Private credit Still deteriorating — avoid BDCs and cash IG/HY

Short the financials (XLF); insurers (MetLife-type) are the bag holders; bankruptcies (First Brands) exposing atrocious underwriting. Gundlach (Jun 12): the marks are already cracking — one of the largest BDCs went from 100 (Dec 31, 2025) to 77 by May 2026; firms mislabel software/AI exposure (calling a healthcare-software loan "healthcare") to hide over-concentration, the usual private-market obfuscation. Eisman (Jun 12): the illiquidity itself is the risk — ~$4T of PE investments still unmonetized, holding periods stretched from 3–4 to 7+ years, and PE tech deal value −70% to $20B in Q1; the tell is in private credit, where Blue Owl's OCIC fund raised $500M in a bond sale ("was this done to help meet future redemptions? Unclear"). Singh (Jun 14): the redemption wave is here — Cliffwater 17% (honored 7%), Blackstone B-CRED 10% (~$4.4B; honored 5%), Partners Group gated, with Blue Owl OTIC at 40% / OCIC 21%, Apollo 12%, HPS 9% — and managers are masking it with $30B+ of Collateralized Fund Obligations (CFOs): bonds backed by PE equity with no organic coupon (paid only by selling holdings, "like a Ponzi"), levered ~60%, conflict-rated and stuffed into the $10T life-insurance sector (ceded offshore) — a 2006–07 echo whose bag-holder is the policyholder (cf. the SHIP blow-up at ~15¢). Eisman (Jun 18): the redemption squeeze keeps widening — BlackRock capped redemptions from its HPS corporate-lending fund at 5% after investors sought to pull 13% (up from 9.3% in Q1). Singh (Jun 21): the contagion "is frankly not over" — fresh marks landed (Thoma Bravo −$5.1B, Blackstone −$2B; take-back paper now ~40¢ on the dollar, ~85% written down) and defaults are ~6% (Fitch) and set to rise as the market keeps ignoring it. Paulo Macro (Jun 23): the slow bleed continues — Apollo (APO) "dropped another one," with redemptions that "will continue until morale improves," while hyperscaler CDS leaks higher even as their cash bonds rally. Polomny (Jun 24, via Kopernik): the rising use of redemption gates across the "overdone" private-credit arena in recent months signals "a reallocation of wealth is underway" — Caveat Emptor. CNBC Halftime committee (Jun 26): redemption headlines this week hit Apollo (APO), Ares and Morgan Stanley; Talkington sold Apollo — fee-related earnings still grow ~20% but the charts/sentiment are "just so negative" and capital is flowing to the money-center banks (Goldman, BofA, JPMorgan) instead — while keeping the BDCs (OTF, ARCC, ~13% yield) whose underlying loan portfolios she judges "money-good" (own the lender, not the manager). Singh (Jun 28): the redemption gates kept slamming — Apollo Debt Solutions BDC capped withdrawals at 5% against ~16.8% requests (offshore feeder ~12.5%) and Ares Strategic Income capped at 5% on ~14% for a second straight quarter, while PE bosses borrow against their carried interest — "this private credit issue is not over." Singh (Jul 5): the gates kept slamming — Blue Owl's OCIC ($34B) took 18.8% redemption requests and its Technology Income Corp a wild 38%, both hard-capped at 5%; Lee Robinson's Altana is launching a fund to short private-credit-exposed life insurers (Lincoln National, MetLife), and the BIS warned that "circular financing" across chipmakers/hyperscalers/AI labs (direct lenders' tech exposure quadrupled to ~15% of portfolios) is a systemic risk. Paulo Macro (2025-NOV-17, "Credit Enters Snapcount Pt 3", back-fill — the early call): private credit entered its April-2007 Bear Stearns moment when Blue Owl (OWL) folded its unlisted BDC (OBDC II) into listed OBDC at a ~20% NAV discount rather than meet redemptions — "public is the exit for private," forced price discovery of the private marks; the marks and the AI-capex funding chain both depend on fresh inflows continuing. Paulo Macro (2025-DEC-19, back-fill): record-tight HY spreads are a flow artifact (private credit crowded out HY issuance, shrinking supply), so the break-catalyst may be a supply shock — an Oracle downgrade (BBB/negative, ~$101bn of bonds) to BB+ would grow the ~$1.7T HY market ~6% overnight and force "make-room" selling; the tail risk is a ~$12bn HY fund levered 10-15× via short CDS (the positive-basis trade — the Bear-Stearns-2007 analog). Singh (Jul 12): BlackRock TCP Capital's (TCPC) NAV collapsed 54% ($14.36 → $6.72) and Blue Owl (OWL) keeps underperforming — "this private-credit issue is not over." Paulo Macro (Jul 21): the December Oracle "emerging credit risk with contagion potential" call is tipping over — S&P cut ORCL to BBB- (one notch above junk), its 5Y CDS blew out to ~2× the BB CDX (~200bps, wider than the BB corporate complex at 154 despite the IG rating — "the market as usual is running well ahead of the agencies"); a junk downgrade would drop $120bn (~7% of the entire HY market) into a market near all-time-tight spreads, with a 7.6yr-vs-2.9yr duration mismatch creating an air pocket (the UK 2061 Gilt analog) on extended dealer balance sheets — the classic "Who's Next?" contagion trigger. Paulo Macro (Jul 23): credit widening and BDCs "back in the crosshairs" in an ugly, everyone-getting-the-business tape. Eisman (Jul 24, on Blackstone's beat): the two sector overhangs stand — the time to sell companies and return LP capital "keeps lengthening," and private credit's software problems won't really start to matter "until next year when the refinancing cycle begins"; "nothing in today's Blackstone report alleviates any of these concerns." Morrison (Jul 23): relocates the bubble from banks to smaller PE/private-credit GPs — questionable marks, leverage, gating, and 10–15k firms where his career started with ~1k, funded by QE-era free money — with a wall of debt maturing the rest of the decade to sort real underwriters from tourists. Explicitly not the AAA franchises (met Apollo in June: "incredibly great franchise, great underwriting"). Canadian banks would "catch a cold" in a credit bust but "it's not going to be a Lehman and Bear event… not a Silicon Valley Bank event"; goeasy's implosion is the live Canadian subprime casualty. Post-2008 rules that pushed lending into private credit are now being reversed across jurisdictions — flow drifting back to banks. Hay (Jul 26): private credit yields ~9% vs junk ~7.3% — an unusually wide gap — while "default rates in private credit are soaring"; Gundlach's anecdote of a prestigious portfolio marked 100 → 81 overnight contradicts the "our book is rock solid" defence: "something is rotten in Denmark." He declines the blanket verdict ("there's obviously really good credits… I don't want to panic") but the signal stands: "at least some fire." Paulo Macro (Jul 30): Blue Owl (OWL) raised $7.6bn in Q2 vs $12.1bn a year earlier, with the credit business collapsing from $5.8bn to $1.8bn — a three-year low. Against it, "so much debt on bank balance sheets (project finance) that is hoping to be refinanced in the public/private credit and securitized markets. The market is not closed, but it's sure going to extract a lot of concession to continue to stay open." 2026-AUG-02 (Jay Singh SSR call): asked whether oil or BDCs are attractive here, the answer was "no, not yet — private credit default rates keep going up." More broadly he finds no value in cash credit: "IG credit spreads have been so low that I haven't found any value outside of prefs in bonds," and high yield at ~300 bps doesn't compensate for the rate volatility. The prescribed alternative is preferreds and closed-end funds bought at a discount to par, emerging markets, event-driven names and left-for-dead value. A September Fed hike "does provide a buying opportunity in preferreds," which shouldn't sell off much unless the market prices a sequence of hikes. 2026-AUG-10 — Steve Eisman Playbook Ep 72 (rec. Jul 30; Glenn Schorr, Evercore / Ken Worthington, JPM): wealth-channel gross inflows into direct lending are now "infinitesimal"; redemptions still above the 5%/quarter gates in most funds but easing (the same sellers, not new ones); returns have fallen from mid-teens to high/mid single digits, "flowing through the valuations already. Gradually." The clock: ~$270B of sponsor-held software maturities in 2028–29 hit their normal refinancing window "in the next two quarters, three quarters," breaking the current lender-vs-sponsor stalemate (very few keys handed back, very few new equity cheques so far) — Eisman: "we are a year away from finding out what we're going to really need to find