Private Credit Could Be On Thin Ice
I don't like the look of things. Here's the names I'm avoiding.
Since last year I’ve been warning that private credit is far more fragile than its marketing suggests. What has been promoted as a stable, defensive, yield-generating alternative to traditional lending increasingly looks like a highly leveraged, lightly regulated system that benefited from an unusually easy financial environment. As that environment fades, the cracks are becoming harder to ignore, no matter how many glossy investor decks insist everything is “performing as expected.”
I wrote about this a month ago in my critically acclaimed1 article:
And the hits keep coming.
As our friends over at Zero Hedge noted this morning, on Friday, BlackRock TCP Capital Corp., a publicly traded private-credit fund structured as a business development company, disclosed in an 8-K filing that it had marked down its net asset value by roughly 19 percent.
For a fund designed to deliver steady income and preserve capital, that is a significant loss, even if it is presented as a routine accounting adjustment rather than what it really is: capital destruction.
Management attributed the decline to “issuer-specific developments.” That phrase appears regularly in credit markets when borrowers begin to struggle and lenders are forced to admit that loans are no longer worth what they were previously marked at. In practical terms, it means cash flows weakened, asset quality deteriorated, and expected recovery values were revised sharply lower. It is the financial equivalent of saying, “nothing to see here,” while the smoke alarm is going off. Or, as I put it last month, the shit simply hitting the fan.
According to Bloomberg, the fund has struggled in part because of its exposure to e-commerce aggregators that buy and manage Amazon sellers, as well as to Renovo Home Partners, which has filed for bankruptcy and plans to liquidate. These examples are not unusual. They reflect business models that thrived in a low-rate, high-liquidity environment and are now struggling under higher borrowing costs and weaker demand, which is what happens when optimism is financed with cheap debt.
This episode fits into a broader pattern that has been developing across private credit.