(Bloomberg) - JPMorgan Chase & Co. is restricting some lending to private credit funds after marking down the value of certain loans in their portfolios, according to a person familiar with the matter, in the latest sign of stress in the $1.8 trillion industry.
The devalued loans are to software companies, the person added, some of the biggest borrowers fueling the growth of the private credit market. Software has been in the spotlight in recent weeks due to investor concern over the impact of artificial intelligence. The decision was reported earlier by the Financial Times.
Wall Street lenders like JPMorgan act as banks to private credit funds, providing them with cash using their loans as collateral. A reduction in the value of those assets will curtail the amount the bank is able to lend to these funds, heaping further pressure on an industry already grappling with a succession of hefty withdrawals from retail investors, spooked by renewed scrutiny of underwriting standards and developments in AI.
Cliffwater LLC, for instance, became the latest private credit firm to face redemption requests in excess of 7% from its flagship fund, Bloomberg News reported on Tuesday, following similar demands from investors in funds managed by BlackRock Inc., Blackstone Inc. and Blue Owl Capital Inc.
A person familiar with JPMorgan’s move said it was made preemptively, adding that it was not the first time it has remarked assets.
Unlike its rivals, the US’s largest bank reserved the right to revalue private credit assets at any time while other lenders require triggers like missed payments, according to the report. Private credit executives said they hadn’t seen other banks take a similar view, the FT said.
JPMorgan Chief Executive Officer Jamie Dimon told investors at the bank’s leveraged finance conference last week that it’s being more prudent in lending against software assets, according to the report.
JPMorgan declined to comment. US equity index futures pared gains after the FT report, with S&P 500 contracts up 0.3% after an earlier advance of 0.5%.
Dimon warned in October that more “cockroaches” would surface in the once-booming but opaque world of private lending, where prices aren’t typically disclosed. Since then, some investors in the sector have brushed off jitters about default rates and the potential for more widespread risks.
Wall Street banks have been the staunchest financial supporters of the private credit industry, lending about $300 billion to credit funds as of late June, according to a Moody’s Ratings report from October, based on data from the Federal Reserve’s Board of Governors. JPMorgan had $22.2 billion of exposure to private credit, the report showed.
Facing increased regulation in the wake of the financial crisis, banks offloaded much of the risk of lending directly to high-yield and unrated borrowers to private credit lenders, which offered them a safer way to reap the benefits from the rapid growth of the asset class.
But that strategy is wobbling with the recent collapse of UK mortgage lender Market Financial Solutions Ltd.
MFS, which borrowed more than £2 billion ($2.7 billion) from backers including Barclays Plc and Apollo Global Management Inc.’s Atlas SP Partners unit, claimed to be operating one of the UK’s biggest providers of short-term bridge loans until its Feb. 25 collapse.
By Adam Haigh
With assistance from Ambereen Choudhury and Megawati Wijaya