out." Stress arrives as terms, not defaults: opportunistic funds take the paper 200–300bp wider with blockers on LMEs and EBITDA add-backs, "which will eventually bring markdowns that you haven't seen yet." OWL is the named tech-heavy lender ("stock has suffered"); KKR's record monetizations the exception that proves the exit drought; PE has underperformed public markets "for the first time… probably since '08 or '09," with the 2020-21 ZIRP-vintage purchases now at selling age. Singh (Aug 9): the life-insurer warning is moving from thesis to process — the FT reports a formal investigation into Egan-Jones, which has been "rating thousands of companies with only 20 analysts and getting paid to do these ratings — so it's a conflict of interest." AUG-16 (Jay Singh, SSR): the private-equity exit bottleneck transmits straight into BDCs. Asked what 33,575 unsold PE portfolio companies mean for BDC recoveries: "it actually is bad for BDCs because BDCs own a lot of these PE companies that will need to refi and will not be able to service interest, which is going to mean more PIK interest" — interest paid in more debt rather than cash. He also notes the forced-selling endgame: "many in the industry predict that the PE firms will eventually be forced to sell and give cash back to investors, even if it means accepting a lower price. This is a big risk for private credit as well." 2026-08-17 — Strategas frames the whole asset class as a regulatory artefact rather than a credit innovation: "with Sarbanes-Oxley and Dodd-Frank… private credit was largely a regulatory arb. The banks were not allowed to do certain things and private credit stepped in" — "they came from nothing." On the shape of the next cycle: "the good thing is it won't be that systemic, but it could be big… it was disproportionately good for wealthy people and now it might be disproportionately bad for wealthy people if it goes the other way." The tape agrees so far — the early-year concern "never was a message of some systemic threat pulsing through the banking system," with public credit benign and double-B spreads at new cycle lows. (Trennert/Verrone on Eisman Ep 73, Aug 17) Wigglesworth (Monetary Matters, 2026-AUG-16) — long-run bull, near-term bear. He wants the asset class to grow (moving bundles of loan risk out of banks genuinely de-risks the system, and high yield is better for it — over half the market is now double-B), but "too much money flooded in too quickly" on backward-looking data and an "illusion of safety" that is really just the absence of mark-to-market. His personal tell: cold-called with term-loan offers as a journalist — "nobody should lend any money to any journalist ever" — spray-and-pray origination reproducing the 2008 mortgage incentive, where you get paid to source and the next guy holds the risk. Two things are masking the cycle: PIK ("it's unambiguous that lots of private credit funds have been using PIK as a way of deferring the pain") and refinancing inflows that suppressed defaults independent of fundamentals. The bigger error is recovery assumptions he calls "fantastical" — high yield conventionally recovers 70–80¢, but an asset-light software borrower "where there are no plants and factories and roads and trucks" recovers nothing. Verdict: "a bad default cycle. It's started already, but it's getting masked" — bad, not catastrophic, and "the asset class deserves to survive and thrive." Structure rules he'd impose: no semi-liquid wrappers for illiquid assets ("if you invest in loans with a 5-year tenor, then you should be locked up for 5 years"), longer lockups even for mutual funds because one-day liquidity is "actually dangerous," and no leverage stacked on leverage — a vehicle lending to highly levered companies should ideally carry none itself. In a crisis he expects public BDCs to trade to 30–40¢ of NAV — an opportunity for whoever can stomach it, "but I'm not yoloing into BDCs." The slow-burn systemic item: "private label credits that insurance companies are getting on private credit loans and saying they're investment grade when really the reality is, I suspect, a lot iffier" — worse where private-equity-owned insurers also own the private-label rater. "The tangled private capital ecosystem of private