more than 30% so far this year, while Blackstone Inc. and KKR & Co. Its shares fell nearly 30% after new AI tools raised concerns about the private lending industry’s loans to software companies that are at risk of being disrupted by advances in AI. Meanwhile, wild swings in the market have led to comparisons with the global financial crisis.
Shares of Blue Owl Capital Inc., the poster child for concerns percolating in the $1.8 trillion private loan market, have fallen nearly 40% this year and posted their worst monthly performance ever in February. Bearish bets against the Blue Owl hit an all-time high earlier this month.
But the selloff has gone too far, BofA analysts say, especially for top buy-rated Ares, a “world-class” alternative asset manager with $160 billion in dry powder, that they say is the industry’s best path back to basics. They are also considering Blackstone, KKR and Blue Owl as buys.
Concerns about the sector have increased in recent weeks. There are questions about asset quality, and private loan funds are grappling with a barrage of redemption requests as concerns swirl about the quality of their loans to software companies, particularly those under threat from artificial intelligence. Last week, Morgan Stanley and Cliffwater LLC became the latest money managers to impose limits on payments from billions of dollars in private loan funds, following a similar move by BlackRock Inc.
The backdrop has led to comparisons with the period before the 2008 financial crisis; Some worst-case default estimates for the private credit industry have reached 15%. However, according to BofA, the current situation is not a repeat of the 2008 crisis.
“This is not a repeat of the GFC,” BofA analysts wrote. “Defaults only reached 9% in the GFC, when the quality of private credit managers was poor and GDP growth was negative.”
It was stated that Lehman Brothers and Bear Stearns have more than 30 times leverage, while business development companies have approximately 2 times leverage. Today, banks are well capitalized and do not carry significant risks.
They argue that “despite a good economic environment, there is misinformation regarding private loans.” “This causes markets to overreact to small data points due to fears that credit quality and net flows will get much worse.”
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