Private Credit Default Rates Just Hit The Point Of No Return

The most important number in private credit right now is not a dividend yield or a default rate. It's not some net asset value or the size of the marketplace. It's 16.8%. That is how much of Apollo Debt Solutions outstanding shares investors wanted the firm to buy back in the second quarter. And the reason why it's such a big deal is because in the first quarter, they only asked for 11% back, which means this thing is not stabilizing. It is still escalating, and it is only the start of this story. Apollo's president, Jim Zelter, said in May that he didn't think the withdrawals were a one-shot. He also said he didn't expect a dramatic increase in the exit requests, and that they're, quote, maybe even a little bit of an increase. Well, that prediction has already been overwhelmed by reality. This was not a little bit of an increase. Going from 11% to 16.8% is another major escalation. And it matters because private credit is, as we've been saying, built on confidence. The industry says fundamentals are healthy, and investors keep saying, and why can't I get more of my money out? So here's the big question. Why aren't investors buying the reassurances? And we see this all over the industry, whether in publicly traded BDCs like Blue Owls, which keep hitting new lows, or here in Apollo's case with a non-traded vehicle. Investors are fleeing in bigger and bigger numbers. Think about it this way. If a money management firm had one out of six of its clients calling them up this quarter and wanting to fire them, the natural reaction wouldn't be that this is somehow clients overreacting. It would be to take a hard look at why this is taking place. And since this is happening all over the industry, the explanation has to apply to everyone, or nearly everyone. The assets are likely rotten, or enough of them anyway, and people know it. Now, what people can't see is why this matters for anyone who's not a hedge fund investor who maybe made some bad decisions. The channel for contagion is what this is all about. It's not about Apollo's funds. It's about what Apollo is doing that you don't really necessarily know about. So we have information on the contagion channel, what's taking place, why these redemptions matter, and how they fit into that process. Because like I said, there is a lot going on here that you don't see. But let's start with the basic facts, the latest one. Apollo Debt Solutions disclosed in the second quarter of 2026 its gross inflows. That's money coming in, totaled about $300 million. So some people are still adding new money. But during the same period, investors submitted repurchase requests equal to approximately 16.8% of outstanding shares. Like I said, one in six of Apollo Debt Solutions clients are saying, we want to fire you, we want our money back. Now, this fund isn't small. It's about $26 billion, and Apollo is not honoring all those redemption requests. It has stated its quarterly purchase target of 5% of shares. It's going to stick with that no matter what. So that means Apollo expects about $700 million of gross outflows. Gross outflows based on the May 31st net asset value. So the math is simple. 300 money coming in, roughly 700 million going out. That means net outflows of approximately 400 million for the quarter. So for the first time, more money going out than coming in. It would be a lot worse if not for that 5% limitation. Now, this is an immediate threat to the fund because it can handle $400 million net, especially as it has reportedly $4.6 billion in available liquidity, mainly credit lines with banks that it can draw on if necessary. Now, Apollo framed this as consistency. The company said it has a fiduciary duty to all its investors and that adhering to its stated liquidity targets is important. And that's all true in a very narrow sense. Fund like this is not supposed to be a checking account. These are illiquid loans held inside a semi-liquid vehicle. If everyone wants out at once, the manager has to slow down the process. But that's exactly the problem. The structure works beautifully when the money's coming in. It becomes far more difficult when the money starts to go out. Stage two. The biggest change here is that net flows have now turned negative for the first time. And that's the moment the money machine changes direction. The growth vehicle becomes a liquidity management vehicle. A lender becomes a seller or at least a hoarder of cash. A fund that used to make loans now is to think about who might ask for their money back next quarter. It's not just individuals, I assure you. And it's not a small change because the implications are indeed systemic. And of course, managers all keep saying the same thing. Their fundamentals are absolutely solid. Why would anyone want to question either their performance or their underwriting standards? And time and again, what we see is that investors do not buy that spin. And the question you need to ask yourself as a start is why not? What else must be lying inside all of this shadow bank money? Before we go on with our video today, let me ask you a question. What if your gold could actually pay you every single month in more gold? That's what today's video sponsor, Monetary Metals, lets you do. And here's how it works. You still own the gold. It's still in your name. It's fully insured. But instead of just sitting there doing nothing, it