credit, private equity, private ratings and private-equity-owned insurance companies… could at some point bear watching." (Wigglesworth, Monetary Matters, 2026-AUG-16.) Slegers 2026-APR-26: sizes the private-credit fear against the exposure that caused it — KKR "is down nearly 21% this year due to fears around private credit. But KKR's actual direct lending exposure is just 21% of assets. This looks like an overreaction." The structural offset is redemption-proofing: the Global Atlantic acquisition supplies $321bn of permanent capital ("money that never leaves") and 92% of $744bn AUM sits behind 7-12 year lockups — "they don't have to worry about investors panicking and pulling their money out during a market crash." By 2026-MAY-03 the same name is Best Buy #1 on a record $129bn raised in 2025 and ~$126bn of dry powder, with insiders buying at ~50% off the highs. Slegers 2026-JUN-07: ranks KKR the single best idea of the month, and the case is the fee stream rather than the assets — nearly $800bn managed, with "the management fees are very stable. They have to be paid no matter how the underlying investments perform." Fundraising has not slowed: a record $129bn raised in 2025. Two structural extensions worth tracking: Global Atlantic supplying permanent insurance capital that cannot be redeemed, and the K-Series vehicles opening private markets to individual investors — a channel KKR sizes at another $11 trillion. Insiders have been buying. Slegers 2026-JUN-21: KKR bought ($50,000, $98 limit, 520 shares) explicitly on the funding structure — $219bn of permanent capital through Global Atlantic, "money from insurance premiums KKR can invest for decades… unlike most competitors who raise fixed ten-year funds and return the money" — with the origin story stated as "banks pulling back from direct lending after 2008." Insurance is now 56.7% of segment mix against asset management's 38.2%. Three weeks later (2026-JUL-09) Ares Management tops the same screen on a 4.6% yield and a 20.3% expected return, and Hamilton Lane is the universe's sixth-worst performer at −41.6% YTD — three names, one de-rating. 2026-AUG-26 (Dowd/Phinance, WTFinance): private credit, "a big source of funds for the AI buildout, started to freeze because of other issues — it's the end of the credit cycle," which is what pushed OpenAI to float government financing. Dillian (2026-SEP-03): the call made roughly two years earlier has worked in the listed alt managers and he is not taking it off — “I was very bearish when we talked a couple years ago. I’m still bearish … we have not found the bottom yet.” He explicitly declines to treat headline negativity (daily “private credit doom” articles) as capitulation, and links it to the AI trade as one position: “AI, private credit, something else — I think it’s all connected. And I think if AI unwinds, private credit will also or vice versa.” 2026-SEP-07 (Jay Singh) — redemption gates re-imposed across seven managers at once: BCRED (5% quarterly cap on a $77.2bn fund after $4bn / 10% of requests), Cliffwater (5% cap after 16% / $1.8bn), Blue Owl (5% after 20%), BlackRock (9.3%) and Morgan Stanley (10.9%) triggering 5% tender caps, plus Ares and Apollo liquidity gates — “so the private credit risk has not gone.” The alarming counterpoint: the strategy still raised $99bn in Q2, much of it secondaries. 2026-SEP-07 (Alden & Gromen, BTC Sessions): Alden separates the two failures — a redemption gate is a liquidity feature written into the contract (the lenders are pensions, insurers and family offices lending savings, not payroll; “arguably closer to full reserve banking” than a demand deposit), while solvency is a separate question: “on the margins we do see solvency issues… it's still unclear how big some of those solvency areas could be.” Gromen supplies the second-order effect: insurers and pensions are “jammed up… there's no price of long-term treasuries where they can take the mark of selling down private credit,” removing the Treasury market's last patient buyer. The gate is also his end-game template at small scale — “‘We want three billion.’ ‘You can't have it.’” 2026-SEP-08 (Larry McDonald, Julia La Roche): the "credit sandwich" read — investment grade (LQD) rolling over hard against the S&P on data-center issuance at the top, CCCs "blowing out wider every day" and a weak loan market at the bottom, with the BDCs and private equity in between: KKR against the financials "smells to high heaven," and the same for Blue Owl. His stage call is explicit and deliberately not maximal: "it's not late 2007… definitely late 2006 type dynamic." 2026-SEP-09 (Peter Grandich): the junk-vs-Treasury spread has completed the round trip he called at the start of 2025, when it was "one of the largest" on record. His pre-committed exit was a level, not a date: "if it gets to where it's close to Treasuries you're going to want to sell junk bonds too." That condition is now met — at a compressed spread junk pays Treasury-like yield with equity-like downside. "The bond market has substantial losses for a wide spectrum of people." Wigglesworth (The Meb Faber Show, 2026-SEP-11) — frothy, not systemic. His froth tell: lenders were cold-calling a journalist with private credit loans. Originators couldn't source deals fast enough, standards slipped, PIK use "has gone up massively," and much of the money went into software — "a credit cycle now that's quite nasty and we just can't see it." But the leverage isn't large enough to be systemic: "lots of people are going to lose money and be a little bit embarrassed." The asset class is still "fantastic" — he agrees with Marc Rowan (Apollo) and Jon Gray (Blackstone) that lending from locked-up funds is safer than from banks — while semi-liquid retail wrappers are "dumb." 2026-SEP-02 Pomboy: private-credit assets that actually have to trade are trading at huge haircuts to prior marks; junk borrowers pay 7.4% vs 4% at the zero-rate trough on a $1.2T corporate roll that competes with the Treasury, munis and AI issuance for capital — look through narrowing spreads to the absolute cost. The biggest wave of corporate bankruptcies since the GFC plus downgrades; she expects a high-profile refinancing to 'really not go well'. Jay Singh (SEP-13): the head of Blackstone real estate quit after a year on rate and private-credit stress, and Palmer Square ($27bn CLO platform) is exploring a sale "likely at the top of the credit cycle." Luke Gromen (2026-SEP-13), citing Nick Neoth's Substack work: of a $10trn life-insurance industry, $1.54trn is affiliated (non-arm's-length) reinsurance against ~$647bn of total reserves — 'if the marks are bad enough, they're out of reserves,' and they sell Treasuries and mortgage-backs to fill the hole. A 'Mexican standoff' keeps insurers out of the long end; expected fix is regulatory relief, 'just QE through the life insurance industry.' Gundlach (2026-SEP-16): rating arbitrage across 7–8 small agencies (one 25-person shop rated 3,200 deals; DOJ investigating); PE-owned life insurers buy sponsor private credit and reinsure offshore on thinner reserves — "private credit is the fuse and the insurance companies are the bomb"; buy annuities only from mutual insurers. Hedgeye (RPK, 2026-SEP-18): high yield now bearish trend; BB spreads ~273bp (+20bp in a month) but CCC at 920bp — "a 14% cost to borrow on the crappiest companies, and those crappy companies are what your PE credit looks like." Chris Whalen (2026-SEP-19): agrees with Gundlach that private credit is the fuse and insurance companies are the bomb. Sponsors such as 777 and Guggenheim piled leverage and dubious assets into life insurers, and "the Apollos" control annuity writers. Some carriers won't pay annuity holders, and state guaranty mechanisms won't make them whole. PE portfolio companies and mortgage non-banks can't raise money. Harley Bassman on MacroVoices #550, 2026-SEP-17: private credit is 'probably' a problem someday. The nearer effect is that non-banks disintermediate the banks that borrow from and price off the Fed, which blunts policy transmission. Contrarian Codex (2026-SEP-22): life insurers' private placements rose to ~23% of admitted bonds in 2025 from ~18% in 2021 (private credit ~11-16% of industry assets). The unmarked book is why insurers won't rotate into 5% Treasuries, and a capital hole would make them sell Treasuries instead. Fund gating is "closer to the deal investors signed up for than a bank run," but solvency problems are showing at the margins.