Last week, two Wall Street giants offered radically different views of the private credit market (loans generally granted by institutions that are not traditional banks).
JPMorgan Chase CEO Jamie Dimon warned investors that the recent failures in private credit could be just the beginning: “When you see one roach, there are probably more.”
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Hours later, BlackRock CEO Larry Fink struck a defiant tone on his earnings call, defending his company’s $12 billion bet on private credit through its acquisition of HPS Investment Partners: “I’ve never been more excited about the future of BlackRock.”
So who is right?
Investors have become so concerned about the stability of private credit recently that their frenzied selling has driven up the “fear” VIX index by 35% over the past month.
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They are frightened by the collapse in September of Tricolor Holdings, a subprime car lender and dealer, revealing allegations of fraud in which the company had given the same asset as collateral to multiple banks.
Private credit took another hit late last month when First Brands, an auto parts supplier, went into bankruptcy, owing $10 billion. That triggered federal investigations into $2.3 billion in missing funds.
Then, on Oct. 16, regional banks Zions Bancorporation and Western Alliance disclosed fraud-related losses, catalyzing a selloff that erased $100 billion in market capitalization from U.S. bank stocks and sent volatility to four-month highs.
Major institutions calculated their losses: JPMorgan took $170 million in losses from Tricolor, UBS disclosed more than $500 million in exposure to First Brands, and Jefferies disclosed $715 million in questionable receivables.
The private credit market—which grew from $200 billion to $3 trillion globally in 15 years—suddenly looked vulnerable.
However, credit analysts and executives who spoke to Fortune have divided opinions about the Wall Street panic. Several argue that the failures are not private credit problems.
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These cases, they argue, are breaches of traditional bank lending, and the mislabeling reveals more about competitive tensions between old-school banks and private credit disruptors than genuine systemic risk.
The question, however, is whether these analysts are right or whether they are dangerously glossing over the cracks in a $3 trillion market that is systemically important to global finance.
The problem of definition
“First Brands, if it were rated by us, would not be considered a private credit transaction at all,” said Bill Cox, rating director at Kroll Bond Rating Agency (which tracks thousands of private credit loans).
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“Its principal debt was entirely public, widely distributed syndicated loans (BSL).”
This distinction is important. The BSL market—dominated by large commercial banks—operates differently from the direct lending market that defines private credit.
BSL loans are originated by banks, syndicated to multiple investors and traded on public markets at daily prices.
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Private credit loans, on the other hand, are bilateral transactions between a lender and a borrower, held to maturity in a “buy and hold” strategy, with no secondary market trading.
The First Brands bankruptcy primarily involved BSL debt and receivables factoring, a form of lending in which banks buy accounts receivable from a company at a discount, hoping to profit later when customers pay their bills in full.
Neither activity represents the core direct lending business that companies like Ares, Apollo and Blackstone have built.
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“None of them do factoring,” Cox said of the dozens of private credit platforms his company ranks. “We looked at the entire universe of our CLOs, BDCs and other lines of credit for exposure to First Brands. The exposure was negligible,” he said, referring to collateralized loan obligations (CLOs, which are packages of loans sold to other investors) and business development companies (BDCs, which are created as investment bets on distressed companies).
Brian Garfield, who heads U.S. portfolio valuation at investment banking firm Lincoln International, which performs more than 6,500 quarterly valuations of private companies, reiterated that view.
“A First Brands [tinha em grande parte linhas de crédito BSL] and this is not the direct lending market. I think it’s important for us to understand that that, in and of itself, is really important, because there’s this whole combination of things where everyone is just putting everything in the same bag,” Garfield told Fortune.
The real state of private credit
This is not to say that private credit does not face challenges. Lincoln International data tracking the direct lending market shows that covenant defaults — technical violations of loan terms rather than nonpayment — have increased from 2.2% in 2024 to 3.5% currently.
Deferral of cash interest payments has increased from 6.5% of deals in Q4 2021 to 11% today.
