00:00Emily, you took a look at this research and you've been reporting on this sector for some time now.
00:04How much of this is just a return to normal, a credit cycle that's been really benign versus deep issues
00:10within software for private credit?
00:12Well, so the strategists at Morgan Stanley do say that they only see most of the defaults in the software
00:18sector.
00:19But the reason why people are kind of on edge right now is because software makes up so much of
00:24the private credit industry.
00:25Alternative Asset Managers were funding this sector for basically the last decade because they thought there were reliable revenue streams.
00:33Now with AI and the disruption that that could cause, it's come into question.
00:38Eight percent would be about where we were during the pandemic.
00:42Financial crisis, it was about 10 percent. So eight percent is higher than where we are right now.
00:49We survived that after the pandemic.
00:50Yes, we survived it after the pandemic. And they do point out that the credit cycle is in the late
00:56stages.
00:57You know, first of all, yesterday there was a Wall Street Journal story about John Zito from Apollo who said,
01:02like, he would be cutting all marks right now.
01:06It was clarified that he meant software. He says there will be an issue with respect to credit, which I
01:10think will be worse than people expect.
01:12And secondly, UBS has said default rates could be 15 percent.
01:17And Bruce Richards from Marathon said not only does he expect 15 percent default rates, but that could happen in
01:23multiple years in 27 and 28.
01:25So this doesn't seem that bad.
01:28Yeah. So 15 percent, though, for UBS, that was the worst case scenario.
01:31The reason why this Morgan Stanley note stood out to my colleague Renee Ismail and I is because this was
01:37Morgan Stanley's base case.
01:40If you look at it, though, again, they do say risks in the private credit market, significant but not systemic.
01:45They pointed to the fact that outside of the software sector, corporate balance sheets still remain healthy, like you were
01:51pointing out, Danny.
01:51And so they don't see risks spreading beyond just software.
01:56So I guess survivable.
01:57That's that's all well and good.
01:59But the thing that I keep coming back to is now that this is a product not just for institutions,
02:03but retail, too.
02:04And it was sold to a lot of retail clients is this thing is uncorrelated with the rest of this
02:09market.
02:09It's a safer asset. It's semi liquid.
02:12So you can get your money out.
02:13But it just factors in the rest.
02:15I mean, you're talking about this.
02:16This is the rest of the credit cycle.
02:17They are exposed to it, whether it's public or private credit.
02:20I mean, it feels like the worst time to be pushing these products onto retail right now.
02:25Right. There's a bit of a self-reinforcing cycle.
02:28Once there's fears around credit, then people start to want to get their money out.
02:32And that's exactly what we're seeing right now in the retail funds, the business development companies, investors trying to redeem
02:38their shares.
02:39And some of these funds saying we can't give you all of your money back all at the same time.
Comments