Beach Point on First Brands Fallout, Private Debt Risks

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00:00Legendary short seller Jim Chanos is sounding the alarm on the private debt boom following the collapse of First Brand's auto lender,

00:07telling the Financial Times, quote,

00:09I suspect we're going to see more of these things like First Brands and others when the cycle ultimately reverses,

00:15particularly as private credit put another layer between the actual lenders and borrowers.

00:20Joining us now, I'm thrilled to say, is Sinjin Boron, Portfolio Manager at Beach Point Capital Management,

00:25who is one of the lenders stepping in to give First Brands a lifeline.

00:29Sinjin, wonderful to see you this morning.

00:31And I think we should be clear in this that Chanos has been a credit bearer his entire life and calls the end of things many, many times.

00:39But here he is arguing that First Brands argues more collapses to come.

00:44Do you think he's right?

00:47Well, hi, Danny. Thank you for having me this morning.

00:49I would say, first of all, I can't really comment on specific credit situations, especially ones that are ongoing.

00:56What I can comment on is just broad trends and how they might feed into the overall leveraged credit universe.

01:05And from that perspective, we don't disagree that ultimately this business cycle will turn

01:11and that we will probably get higher defaults into the end of the cycle.

01:16We just don't think that right now is that time.

01:19Credit fundamentals, while slowly eroding, are still quite strong.

01:23The technicals that are underpinning all of the subsectors within leveraged credit, high yield, senior loans, private credit,

01:30those are all still quite strong as well.

01:32How much of it, though, is just the amount of money sloshing out there,

01:37the demand for credit in all corners of the universe versus the fundamentals?

01:42Well, it's a great question.

01:45I mean, it's one reason why valuations are where they are.

01:52And to us, what recent events are more indicative of, they really play into this theme of dispersion within the market.

01:59There's a huge amount of leveraged credit that trades at very rich valuations.

02:05And then in the other end of the spectrum of the market, you start to see problems arise.

02:12And it can also be overlaid very neatly with the type of buyers within each of these subsectors.

02:19And that's what speaks to the amount of capital flowing into each one that you describe.

02:24Well, there was a study from Fitch saying that in a monitor of roughly 1,200 corporate borrowers or private credit,

02:30they reported a default rate of 5.5% in the second quarter.

02:34That's higher than the first quarter, which was 4.5%,

02:37which maybe speaks to your point that it is a split screen or a dispersion of the haves and haves-nots.

02:44And, Jen, is there a risk, though, that on the downside, on the defaults, that it could spill more broadly,

02:49that it could create pain in other parts of the market that were otherwise healthy,

02:53as you maybe contend with things like forced sellers or otherwise?

02:57Yeah, it's a very good question.

03:01And, I mean, it really does come down to the fundamentals themselves.

03:04I mean, so this type of market really should emphasize the need, importance,

03:09and even criticality of doing bottom-up fundamental credit analysis on each position within a portfolio.

03:16Right now, most of the default activity has been very idiosyncratic in nature.

03:21We have seen a recalibration of risk premia in certain subsectors.

03:27Consumer financials comes to mind.

03:29But to us, that's just the market being conservative.

03:32It's not really a reflection of any sort of panic at this point.

03:37You know, we've been hearing for a while now, Sinjin, that there's so much liquidity

03:44and there's so much demand for fixed-income products that spreads are going to stay this tight near to eternity.

03:52How much easier or how much more difficult does that make your job?

04:00Well, it's both, right?

04:02I mean, the yield on these sub-asset classes is incredibly attractive.

04:06And so we do focus on that.

04:10From a spread perspective, I think some time series of quality composition needs to be taken into account

04:17when we look at how spreads have changed over time.

04:21High yield, for example, is of the highest quality that it's been in decades.

04:26And so that probably warrants, you know, tighter spreads in general.

04:30Additionally, some of the components that go into spreads, including liquidity premium,

04:36forward expectations of credit losses, all of these are quite benign at the moment.

04:41And so we would expect that this current framework for the market would continue.

04:45Sinjin, there has been a trend post-financial crisis, fueled after COVID,

04:50when the bank stepped out of the market, that more lending was going towards private credit.

04:55We did, though, see last week $55 billion, the biggest LBO,

05:00where JP Morgan financed $20 billion of that, was the sole financer.

05:05Does that maybe suggest that things are shifting back the other way,

05:09and that banks and the broadly syndicate market is coming back and taking market share back from private credit?

05:15Mm-hmm.

05:17In part, yes.

05:19But also, the size of that particular transaction sort of speaks to the necessity of having deep pools of capital

05:26and multiple asset classes that they can tap in order to finance it.

05:31And so that share shift is likely to go back and forth, you know, as the market progresses.

05:38I can't think of a better example of just market dispersion in general than having that size of LBO announced during the same month

05:46that, you know, loan payment defaults increases for the first time, you know, in over two years.

05:52And so, again, just hearkening back to that theme, you know, especially as financial conditions ease,

05:59as rates come down, we would expect more of that.

06:01But that doesn't mean that private credit is out of the game in terms of financing some of these transactions going forward.

06:07And we would expect 2026 to be an incredibly busy year from that perspective.

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