actually starts working for you. Monetary Metals has built a system that turns idle gold into productive gold, earning real yield paid in physical gold, not dollars, no selling, no trading, no converting. You keep your gold and every month you get more of it. It's a simple idea, but it solves a big problem. If gold is money, it should act like money. And now it finally can. If you're a long-term gold holder looking for a smarter way to store value, check them out at monetary-metals.com slash Snyder. Again, that's monetary-metals.com slash Snyder. I highly recommend booking a call with them today to see if they're the right fit for you. We thank Monetary Metals for their sponsorship, but now let's get back to the rest of our video. Now, Powell's president said the underlying performance of the funds was solid in March, April, and May. The industry broadly says borrowers are still paying, losses are manageable, and the system is working as it was designed. But markets are not just what people say. Markets are what people do, and investors keep asking for more and more of their money back. That's the key contradiction. If everything was so solid, then why are redemption requests rising for Apollo from 11% to 16.8%, one in six? If private credit is so stable, then why are net flows turning negative? If investors really believe the NAV valuations, why are they lining up to exit at the NAV where it is while they still can? This is where the industry spin really starts to break down because the issue is not whether every loan is bad. Of course not. That's not what happens. The issue is whether enough investors have started to doubt the marks, doubt the liquidity, and the ability of these funds to manage a downturn, manage a downturn without trapping them inside. That's the key here. They know that there's a downturn and they can see it coming and they don't want to be stuck inside these funds who will be at the absolute center of it. Once investors begin thinking that way, redemptions become self-reinforcing. Imagine you're considering putting fresh money into a fund. You see that existing investors have submitted exit requests equal to 10, 15%, maybe more of the fund. Do you really want to subscribe now? Or do you worry your money is going in just as someone else's money is being paid out? That's how net inflows disappear. And once the net inflows disappear, stage two, the private credit growth story changes very quickly. Here's one other point that is potentially important, though. We're going to save the implications for later. Now, Apollo and its Debt Solutions Fund, the 16.8% withdrawals, were not entirely from the U.S. In fact, very few of them came from the United States. Most of them, at least according to the filing, came from offshore. U.S. onshore repurchase requests, they were sequentially around 4.3%, while offshore redemptions increased sharply to around 12.5%. And that is worth noting. It means the redemption pressure is not evenly distributed. And the offshore stuff could be even more concerning because offshore capital can be more rate sensitive, more mobile, and more willing to exit when the confidence turns. And it also signals institutional, especially insurance companies, who are the real ground zero in the story once we get past the outside layer that's wrapped up in these BDCs. These funds are only the final stage in a complex arrangement where the money, the real money flows through insurance companies who are promising retirements to their fund holders. And so this is not happening in isolation. According to reporting from the Wall Street Journal, Apollo has been in discussions to sell MidCap Financial Investment Corp, or MFIC, its publicly listed private credit fund. So MFIC is another business development company, one that makes loans primarily to mid-sized businesses through Apollo's MidCap Financial platform. And loan defaults at MFIC climbed to 5.3%, and that was in the first quarter, up from 3.9% back in December, forcing the fund to post a net loss of 61 million. So now we already have a loss at the same time as loan default rates are rising. Its shares have traded around 85 cents on the dollar relative to net asset value and small wonder why. Investors can see where this is heading, and it's not solid fundamentals. Perhaps most importantly though, MFIC has largely stopped new lending. Instead, it's been redirecting payment proceeds towards share buybacks and debt reduction. This is potentially the future for more of the industry. Remember, this is Apollo too, and it's exactly what stress looks like in a BDC. The shares trade below NAV, investors lose confidence in the marks of the future returns, the manager buys back stock because lending into the market no longer looks attractive, defaults really rise, growth just completely stops, and debt reduction becomes the fund's priority. The point is that one of the biggest names of private credit right now is dealing with redemptions in one vehicle and a reported sale discussions around another vehicle, both of them under stress. That's the pattern. Investors in the one are looking at what's already happening in the other, the one that no one at Apollo wants to talk about, which is almost certainly why they tried to sell the thing. Investors aren't waiting for what's happening there to show up in the big one. This is why it's critical to watch and focus on all of these other market signals and curves