After the collapses of auto parts manufacturer First Brands Group and subprime auto loan company Tricolor Holdings, and the turmoil in the credit market, top American financiers are warning that lending standards are on the decline.
On Tuesday, October 14th, at the Private Equity Summit hosted by the Financial Times in London, Marc Rowan, CEO of Apollo Global Management, stated that the failures of these two companies resulted from lending institutions opting for higher-risk borrowers in pursuit of profit.
“We are witnessing unexpected events at the end of the economic cycle, which doesn’t surprise me. In a competitive market, taking shortcuts to succeed is often the norm,” he said.
The bankruptcies of First Brands and Tricolor Holdings last month triggered a chain reaction in the credit market, causing significant losses for investment firms and major banks like Blackstone, PGIM, and Jefferies Bank.
These events have prompted a closer examination of the risks in bank loans and the private debt market, as well as the lack of financial transparency in borrowers with highly leveraged and heavily indebted financial structures.
Rowan pointed out, “In these highly leveraged loans, there is indeed a tendency to take shortcuts.”
Both Rowan and Jonathan Gray, the President of Blackstone, directed their criticism towards banks, arguing that the exposure of banks to First Brands and Tricolor was excessive. However, they also emphasized that these bankruptcies do not imply systemic issues in the overall financial system.
“Interestingly, both cases were financed by banks,” Gray stated while categorically denying any systemic risk allegations.
Rowan added, “In fact, most of the institutions taking on the risk are financial institutions themselves.”
In recent years, tensions have escalated between banks and private equity companies as corporate borrowing increasingly shifts towards the private credit market. Banks have complained about “regulatory arbitrage” and criticized the loose oversight of non-bank financial institutions.
However, the collapses of First Brands and Tricolor have revealed the intricate interweaving of structures between banks and private equity firms, leading to confusion about who bears the risk, especially when banks actively participate to maintain their market share.
Jamie Dimon, CEO of JPMorgan Chase, also expressed similar concerns on Tuesday. The bank reported strong profits, but the $170 million loss from Tricolor’s bankruptcy cast a shadow on its performance.
“When events like these occur, my alertness goes up. I might not be supposed to say this, but usually, when you see one cockroach, there are probably more,” he said. “I believe there is clear fraud in these events, but that doesn’t mean we cannot improve our internal processes.” He admitted that Tricolor’s bankruptcy was “an embarrassing moment for us.”
On the same day, the International Monetary Fund (IMF) called for regulatory authorities to monitor banks’ exposures in this field, noting, “Banks are increasingly lending to private credit funds as these loans typically offer higher returns on equity compared to traditional commercial and industrial loans.”