Banks and Private Credit Clash After Dimon’s Cockroach Barb
(Bloomberg) — On Wall Street, everyone is a friendly rival until the losses start.
A series of credit market booms have sparked a war of rhetoric over whether banks or private lenders are better positioned to weather a broader downturn.
JPMorgan Chase & Co. Chief Executive Jamie Dimon said he never had a single cockroach, using his bank’s losses from auto lender Tricolor Holdings; a joke some of their non-bank rivals use against them.
Marc Lipschultz, the boss of Blue Owl Capital Inc., countered that the problem was in loans directed by banks, so Dimon should examine his own books if he wanted to eliminate more errors.
Lipschultz’s words echoed the sentiments of a group of private credit managers. Privately, they complained that banks’ sloppy handling of Tricolor and auto parts supplier First Brands Group was cited as evidence of increased risks as new players began lending.
“There are people in the industry with meaningful, parochial interests who are not continuing to grow and succeed,” Lipschultz said of the disdain for private market players. “Blackstone’s market cap exceeds the market cap of most financial institutions in the world today. It’s not like it’s coming from someone, and of course these people don’t like that.”
This conflict shows that there is a wave of change at stake that is sweeping the financial landscape. Banks, whether they want to or not, are being forced to step back or learn to live with upstart lenders.
It risks unraveling the delicate détente experienced over the past few years as fast-growing private lending firms take some business from banks’ leveraged lending desks while also becoming some of their biggest customers and occasional partners.
The conflict comes at a time when “land mines are starting to explode everywhere,” according to Akshay Shah, director of distressed debt firm Kyma Capital.
“Marc says it’s in the banking corner, Jamie might say it’s somewhere else,” he said. “I would say he exploded in both corners.”
According to Shah, there are a number of distressed players who could review private loan booms or syndicated loan booms. “What Jamie is more right about is that it is harder to close these cracks in public markets,” he said.
Dimon said Tuesday that while many of the nonbank lenders are sophisticated firms that JPMorgan is helping to finance, it’s a large category and not every player is “very smart.”
“We don’t know everyone’s insurance standards,” he said. “Every once in a while we see what someone else is doing and we’re surprised by their standards. They’re not very good, but that’s always been true. I suspect that when there’s a downturn, you’ll see a higher than normal downturn type of credit losses in certain categories. I just suspect that.”
Dimon’s comments came after the bank announced a $170 million loss tied to a Tricolor exposure that caused loan costs to rise higher than expected in the third quarter. “This is not our finest moment,” he said.
“The idea of never letting the facts get in the way of a good story may have gone a little too far here,” said John Cortese, who runs portfolio management and trading at Apollo Global Management Inc. “These businesses were clearly funded by banks and public markets. But ultimately we see this as late-stage behavior where market participants are moving away from the fundamentals, not as widespread.”
Blackstone Inc. Its chairman, Jon Gray, underlined this point at the Financial Times conference on Tuesday.
“None of these are what you think of as direct lending or the traditional private loan market,” he said. “It seems a bit odd to me to look at these two transactions and extrapolate that to the private credit market.”
Dimon’s comments poured some cold water on the CAIS Alternative Investment Summit in Beverly Hills, California, one of the private lending industry’s largest annual gatherings. And it’s a delicate moment for a sector that has thrived over the past decade on strong yields but also faces consistent questions about how to deal with higher defaults.
Carlyle Group Inc. on the CAIS panel. “Private markets are often talked about as a shadow,” said CEO Harvey Schwartz. “Never in the history of time have I seen such a bright shadow.”
Many private credit leaders argue that while banks often make loans and then sell them to other investors, direct lending funds hold on to those loans, forcing these firms to spend more time avoiding implosion.
“The level and amount of work you can do in terms of due diligence is much more comprehensive,” Joel Holsinger, partner and co-head of alternative lending at Ares Management Corp., said on Bloomberg’s Credit Edge podcast. “More work probably could have been done to unearth some of the things that were alleged.”
Dimon, 69, also ruffled some private credit feathers during his last analyst call in July. When asked if JPMorgan was interested in buying a firm in this region, he said “you may have seen private lending peaking,” then backtracked a bit to add that the sector still has room to grow.
This week, Dimon captured a technical dynamic that has spurred credit investors and led sophisticated hedge funds to invest against such instruments. In particular, many of the largest private credit business development companies are trading at a notable discount to their net asset value; This suggests that shareholders do not believe they will be able to fully recoup their investment if they withdraw money.
Other stress signals are also flashing as the percentage of in-kind payments in BDC portfolios, a tool for deferring cash interest payments, continues to rise. Blue Owl’s shares have fallen 27% this year and its BDCs have weakened.
Blue Owl’s BDC counts about 14% of its investments as PIK, meaning some or all of the interest is deferred until maturity.
“We’ve been mispriced in terms of the industry,” Blue Owl executive Jonathan Lamm said last week. “The only reason the industry is trading this way is because there’s a huge amount of loan defaults coming in that we see no evidence of.”
–With help from Olivia Fishlow, James Crombie and Dani Burger.
(Updates with additional Dimon comments starting in paragraph 14, Carlyle CEO Schwartz in paragraph 19.)
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