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US private credit defaults hit record 9.2% in 2025, Fitch says

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Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#291

Post by NoboruWataya »

mbrumlow wrote: post #278
chrisweekly wrote: post #271

Earlier quoted context omitted.

"So now the VC lends the money from the bank" "lends" -> "borrows", right?

No dude. Read it again. The VC lends (the money from the bank) which the vc borrowed, to the clinic. They are a sort of middle man. It the clinic is on the hook to the bank and the Vc takes fist cut before playing the bank. Eg. The vc only risked the company they were buying, and gets paid first.

If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank.

(Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is being described doesn't even work on its own terms. Needless to say, LBOs are not "risk free".)

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#292

Post by tmaly »

kelp6063 wrote: post #122

Unless I'm misunderstanding something, this isn't that big of a number in the larger scale of US banking; According to the numbers in the article that's only about 2.5% of all bank lending (300B/1.2T, with the 1.2T being ~10%)

If there are credit default swaps involved anywhere, this could amplify the pain in the economy.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#293

Post by JumpCrisscross »

o-o- wrote: post #247
fairity wrote: post #193

So, if I’m following: Banks are lending to private equity firms to fund purchases of businesses. Many of these businesses are SaaS which means their valuations are tumbling. It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and t…

> Banks are lending to private equity firms to fund purchases of businesses. Yes some businesses are SaaS but here's the real problem: Many businesses' sole purpose is _leveraged buy-outs_ which really is the devil in disguise. It goes like this: A VC specialising in veterinary clinics finds a nice, privately owned town clinic with regular customers and "fair" prices, approach the owners saying "we love the clinic yo…

> now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books

This mostly correctly describes a leveraged buyout (LBO). LBOs are done by LBO shops, a type of private equity (PE) firm. Not VCs. (VCS do venture capital, a different type of PE.) And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent.

Private credit, on the other hand, involves e.g. Blue Owl borrowing from a bank to lend to software businesses, usually without any taking control or equity. It’s fundamentally different from both LBOs and VC or any private equity inasmuch as it doesn’t have anything to do with the equity, just the debt. (Though some private credit firms will turn around and lend into a merger or LBO. And I’m sure some of them get equity kickers. But in that capacity they’re competing with banks. Not PE. Certainly not VC, though growth capital muddles the line between what is VC and other kinds of PE or even project financing.)

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#294

Post by JumpCrisscross »

edgyquant wrote: post #284
jaggederest wrote: post #275

Earlier quoted context omitted.

They're not so silly as to have any personal or professional liability, they probably spin up a special purpose vehicle or llc to hold the bag if it all goes south

No bank would agree to such nonsense

It’s analogous to a mortgage in a non-recourse state. If the borrower defaults the bank (or non-bank lender) gets the leveraged company, but can’t usually go upstream.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#295

Post by mbrumlow »

NoboruWataya wrote: post #291
mbrumlow wrote: post #278

Earlier quoted context omitted.

No dude. Read it again. The VC lends (the money from the bank) which the vc borrowed, to the clinic. They are a sort of middle man. It the clinic is on the hook to the bank and the Vc takes fist cut before playing the bank. Eg. The vc only risked the company they were buying, and gets paid first.

If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank. (Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is…

Nope. The clinic is the collateral to the bank. VC stand to loose nothing.

It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.

This can be done in about 6mo to 1 year process with some companies. The initial out of pocket expense is small and paid back very quickly.

I also forgot. Sometimes they will take the newly owned company and merge it. During that process they extract more money and load more debt onto the remaining entities, again making the VC money.

In some cases they can even get huge tax benefits by loading the company with debt which offsets the tax bill of the final entity.

When these transactions are done, within the span of a day multiple companies are created and merged and absolved.

There is little to no risk for the VC

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#296

Post by WorkerBee28474 »

o-o- wrote: post #247
fairity wrote: post #193

So, if I’m following: Banks are lending to private equity firms to fund purchases of businesses. Many of these businesses are SaaS which means their valuations are tumbling. It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and t…

> Banks are lending to private equity firms to fund purchases of businesses. Yes some businesses are SaaS but here's the real problem: Many businesses' sole purpose is _leveraged buy-outs_ which really is the devil in disguise. It goes like this: A VC specialising in veterinary clinics finds a nice, privately owned town clinic with regular customers and "fair" prices, approach the owners saying "we love the clinic yo…

> So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly...

