<\/p>\n
(Bloomberg) — On Wall Street, everyone\u2019s a friendly rival until the losses start.<\/p>\n
A pair of blowups in the credit market have sparked a war of words over whether banks or private credit firms are better positioned to weather a broader downturn.<\/p>\n
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JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon used his bank\u2019s losses from auto lender Tricolor Holdings to say there\u2019s never just one cockroach \u2014 a quip some of his nonbank rivals have taken as a shot at them.<\/p>\n
Blue Owl Capital Inc. boss Marc Lipschultz fired back, saying the issue was in loans that banks led, so Dimon should be scouring his own books if he wants to squash more bugs.<\/p>\n
Marc Lipschultz and Jamie DimonPhotographers: Jeenah Moon, Jose Sarmento Matos\/Bloomberg <\/p>\n
Lipschultz\u2019s remarks gave voice to the sentiments of a swath of private credit executives. They\u2019ve privately complained that sloppy diligence from banks on Tricolor and car-parts supplier First Brands Group are instead being held up as evidence of growing risks enabled by newer players muscling into lending.<\/p>\n
\u201cThere are people who have meaningful, parochial interests in the industry not continuing to grow and succeed,\u201d Lipschultz said of the scorn heaped on private-market players. \u201cBlackstone\u2019s market cap exceeds the market cap of most financial institutions in the world today. It\u2019s not as if that\u2019s not coming from someone, and of course those people don\u2019t like it.\u201d<\/p>\n
The bickering underscores what\u2019s at stake as a tidal wave of change sweeps across the financing landscape. Banks are being forced to cede ground or learn to live alongside upstart lenders, whether they like it or not.<\/p>\n
It risks disrupting a delicate detente over the past few years, as rapidly growing private credit firms have taken some business from banks\u2019 leveraged loan desks, but have also become some of their biggest clients as well as occasional partners.<\/p>\n
The clash comes at a time when \u201cthere\u2019s land mines starting to go off everywhere,\u201d according to Akshay Shah, who runs distressed-debt firm Kyma Capital. <\/p>\n
\u201cMarc is saying it\u2019s in the banking corner, and Jamie might say it\u2019s elsewhere,\u201d he said. \u201cI would say it\u2019s going off in both corners.\u201d<\/p>\n
Akshay ShahPhotographer: Chris J. Ratcliffe\/Bloomberg <\/p>\n
And there are plenty of distressed players out there who can sift through the private credit blowups or the syndicated loan blowups, according to Shah. \u201cWhere Jamie is more right, is in public markets those cracks are harder to paper up,\u201d he said.<\/p>\n
While many nonbank lenders are sophisticated firms that JPMorgan itself helps finance, it\u2019s a big category and not every player is \u201cvery smart,\u201d Dimon said Tuesday.<\/p>\n
\u201cWe don\u2019t know everyone\u2019s underwriting standards,\u201d he said. \u201cEvery now and then we see what someone else is doing, and we\u2019re surprised at their standards, they\u2019re not particularly good, but that\u2019s always been true. I suspect when there\u2019s a downturn, you will see higher than normal downturn type of credit losses in certain categories. I just suspect that.\u201d<\/p>\n
Dimon\u2019s comments followed the bank\u2019s disclosure of a $170 million loss tied to its Tricolor exposure that drove higher-than-expected credit costs in the third quarter. \u201cIt is not our finest moment,\u201d he said, noting that after such an incident the bank takes pains to scour processes, procedures and underwriting to ensure there aren\u2019t gaps.<\/p>\n
\u201cThe notion of never letting the facts get in the way of a good story may have gone a bit too far here,\u201d said John Cortese, who runs portfolio management and trading at Apollo Global Management Inc. \u201cThese businesses were clearly funded by banks and the public markets. But ultimately we view this as late-cycle behavior where market participants got away from the fundamentals, not as something that is pervasive.\u201d<\/p>\n
Blackstone Inc. President Jon Gray underscored that point Tuesday at a Financial Times conference.<\/p>\n
\u201cNeither of these are what you think of as direct lending or the traditional private credit market,\u201d he said. \u201cTo look at those two transactions and then extrapolate that to the private credit market, to me seems a little bit odd.\u201d<\/p>\n
Blue Owl\u2019s Marc Lipschultz weighs in hours after Jamie Dimon said the collapses of Tricolor Holdings and First Brands Group should serve as warnings for credit markets.Source: Bloomberg <\/p>\n
Dimon\u2019s comments poured some cold water on one of the private credit industry\u2019s biggest annual gatherings, the CAIS Alternative Investment Summit in Beverly Hills, California. And it\u2019s a sensitive moment for an industry that has grown on the back of strong returns in the past decade, while facing consistent questions about how it will handle a period of higher defaults.<\/p>\n
\u201cPrivate markets get referred to often as sort of like the shadow,\u201d Carlyle Group Inc. CEO Harvey Schwartz said during a CAIS panel. \u201cI\u2019ve never seen a shadow this bright ever in the history of time.\u201d<\/p>\n
Many private credit leaders argue that while banks typically extend loans and then sell them to other investors, direct lending funds hold them, forcing those firms to spend more time ensuring they avoid blowups.<\/p>\n
\u201cThe level and amount of work you can do from a diligence standpoint is dramatically more extensive,\u201d Joel Holsinger, partner and co-head of alternative credit at Ares Management Corp., said on Bloomberg\u2019s Credit Edge podcast. \u201cThere probably would have been more ability to do some of the work to unearth some of the stuff that has been alleged.\u201d<\/p>\n
Dimon, 69, also ruffled a few private credit feathers on his last analyst call in July. When he was asked if JPMorgan was interested in buying a firm in that area, he said \u201cyou may have seen peak private credit,\u201d before backtracking a bit and adding that the industry still had room to grow.<\/p>\n
This week, Dimon seized on a technical dynamic that has animated credit investors and attracted bets against such vehicles by sophisticated hedge funds. In particular, many of the biggest private credit business development companies are trading at a notable discount to their net-asset value, indicating that shareholders don\u2019t believe they\u2019ll be able to recoup their investment in full if they pulled money.<\/p>\n
<\/p>\n
Other signals of stress are flashing, too, with the percentage of payment-in-kind in BDC portfolios, a tool to defer paying cash interest, continuing to rise. Shares of Blue Owl have tumbled 27% this year, and its BDCs have languished.<\/p>\n
Blue Owl\u2019s BDC counts about 14% of its investments as PIK, meaning that some or all of the interest is being deferred until maturity.<\/p>\n
\u201cWe are mispriced from a sector perspective,\u201d Blue Owl executive Jonathan Lamm said last week. \u201cThe only reason that the sector should be trading off like this is if there is a massive amount of credit defaults coming, which we see no evidence of.\u201d<\/p>\n
–With assistance from Olivia Fishlow, James Crombie and Dani Burger.<\/p>\n
(Updates with additional comment from Dimon in 14th paragraph. An earlier version of this story corrected the spelling of a name in the photo caption.)<\/p>\n
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