“Are there cracks? Yes,” Garfield acknowledged. “But on average, we are seeing strong fundamental EBITDA growth (earnings before interest, taxes and other discounts)? Yes.” Its data shows year-on-year Ebitda growth over the last 12 months of 6% to 7% — the highest level since Q1 2021.
Consulting firm KBRA’s analysis of 2,400 midsize companies representing approximately $1 trillion in debt tells a similar story.
Cox’s team projects that defaults could peak at 5%, which he admitted is “a lot more than this industry has seen,” but he said is “relatively” low relative to similar companies in the public market.
Why the panic?
Given that the fundamentals are not catastrophic, analysts point to several factors beyond credit quality to explain investor anxiety, mainly lower safeguards and documentation processes.
“If something grows like a weed, maybe it is one,” Timur Braziler, who follows regional banks at Wells Fargo, told Fortune. “With the availability of credit over the last five years, when you have more than one source competing for the same loan, maybe underwriting isn’t as rigorous.”
Andrew Milgram, managing partner and chief investment officer at Marblegate Asset Management, an alternative investment firm focused on middle-market distressed and special situation investments, offered a more direct critique: The competitive dynamics of unregulated lending inevitably lead to deteriorating standards.
“When loans were made by banks, they were subject to supervision,” he explained. “As these loans moved out of the banking system into an unregulated environment, they began to compete for business by relaxing documentation, relaxing underwriting standards.”
Private credit loans are typically provided by non-bank lenders such as alternative asset managers, private equity firms and pension funds.
Without the safeguards and protections provided by traditional banks, which are required to comply with the rules of regulators and the federal government, disaster could occur, according to Milgram, who has long been skeptical of the private credit market.
“Lending has been regulated in societies for all time. In fact, Hammurabi’s code contemplated the regulation of lenders because every society, everywhere and for all time, recognized that durable and responsible lending is central to a well-functioning economy,” he added.
Cox sees a different dynamic at play: Competitive tensions between traditional banks and private credit startups have led, in his view, to an increase in misinterpretation of the overall risk of private credit and direct lending.
“If your neighbor is saying it’s your dog relieving itself on the lawn, and you know it’s not your dog, it’s very frustrating,” he says, noting that both Tricolor and First Brands were primarily bank loan failures, not private credit issues.
He admits, however, that there are corners of the private credit market that are more exposed to and involved in “riskier parts of credit,” where lenders provide high-risk loans in hopes of high returns.
Private credit has a reputation for being targeted at smaller, mid-sized companies that are highly leveraged and potentially unable to obtain traditional bank financing.
While these companies may offer higher yields to compensate for risk, they are more vulnerable to financial shocks.
What’s next
The debate about the risks of private credit will not end with these bankruptcies. Braziler expects more fraud cases to emerge: “With the abundance of credit, it makes sense that you would have more of these bad players.” However, he does not see systemic risk for the banking sector.
Tim Hynes, global head of credit research at Debtwire, expects continued stress but not catastrophe: “Weaker companies are starting to get hit as a result of tariffs and the economic slowdown. You will see an increase in bankruptcies, but there is no systemic risk.”
The real test may be transparency. Unlike BSL loans with daily market prices, private credit assessments are less transparent, being updated quarterly using subjective methodologies. “It’s really opaque,” notes Braziler. “It’s very difficult to get a good understanding of who the end borrower is.”
As BlackRock goes all-in with its $12 billion acquisition of HPS and Dimon warns of roaches, the private credit industry faces a credibility test.
The question is not whether some loans will default — they will. It’s whether the industry’s risk management, documentation standards and valuation practices can withstand a financial stress test.
“Anyone who has any amount of significant exposure to the corporate credit markets, and in particular the corporate credit markets for leveraged loans, should re-examine their portfolio in excruciating detail at this point and really think long and hard about the quality of the underwriting that went into making these loans and the veracity of the reporting that supports their understanding of the performance of the business,” Milgram said.
For now, analysts who follow private credit more closely see warning signs, not an apocalypse. But in a market where definitional confusion obscures risk and competitive tensions drive narratives, distinguishing signal from noise is increasingly critical and difficult.
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