Key Takeaways
\nJeffrey Gundlach, a bond market veteran, predicted private credit would be the cause of the next financial crisis during a recent podcast appearance.Private credit markets have ballooned since banks tightened lending standards in the wake of the Global Financial Crisis.<\/p>\n
A credit market veteran known as the “Bond King” has a warning for Wall Street.\n<\/p>\n
\u201cThe next big crisis in the financial markets is going to be private credit,\u201d said Jeffrey Gundlach, CEO of DoubleLine Capital, on an episode of Bloomberg\u2019s Odd Lots podcast released Monday. \u201cIt has the same trappings as subprime mortgage repackaging had back in 2006,\u201d he said.\u00a0\n<\/p>\n
The U.S. private credit<\/a> market\u2014in which investors loan money to businesses in return for interest payments\u2014has exploded in recent years, growing from $46 billion in 2000 to about $1 trillion in 2023. Morgan Stanley estimates the market was about $3 trillion at the start of 2025. Over the past 10 years, private credit\u2019s risk-adjusted returns have significantly outpaced the rest of the bond market, according to Morgan Stanley.\u00a0\n<\/p>\n Why This Matters<\/p>\n Several financial industry insiders have recently expressed concern about private credit, which they say poses risks to financial stability because of its opaque lending standards, illiquidity, and excess leverage. A spate of recent corporate bankruptcies have made their warnings more urgent.<\/p>\n Concerns about the health of the market have been heard before. In September, two corporate bankruptcies wiped out billions of dollars from bank balance sheets and raised questions about non-bank<\/a> lending standards.\n<\/p>\n \u201cWhen you see one cockroach, there are probably more,” JPMorgan Chase CEO Jamie Dimon warned<\/a> at the time. Months earlier, Dimon had cautioned that private credit’s risks\u2014the opacity of its credit ratings, its leverage, its illiquidity\u2014were a “recipe for a financial crisis<\/a>.”\n<\/p>\n There’s no way to know when a private credit crisis will erupt, said Gundlach. “It\u2019s impossible to be both right on the direction and correct on the timing” of financial trends, he said. He notes he became sceptical of mortgage lending in 2004, three years before the subprime crisis began. “So these things take forever, and it goes on much longer than you\u2019d think.”\n<\/p>\n JPMorgan estimates that private credit accounts for less than 10% of corporate debt, a substantial share but which it believes insufficient to cause widespread economic damage. The firm also notes that the banking system’s direct exposure to private credit is small enough that private market distress “is unlikely to trigger a ripple effect that would destabilize the banking system and create systemic risk.”<\/p>\n Why Has Private Credit Grown So Much? <\/p>\n According to Gundlach, private credit\u2019s outperformance and its low volatility have been the space\u2019s main selling points. But, he argues, those benefits have been underpinned by the market\u2019s opacity, not its fundamental strength.\u00a0\n<\/p>\n The recent bankruptcy of Renovo, a private equity owned home improvement contractor, is illustrative, he said. The value of investment firm BlackRock’s loan to Renovo dropped from $150 million to $0 when the company earlier this month filed for bankruptcy with just $50,000 in assets.\n<\/p>\n “It’s like there’s only two prices for private credit, it appears: 100 and zero,” said Gundlach.\n<\/p>\n Renovo’s debt, he said, should have been repriced well before it declared bankruptcy. But unlike public debt, which is regularly repriced because it’s actively traded, the holders of private debt don’t need to adjust prices, setting the stage for wipeouts.\n<\/p>\n The Renovo example also calls private credit’s outperformance into question, according to Gundlach. “Obviously, with bonds going from 100 to zero in a matter of weeks, the public market has been performing better than the private market,” he said.<\/p>\n","protected":false},"excerpt":{"rendered":"Key Takeaways Jeffrey Gundlach, a bond market veteran, predicted private credit would be the cause of the next…\n","protected":false},"author":2,"featured_media":140714,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[138,219,111,139,69],"class_list":["post-140713","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-new-zealand","tag-newzealand","tag-nz"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/140713","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=140713"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/140713\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/140714"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=140713"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=140713"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=140713"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}