Key Takeaways
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- JPMorgan’s ~$170M Tricolor loss and stress at First Brands reignited a public spat over whether banks or private credit are more exposed late cycle.
- Jamie Dimon flagged weak underwriting in parts of nonbank lending, BDCs trading below NAV, and rising PIK as signals of mounting stress.
- Private credit leaders countered that the troubled loans were bank-led and reflect late-cycle slippage in public markets, not a broad indictment of direct lending.
- Interconnectedness is high: banks finance private credit platforms even as they compete, creating two-way contagion risk.
What happened?
Two high-profile credit mishaps—JPMorgan’s loss on auto lender Tricolor and issues around First Brands—sparked a sharp exchange between bank and private credit leaders. Jamie Dimon used the events to caution that poor underwriting exists in parts of the nonbank ecosystem and that “there’s never just one cockroach,” pointing to broader vulnerabilities. He highlighted technical stress markers, including business development companies trading at discounts to net asset value and rising payment-in-kind interest, as evidence of growing pressure on borrowers. Private credit executives, including Blue Owl, Apollo, and Blackstone, pushed back that these were bank-led or public-market deals and argued direct lenders’ hold-to-maturity approach enables deeper diligence and closer monitoring than syndicated markets, where cracks show faster. The dispute comes as private credit continues taking share from banks’ leveraged loan desks while simultaneously relying on banks for financing and syndication partnerships.
Why it matters
This flare-up is a late-cycle tell: widening BDC discounts and higher PIK usage are classic signs of tightening cash flows and rising default risk, regardless of whether the exposure sits on bank or private credit balance sheets. Because banks provide warehouse lines and other funding to private credit platforms, stress is likely to be transmitted in both directions, undermining the notion that one side is insulated. For investors, the key implication is that dispersion will increase across lenders and portfolios based on underwriting quality, documentation strength, sector mix, and funding resilience. Public markets may recognize losses sooner, but private vehicles face valuation scrutiny and liquidity pressure if discounts persist and NAVs roll over.
What’s next?
Near-term, focus on whether BDC discounts to NAV narrow or deepen, how quickly elevated PIK transitions to amendments or restructurings, and whether banks increase reserves and take additional marks on leveraged finance exposures in upcoming quarters. Watch for any uptick in club deals between banks and private credit to manage troubled credits and for secondary pricing in syndicated loans as a leading indicator of stress migration. Positioning-wise, prefer higher-quality BDCs with diversified portfolios, lower leverage and LTVs, stronger covenants, and stable funding bases; within banks, emphasize capital strength, transparent reserving, and limited single-name concentrations. Distressed and special situations strategies are likely to see growing opportunity as late-cycle dynamics force more asset sales and liability management exercises.
