Michael Arougheti, co-founder, CEO and president of Ares Management Corporation
Adam Jeffery | CNBC
The explosion in personal loans raised a number of concerns, but one of the more vociferous concerns recently has been that the industry has not experienced a large-scale downturn. And what does that mean for borrowers if there is a crisis?
When asked about the migration of assets to the non-bank sector at the JPMorgan Investor Day earlier this week, Chairman and CEO Jamie Dimon said: “We will compete. We’ll be fine.” But he added that the “question they should be asking is: What does this mean for the United States of America?”
“Many of the people who have taken out personal loans will then be stranded.” [obscenity] “That hits the steamer,” Dimon said. “Banks tend to work with the borrower and the SME loan in a crisis… in the mark-to-market world of private credit, they have to record it as a trustee at face value.”
In other words, he said, “Personal lending has not dealt with the high interest rates, the recession and the high spreads.”
We don’t know how these training sessions will work.
The next day, the CEO of one of the largest private lending companies defended the industry and its behavior during stressful times. When asked by CNBC about Dimon’s recent comments: Ares Management CEO Michael Arougheti responded: “Wrong.”
“We have been investing in the private markets for 30 years. A loan is a loan, whether it is held on a bank balance sheet or in a private credit fund,” Arougheti said. “[Ares has] We have invested $150 billion in the personal loan market since inception and have had a loss rate of one basis point. “So everything we’ve seen over the last 30 years suggests that the risk that people claim exists in our market is simply not true.”
Stock chart iconStock chart icon
Ares Management (ARES), 1 year
Ares Executive Chairman Tony Ressler, who sat next to Arougheti in the CNBC interview, said retail lending growth will “actually reduce systemic risk.”
“These assets end up on the balance sheets of companies that are not heavily leveraged and are not funded by short-term debt or customer deposits,” Ressler said.
Default rates on personal loans
In January, the Federal Reserve examined default rates on personal loans and how they compare to loans from traditional banks (leveraged loans and high-yield bonds). Citing KBRA-DLD data, the Fed showed: “Despite the seniority of the debt structure, private credit loans have a relatively low recovery rate at default (or exhibit a high loss at default) compared to syndicated loans or HY bonds.”
We received updated numbers from KBRA DLD on Thursday, which showed a rather mixed picture in terms of implied rallies. The average post-default value of a direct loan was about 53.1 percent, lower than syndicated loans, which were at 57.5 percent, but higher than high-yield bonds, which were at 46.3 percent
The Fed attributes some of this gap to private credit exposure being skewed more toward sectors with fewer collateralizable or tangible assets, such as software, financial services or health care services.
But the faster private credit grows, the more closely linked it becomes to the traditional banking sector. JP Morgan Executives at Investor Day said the company is the largest financier of personal loan portfolios and already has dedicated capital on its balance sheet that it uses in a direct loan format for corporate borrowers. The company is also developing a co-loan program to increase the amount of capital it can deploy in this area.
So when the eventual downturn in the economy manifests itself, it’s likely that you’ll have, you know, what’s going to be reeling for everyone. Some borrowers will feel the blow more than others.
Source link
2024-05-24 13:53:00
www.cnbc.com
