Apollo CEO Isn't Fully Right About Private Credit

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Transcript

00:00Are all these worries about private credit markets just hysteria?

00:03Apollo Global Management CEO Mark Rowan seems to think so.

00:07He recently said that everyone had lost their minds about private credit losses,

00:11and he even called the press hysterical.

00:13But I've been following private credit for years, and I don't think he's entirely right.

00:16For some borrowers, next year things are going to get much trickier,

00:20and this chart here helps explain why.

00:22Since private credit is, well, private, we don't have a lot of hard data.

00:26But the numbers we do have show that the outlook isn't great,

00:30and in fact is about to get worse.

00:32When private equity funds want to buy a company, they often use private, junk-rated loans.

00:37These are very similar to the leveraged loans that banks originate and sell to investors.

00:41Now, this is slightly different from what Mark Rowan was talking about,

00:44but it's still a brewing problem.

00:46Default rates among these borrowers have climbed steadily since late 2022.

00:51The trailing 12-month default rate hit 1.3% this summer,

00:54which is up from just under 0.5% in autumn 2022.

00:59But that's only part of the story.

01:01There's also selective defaults, where borrowers change the terms on their debts

01:05to give themselves a bit more breathing room.

01:07Now, if we add those into the data, the blue line on that chart,

01:10the selective default rate is much higher.

01:13Companies that selectively default aren't making enough money to cover their debts.

01:17Their lenders haven't lost real money yet, but the borrowers are definitely in trouble.

01:21And more businesses seem to be heading in that direction.

01:25About 15% of junk-rated borrowers aren't making enough operating profit to cover their interest costs.

01:31Many will likely face some kind of reckoning next year,

01:35and that will likely mean losses for their lenders.

01:38All of that makes fears about the private credit market undeniably more real.

01:42All of that makes sense.