Private credit's boom faces a cyclical test
NEW YORK, May 21 (Reuters Breakingviews) - As private credit rises into the stratosphere, the air is becoming thinner. Non-bank loan providers like Apollo Global Management (APO.N), opens new tab and Blackstone (BXSL.N), opens new tab have exploded in size, with so-called direct lending reaching $1.6 trillion in assets under management, according to BNP Paribas. As they grow, they're increasingly exposed to factors out of their control.
Automotive chipmaker Wolfspeed (WOLF.N), opens new tabexemplifies a recent push into strategic industries. Under President Joe Biden, the United States sought to foster electric vehicles and rapid chip expansion, agreeing to extend a $750 million loan to the company under the CHIPS Act. Buyout barons moved aggressively to capitalize, with Brookfield Asset Management and Apollo inking joint ventures with domestic giant Intel. The firm run by Marc Rowan also led a more conventional $1.25 billion funding round for Wolfspeed, with another $750 million to match the government money.
President Donald Trump is less enthusiastic about both EVs and CHIPS funding. Amid federal loan delays and a slowdown in battery-powered vehicle growth, Wolfspeed's market value collapsed from $4 billion to $157 million. The company is now planning a bankruptcy filing, the Wall Street Journal reported.
Meanwhile, humdrum but ordinarily recession-resistant businesses have also struggled. Zips Car Wash, which grew to 260 locations through aggressive acquisitions, saw its annual interest burden jump by roughly 58%, opens new tab to $93 million in the space of a year as rates rose. Lenders took haircuts in a bankruptcy this past February that wiped out private equity backer Atlantic Street Capital.
Technology deals that propelled direct lending's post-pandemic boom can go awry, too. Back then, they extended a flood of loans sized on recurring revenue rather than profit to the likes of Zendesk and Anaplan. A Blue Owl Capital-led group put up $1.5 billion to fund Vista Equity Partners' buyout of video training provider Pluralsight. Tech layoffs and, again, rising rates, tipped the company into a messy restructuring, opens new tab, with creditors ultimately taking the keys.
Lenders' own assessments of these loans only slowly reflected these slides. Main Street Capital valued its loans to Zips at 94 cents on the dollar in early 2024, less than a year before bankruptcy. Blue Owl pegged Pluralsight at 97 cents at the end of 2023.
Similarly, investors trying to gauge the risks they're taking have their work cut out. Around 24% of global private credit assets are still yet to be deployed, BNP reckons. To spend this hoard, lenders are tackling bigger, complex deals, like Thoma Bravo's $11 billion buyout of Boeing's navigation software business, opens new tab, Bloomberg reported. As the stress of tariffs or a potential consumer pullback rises, just how exposed private credit is the vagaries of the economic cycle and policy whims will become clear.
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