BMO's Brennan Hawkin talks private credit fears spooking the markets

"There's been a lot of concern and focus on the direct lending part... so far, actually, we've seen issues emerge from the asset based finance part." The market is obsessing over Direct Lending credit risk, but the actual cracks (fraud, double-pledging) are appearing in Asset-Based Finance (ABF). Investors should be selective, distinguishing between corporate direct lending (which has structural protections) and opaque asset-based finance where fraud risk is currently manifesting. Contagion from ABF headlines could drag down the entire private credit sector regardless of sub-sector nuance.

Jefferies is under pressure due to exposure to a counterparty (MFS) where collateral was "double pledged" (fraud). The stock is "trading below book value again." Despite being below book, the speaker clarifies it is "not below tangible book" and actually trades at a "40%... 50% premium" to tangible book. In "scary" markets, investors value banks on tangible book, suggesting the stock is not yet at a screaming value floor despite the drop. The combination of fraud-related headline risk and a valuation that isn't cheap on a tangible basis makes it an avoid. The fraud exposure could be contained/smaller than feared, leading to a relief rally.

Speaker notes that "Blackstone had the highest level redemptions in a while" and that generally, "gross sales" are lower while redemptions are picking up. He expects funds to go to "proration" (gating redemptions at 5% per quarter). The sector is facing a negative "flow dynamic." While the speaker argues the underlying assets (senior loans with short, staggered maturities) are safer than perceived compared to 2008 real estate, the immediate headwind is investor fear leading to liquidity constraints and gating. Fundamentals might be resilient (senior secured loans), but sentiment and flows are currently negative. If credit losses actually materialize alongside redemptions, the "spiral of concern" validates itself.