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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

#301

Post by JumpCrisscross »

WorkerBee28474 wrote: post #296
o-o- wrote: post #247

Earlier quoted context omitted.

> 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 d…

> the vet clinic now requires less revenue to maintain or even increase its return to equity

The small-town vet would have probably accepted a lower RoE. More critically, they’d have been more willing to absorb shocks to said RoE than a lender will to their debt payments.

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

#302

Post by xenadu02 »

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

> No bank would agree to such nonsense

Ohhhh a live one! Sir do I have a wonderful bridge in Brooklyn to sell you! :)

Fun fact: banks fund this sort of nonsense constantly. I've asked about this before: why they do it. They must be making money I just don't know how. The LBO guys pay themselves massive management fees and dump the debt on the company so they walk away scott free.

My wild guess was the banks offload the eventual IPO onto investors and so make their money on the IPO fees and funneling their own clients the dead-man-walking shares. But I honestly don't know.

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

#303

Post by aurareturn »

bargainbin wrote: post #22

Luckily debt will be solved by the power of AGI, right? Just one more data centre! One more GPU! It can nearly write a basic three tier application with only 10 critical security vulnerabilities all by itself! Definitely think we’re in for a rough year financial prospects wise, and doesn’t even feel like we recovered from the 2008 crash properly.

  Luckily debt will be solved by the power of AGI, right? Just one more data centre! One more GPU! It can nearly write a basic three tier application with only 10 critical security vulnerabilities all by itself!
If you read the article, it says the default is directly related to the sell off of software stocks, which are heavy private credit borrowers.

What caused the SaaS apocalypse? Gen AI.

I'm long on AI hardware companies for this reason.

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

#304

Post by xenadu02 »

cs702 wrote: post #116

Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.[a] tick-tock, tick-tock, tick-tock... --- [a] https://news.ycombinator.com/item?id=47351462

Funny enough Chinese State owned banks have been doing much the same for quite some time. No one ever defaults, loans are extended as long as it takes. Presumably the threat of being called into the next party meeting to explain yourself is sufficient motivation for the people running the business to pivot as many times as it takes until they find a way to make money. Worst case the state swaps someone else into leadership.

I say this to say... who knows? I guess if you shuffle deck chairs fast enough everything works out fine (?)

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

#305

Post by t0mas88 »

WorkerBee28474 wrote: post #296
o-o- wrote: post #247

Earlier quoted context omitted.

> 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 d…

Technically true, but RoE expectations from a PE firm are typically a lot higher than from the original owners of a small business.

And the LBO model is much less resilient to economic headwind. Let's assume a 25% EBITDA margin business, with most costs fixed (like the clinic example). Unfortunately revenue drops 20% because of external factors. It would maybe have a tiny profit left, tax would also be tiny and there is no interest to pay. The shareholders receive near zero, absorbing most of the problem for a year waiting for times to get better.

Now the same business, same reported EBITDA, but paying a large interest sum every year to the bank. If revenue drops 20% they can't pay their interest, and banks don't just wait for next year. Now the business has the restructure, agree with the banks what that looks like, or face a bankruptcy risk.

While the new PE shareholder has a better RoE due to leverage in the upside scenario, the business (and the PE) could be completely cooked in a downside scenario. For the PE this is a calculated risk, they optimise the overall portfolio. But for the employees and customers this isn't a great scenario.

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

#306

Post by fireflash38 »

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…

Who are the bagholders in these scenarios?

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

#307

Post by layla5alive »

mandevil wrote: post #243
npilk wrote: post #100

Earlier quoted context omitted.

It's some sort of Gell-Mann-Amnesia-like effect. I am accustomed to seeing thoughtful, informed discussion about technical topics on HN, so then it's jarring when something like this hits the front page and nobody seems to have any idea what they're talking about.

It's opposite Gell-Mann-Amnesia: I am a SWE and I come here because I find it one of the best places to keep abreast of the broader software world, not just the little corner of it that I'm currently working in. So in the things that I know well, I trust it. My wife is a medical professional, and so I know just enough to see that most medical conversations here are complete and utter nonsense. So the mental model I h…

Probably mostly accurate. Though a few of us do know lots of topics. Can outscore med students on USMLE prep, know what private credit is, etc., etc.

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

#308

Post by mbesto »

JumpCrisscross wrote: post #293
o-o- wrote: post #247

Earlier quoted context omitted.

> 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…

Guy who works in the PE market here (not a PE shop myself) - this comment is correct.

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

#309

Post by 8note »

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…

why wouldnt the previous owners just open a new vet clinic, and hore all the same people back?

or some manager at it? it must be easy enough to raise that starting money, if the PE firm could get the loan

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

#310

Post by gowld »

JumpCrisscross wrote: post #293
o-o- wrote: post #247

Earlier quoted context omitted.

> 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…

Why does Blue Owl borrow from a bank to lend? Why would it need investors if it borrows from a bank?
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