and esoteric indications that we focus on here at Eurodollar University because we're looking for clues that this is not being contained in just private credit. It pays to know them whether you're an investor yourself or portfolio manager. So join me for my next live webinar this coming Sunday, June 28th at 5.30 p.m. Eastern Time, where we're going to break down how to unlock all this secret market information that few people follow and even fewer people truly understand how to fit everything into a disciplined all-weather investing strategy. All the deeper looks at this stuff that we don't get into, we can't get into here on YouTube. We don't want you to react to the markets. Learn to read what information they're already trying to tell you. So again, Sunday, this coming Sunday, June 28th, 5.30 p.m. Eastern Time. There's a link in the description to sign up. It's free to sign up. It's free to attend. Really hope to see you there because it will be worth your time to be there. And of course, these publicly traded BDCs like MFIC are an important window into some level of price discovery because most of these private credit funds, the shadow banks, whatever you want to call them, not only are their assets illiquid, the funds themselves, the only valuations you get, the only price discovery you get is what comes from the funds themselves. So at least in the publicly traded vehicles, the stock market, we get a sense of what investors feel about what they're being told, what they're actually doing, what they're seeing and how all of these things really fit together because these publicly traded BDCs do have share prices. They report their NAVs, they disclose defaults and they pay dividends and issue debt. They either trade or premiums or discounts, which makes them and their stock prices incredibly useful. And right now, the entire sector continues to flash deeper and deeper warnings. Many of them have traded at discounts since last fall because investors are worried exactly what we're talking about here, mounting losses, a downturn in the credit cycle and not wanting to be locked into these things. Moody's, for example, has revised its outlook for private credit investment vehicles to negative, citing redemptions from non-traded vehicles and elevated leverage in publicly traded counterparts. And that is another major shift. For more than two years, Moody's had kept the outlook stable. Now they've shifted to negative. Why? Again, redemptions are rising. Leverage is already elevated no matter what the managers themselves continue to say to reassure you that they don't have much leverage. And the sector is becoming more vulnerable to these growing shocks. This growing shock. This is how stress migrates. This is one part of the contagion path. And this is the transition that really matters. It starts out with some stress. As we know about, you know, we talk about stage one, stage two and stage three. But how do we get from stage one to stage two where we are and then stage two to stage three? Well, we start out with stage one credit stress, defaults start to rise. Borrowers struggle. Some loans get restructured and valuations have to start to be questioned. But then you start to see stress on trust. Investors start wondering whether the marks are real. They start asking whether the dividend is sustainable. Is it going to get cut? Then they wonder why so many investors are trying to get out in the first place. And that's where we are moving now. And once the issue becomes trust, the problem is no longer contained to just one fund. This is why Apollo's 16.8% redemption request number matters so much. It's not just a withdrawal statistic. It is a confidence statistic. Investors are looking at private credit and the entire story and saying, I don't believe the spin that this is nothing or just some minor bump in the road for an industry experiencing annoying yet modest growth pains. And then you get to the more serious stuff. The next layer, that's insurance. Private credit is not just owned by wealthy individuals and pension funds. Insurance companies have been enormous buyers of private credit and structured credit assets. They have been some of the most reaching of reachers for yield. And that matters because insurance companies are at the very least rating sensitive institutions. They don't just care about yield. They care about capital charges, regulatory treatment, asset liability matching, collateral is a big thing. And at the end of the line of all those things, ratings. If private credit vehicles or BDC debt begin facing downgrades, the consequences are going to spread because a downgrade can raise funding costs and reduce collateral value. It forces institutions to have to hold more capital, which they don't want to do because it takes away their ability to generate higher returns. It makes certain assets less attractive or even unacceptable for these insurance company buyers. Ratings actions can trigger outright selling. And if enough insurance companies try to reduce their exposure at the same time, then a supposedly private stable asset class can suddenly discover that it does need market liquidity after all. This is where forced sales become possible. Apollo itself has already shown how connected these worlds are. Earlier this year, the firm restructured another vehicle by moving about 9 billion of commercial property mortgages from its REIT into its insurance company