THE PRIVATE CREDIT LIE BILLIONS EXPOSED

I'm gonna start taking the gloves off on private credit. When I see a story like the one I'm about to share with you today, it genuinely bothers me. Not just as somebody who follows the markets, but as a business litigator who's handled a whole lot of real estate and business fraud cases over 30 years in private practice. When investors are shown numbers that don't reflect the real risk of what they're buying. To me, this is an outright fraud and a sham. Meaning the numbers the investors are seeing in private credit may not be real at all. And a report reviewed by the Financial Times raises exactly the kind of concern inside private credit markets that explain what I'm talking about. According to the FT story, one investment firm said this to its clients. Quote, private credit losses are misrepresented and the credit is far worse than thought. End quote. That accusation came after the firm analyzed loans inside a portfolio managed by Blue Isle Capital. One of the largest private credit lenders in the entire world. Okay, what they found was astonishing. Inside the fund, some riskier junior loan positions were valued at about 90 cents on the dollar. At the same time, safer senior debt issued by the same borrower was trading in the public markets at around 78 cents on the dollar. Okay, let's look at this boiled down in the context of just a simple house, a real estate transaction, okay? Let's say your house has a first mortgage or loan against it and has a second mortgage or loan against it. Maybe the second is a line of credit, okay? Something like that that sits behind the main mortgage. The first mortgage is a safer position. The second mortgage is riskier, okay? It's usually why the interest rate on a second mortgage or a line of credit is higher than the first, right? Because the lender or the investor is taking on more risk, right? I mean, if the value of the house, the collateral in this instance drops, the second mortgage may not get paid at all or could get wiped out in foreclosure. Or if the borrower just stops paying on the second, even if the second tries to force the sale of the property to get their money back, they still have to take subject to the existing first position debt. So if someone tried to sell an investor a second mortgage, for example, and told them that it was just as strong or just as safe as the first mortgage, that would raise, in my mind, very serious legal problems. Okay, not only would the representation be flat-out fraud, but it would also place the investor in a much more precarious position than they thought they were getting into when they bought into the investment or the loan transaction, okay? Because the risk profile is not the same. Some understand that. The position in the capital structure is not the same. If something goes wrong, the second mortgage is usually the one that takes the loss. So the second mortgage should always be worth less than the first mortgage in the marketplace, right? Well, according to the analysis done by VFT, the private credit portfolio at issue was valuing the equivalent of the second mortgage higher than the first. This is the kind of stuff, guys, I'm gonna be diving deeper into in the Risk Map monthly newsletter launching on April the 1st. So if you're not subscribed to the channel, please subscribe so you can stay up to date and participate in that newsletter launch. I appreciate it. So from a legal perspective, okay, this is very straightforward, cut and dry. Investors rely on the information they're given. They rely on the representations made about the risk and the value of the assets they're buying. If the numbers being shown do not reflect the real condition of those loans, the stability that investors thought they had simply does not exist. So here, the riskier junior loans securities were marked around 90 cents on the dollar. Meanwhile, the safer senior debt tied to the same borrower was trading around 78 cents. So 78 cents, keep in mind, already signals distress in the market, okay? Meaning investors are already pricing in a real risk but the borrower may not pay or repay the loan. Yet the private credit valuation suggested the loan was still worth close to full value. Those two numbers cannot both be right, folks. Understand that, okay? And keep in mind, companies, thousands of companies that once went to traditional banks to borrow now borrow through private credit funds to the tune of trillions of dollars. Those investors providing capital include, as we've discussed, pension funds, insurance companies, retirement portfolios, institutional investors, and everyday hardworking Americans. So when the loans marked around 90 cents begin adjusting toward their real market price of 78 cents, those differences will show up in losses. And across billions of dollars of loans, those losses will be enormous. And the losses will not stay confined just to a single portfolio or company. They will spread, okay? Funds will write down assets. Investors' income will fall. Pension funds will take huge losses. And banks that finance the private lenders will be exposed. Okay? This FT report highlights just one example of loans connected to a company, in this case called Pluralsight. It was a software company financed through private credit. And that situation, again, the senior debt tied to the company was trading significantly below the value assigned to junior debt, okay, of the capital structure inside of that portfolio. So given what's coming to light here, investors across the entire private credit spectrum, okay, now need to be asking themselves, if public markets, okay, say a loan is worth 78 cents, why are the investors being shown values closer to 90 cents? And investors, again, rely on full disclosure and value representations when making decisions whether to invest what's basically trillions of dollars in the cumulative, all right? So for years, private credit has been sold to investors in one of the safest places to earn income, right? And that's why the pensions, insurance companies, retirement funds, and private investors are piling money into it, okay? Because investors were told that these loans were stable and that they were somehow insulated from market volatility. So in the real world, all right, you would rightfully say, okay, well, this is a no-brainer. Senior debt should trade higher. Junior debt should trade lower. But the pricing highlighted in this FT report shows that the opposite is happening, okay? You need to keep in mind that most private credit loans do not trade in open markets. Unlike public markets, there's no daily price discovery, folks. There's no continuous buying and selling which forces prices to adjust when conditions change. Instead, the funds holding these loans determine what they believe the loans are worth and they report those values to investors. And that's even questionable now if they're reporting what they truly believe the loans are worth, that they're trading that much less on the open market, okay? But those markets determine what investors believe their portfolios are worth. The private credit markets, not the public markets. Private credit companies determine what the investors are seeing in terms of earnings. They determine how stable the investment appears. But if public markets are already pricing those same loans significantly lower, the numbers investors are being shown do not reflect the real condition of the assets, okay? Markets have already begun questioning these valuations. The FT reported that Blue Owl shares have fallen sharply over the past year, reflecting growing investor concern. Some publicly traded vehicles tied to private credit are also trading well below the reported net asset value. So when investors price those shares significantly lower below the value of the assets they report holding, it means the market believes those assets are worth less than the reported numbers. And if those valuation gaps exist across the industry, the consequences will be huge. And when those numbers eventually meet market reality, the losses will show up. And when that happens, investors will find out what these loans are actually worth. All right, guys, if you enjoyed the content, leave me a like on the video. 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