Unlock Editor’s Digest for free
Roula Khalaf, editor-in-chief of the FT, selects her favorite stories in this weekly newsletter.
Top US financiers have warned of an erosion of lending standards after credit markets were rocked by the collapse of First Brands Group and Tricolor Holdings.
Apollo Global Management chief executive Marc Rowan said the dissolution of both businesses followed years of lenders seeking riskier borrowers.
“It doesn’t surprise me that we’re seeing late-cycle crashes,” Rowan said Tuesday. “I think it’s a desire to win in a competitive market that sometimes leads to shortcuts.”
The collapse of First Brands and subprime auto lender Tricolor last month rippled through credit markets and left investors such as Blackstone and PGIM, as well as major banks including Jefferies, suffering heavy losses.
It has also led to greater scrutiny of the private capital sector and a lack of transparency around borrowers, who tend to be highly leveraged.
“In some of these more highly leveraged credits, there has been a desire to make savings,” Rowan said at the Financial Times Private Capital Summit in London.
Rowan and Blackstone chairman Jonathan Gray pointed the finger at banks for building up exposure to First Brands and Tricolor, but said the collapses were not a sign of a systemic problem. “The interesting thing is that both of those processes were bank-led,” Gray told the same FT conference, rejecting “100%” “the idea that this was a canary in the coal mine” or a systemic problem.
Far from defending First Brands, Apollo went so far as to build a short position in debt linked to the group before its collapse, meaning it would make a profit if the company failed to repay its loans. “Most of the advertised risk holders are actually financial institutions,” Rowan said.
Banks and private equity firms have been at odds in recent years, with companies increasingly turning to private credit for their borrowing needs. Traditional lenders have called the development a regulatory arbitrage and complained that non-bank financial institutions are too lightly regulated.
But First Brands and Tricolor have revealed how the two parties are linked by complex financial structures that can obscure the identity of the insured from underwriting risk, especially as bank lenders aim to maintain market share.
JPMorgan Chase Chief Executive Jamie Dimon echoed some of those concerns on Tuesday as the bank reported strong profits marred by a $170 million hit from Tricolor’s collapse.
“My antenna goes up when things like this happen. I probably shouldn’t say this, but when you see one cockroach, there are probably more,” he said. “There has clearly been, in my opinion, fraud in a number of these things, but that doesn’t mean we can’t improve our procedures,” he added, acknowledging that the Tricolor affair “wasn’t our finest moment.”
Separately, the IMF on Tuesday called on regulators to focus on banks’ exposure to the sector, noting that “banks are increasingly lending to private credit funds because these loans often offer higher returns on equity than traditional commercial and industrial loans.”