From a financial engineering perspective this is wrong.

Both equity and debt have costs of capital. Debtholders expect interest, capital holders expect RoE. The money going to debt interest is money that would previously have gone to equity, but now does not because the equity is replaced with debt.

Crucially, the costs of debt is lower than the cost of equity because of the interest tax shield. Therefore, the vet clinic now requires less revenue to maintain or even increase its return to equity.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#297

Post by KaiserPro »

JumpCrisscross wrote: post #142
kelp6063 wrote: post #122

Unless I'm misunderstanding something, this isn't that big of a number in the larger scale of US banking; According to the numbers in the article that's only about 2.5% of all bank lending (300B/1.2T, with the 1.2T being ~10%)

> this isn't that big of a number in the larger scale of US banking It's not. It's just that we're seeing potentially 10% losses on the portfolio level [1], which could imply up to–up to!–5% losses to the banks' loans to those lenders. Again, tens of billions of dollars of losses are totally absorbable. But Morgan Stanley's stock price took a hit when it gated one of these funds [2]. And some banks (Deutsche Bank, so…

> Again, tens of billions of dollars of losses are totally absorbable.

They are, in isolation. The _problem_ is that PE doesn't generally trade assets in public, which means that valuation only really come when you're either wanting to buy, wanting to sell, wanting to re-loan or in deep shit.

This means that something like MFS can happen (https://www.reuters.com/business/finance/mfs-creditors-claim...) where assets appear to be used to raise two different loans without the other lender knowing.

But! banking can absorb a few billion right? yes, so long as people are not asking questions about other assets.

Because PE assets are not publicly traded (hence private in private equity) the value of assets are calculated at much lower rates than on a public market. This means that the assets that PE holds could be wildly over or under valued. The way we assess the value of PE holdings is thier looking at the Net Asset Value calculations (which might be done twice a year) or infer the value based on public information.

Now we are told that markets are rational and great at working the value of things. This dear reader is bollocks. Because PE is a black box, if a class of asset that they hold (ie SaaS buisnesses, or high street stores, or coffee trading etc) looks like its not doing well, people will start to write down the value of people holding loans given to PE, or shares in PE.

This creates contagion, because one PE company is in distress, the market goes "oh shit, the whole thing is on fire" and you get bank runs (because where is the money coming from to loan to PE? thats right banks, eventually)

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#298

Post by hrimfaxi »

mbrumlow wrote: post #295
NoboruWataya wrote: post #291

Earlier quoted context omitted.

If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank. (Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is…

Nope. The clinic is the collateral to the bank. VC stand to loose nothing. It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back. This can be done in about 6mo to 1…

> It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.

This was the missing bit for me. Thanks for taking the time to explain!

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#299

Post by SoftTalker »

AnimalMuppet wrote: post #186
SoftTalker wrote: post #35

Earlier quoted context omitted.

In fact we rewarded them. We bailed them out by printing a lot of money. We then printed more money during the pandemic to pay people to stay home and watch Netflix. Probably a lot more examples. All that money flowing around that has no basis in actual productivity or value created. It's got to correct at some point. One of the corrections is how much more everything costs now, but I don't think that has fully absor…

> We bailed them out by printing a lot of money. We did. We created about $4 trillion. That just about neutralized the $4 trillion that evaporated in the crash, and the result was that we did not go through a deflationary collapse. You know that they did not create too much, because inflation was basically nothing for the next decade . It was flat until Covid. Covid... yeah, that was inflationary.

Thanks, that was a perspective I hadn't thought about. But still doesn't seem like that taught any lessons, other than the taxpayers will bail out our carelessness.

Re: US private credit defaults hit record 9.2% in 2025, Fitch says

#300

Post by JumpCrisscross »

mbrumlow wrote: post #295
NoboruWataya wrote: post #291

Earlier quoted context omitted.

If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank. (Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is…

Nope. The clinic is the collateral to the bank. VC stand to loose nothing. It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back. This can be done in about 6mo to 1…

> The clinic is the collateral to the bank. VC stand to loose nothing

This is actually a case where using the correct terminology clarifies.

VCs don’t do LBOs. Private equity firms do. When their deals go bust they lose the equity they invested. That equity is the first layer to take a loss. When that happens, the lenders—whether they be banks or private credit firms—take over the company, often converting some of their previous debt into equity.

There is a lot of risk in LBOs. It’s why they have such a mixed record.

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