Private Credit Infecting Public Markets, Boaz Weinstein Says

Buying at a down 35, even with these adjustments, it's probably going to be an okay investment... if we're right and if these buys at -27 or -35 are bad buys you know, look out below. Institutional buyers are currently demanding massive discounts (65 to 73 cents on the dollar) to take private credit loans off the hands of distressed sellers. Publicly traded Business Development Companies (BDCs) hold massive portfolios of these exact types of private loans. If the true market-clearing price for these assets is 25% to 35% below par, the stated Net Asset Values (NAVs) of public BDCs are artificially inflated and highly vulnerable to severe downward revisions. Avoid publicly traded BDCs, as their underlying private loan portfolios carry hidden mark-to-market risks that are not currently reflected in their share prices or stated book values. BDCs generally hold their loans to maturity. If the underlying corporate borrowers continue to make their interest payments and do not actually default, the mark-to-market volatility will not impact the BDCs' cash flows or their ability to pay high dividends to shareholders.

Sometimes people who can't sell the thing, they can't sell or sell what they can sell. And so private credit can certainly infect public credit... I never would have thought ETFs for high yields could trade at 10 to 15 point discount. They did, and people sold them there because they needed the money. Private credit investments are notoriously difficult to sell during market stress. If a macro shock occurs and investors need to raise cash to meet redemptions or margin calls, they will be forced to liquidate their highly liquid public high-yield bond ETFs. This forced selling pressure will overwhelm the public market, driving ETF prices down significantly, potentially causing them to trade well below their actual Net Asset Value. Shorting high-yield public debt ETFs acts as a direct tail-risk hedge against a liquidity crisis or blowup in the opaque private credit markets. If the economy achieves a soft landing and corporate default rates remain low, high-yield spreads will stay tight. In this scenario, a short position will suffer from negative carry, as the shorter must pay the high dividend yield of the ETF.