subsidiary Athene. Now again, perfectly legal and rational, but it shows how assets can move around inside the alternative asset management and insurance ecosystem. And when stresses rise, those connections are really going to matter. Now, Apollo CEO Mark Rowan has also said the firm moved up in credit quality in its insurance business. They cut exposure to riskier sectors like software and stockpiled roughly $40 billion of cash. That's not panic, but it is already defensive behavior and coming from the head of a firm that's getting hit with major liquidity withdrawals in one huge fund at the same time as trying to distance itself from another one that's already exhibiting the signs for all the nasty consequences of the cycle downturn that's driving everything to begin with. Do you see it? Apollo isn't just a fund manager. It has both the insurance and the vehicles to funnel assets to the insurance. As the funds experience these various problems, it may just be a matter of time before they reach the insurance layer. Apollo, not surprisingly, is already taking substantially defensive steps. At the same time, the fund managers tell us there is nothing to see here. In finance, it's always about what they do, not what they say. And what investors are doing and taking so much money out is saying the same thing that Apollo is. We're getting increasingly defensive and increasingly negative, no matter what is being said in the mainstream or by these industry insiders who have nothing but glowing reassessments. They can see deep down in these shadows, it is a credit cycle downturn that is developing and they don't want to get stuck inside of it. One in six in that big fund are saying, I'm not going to be that person. Now, the industry is going to frame every problem as isolated. They already have. But when you keep getting more and more one-offs and you keep getting a pack of lone wolves that only ever increase investor flight or growing concerns across BlackRock, Apollo, KKR, Carlyle, let's see who else, Blue Owl, HSBCs, all the BDCs, even insurance companies and now ratings agencies. At some point, it becomes a pattern and the pattern is clear. The private credit boom was built during a period of enormous demand for yield. Investors wanted the returns when banks pulled back from some lending markets. Private lenders stepped in and asset managers raised huge amounts of capital to the point that they all saw the money coming in and stopped thinking about intermediation and due diligence and underwriting. And insurance companies were right there in the middle of everything. Everyone wanted the same thing, income without volatility, reach for yield and get it without having to worry, already a huge red flag. But credit cycles don't just disappear because the Fed is optimistic and more often than not, inflation-y. Eventually, that weak underwriting does show up. You know, you get PIK interest that begins to rise. Defaults do happen and when they do, they tend to spread. Exit markets and private equity, they start to close down. Valuations get questioned and ultimately, liquidity gets tested. And that is where we are right now. And to be clear, contagion doesn't mean that everyone fails tomorrow, that we have another Lehman Brothers moment. That's not what we're really talking about here. What we're talking about is broader consequences that erupt from a breakdown in private credit that then potentially spreads to other parts of the debt markets and the functioning of the debt markets and how it relates to especially the real economy. Contagion means stress travels. It starts in one corner and moves through the system through behavior, funding, ratings is a big one, and then forced selling. In this case, the path could kind of look like this. First, the redemptions rise in the non-traded private credit funds. And then second, those funds honor only limited buybacks which create redemption backlogs and this is already happening in widespread fashion. Third, though, new investors really begin to hesitate to subscribe because they don't want to fund other investors exits. So the net flows start to turn negative. After that, more funds stop new lending and preserve liquidity, which means borrowers who depended upon private credit face tighter financing conditions and that leads to rising defaults and valuations that are falling. Therefore, even more BDCs traded even deeper discounts to net asset values. Ratings agencies, they start to have to step in and downgrade outlooks or actual ratings on these BDCs on private credit vehicles or the debt that's issued by them. Insurance companies and other rating sensitive holders reduce their exposures, which leads to a growing volume of sales in a market which isn't really able to handle them. Those asset sales pressure prices and the lower prices validate investor fears and they restart the cycle all over again. Financial markets get volatile. The real economy takes a major hit as these companies, which thought that they could rely on the debt markets, they have to really cut back for their own survival. Retirement investors who bought annuities and other retirement products find out the numbers that they were shown won't actually be what they actually get. And maybe a few shadow banks, maybe a couple of these funds do fail. By then it would all be academic. Many people think the 2008 crisis began with Lehman Brothers when Lehman Brothers was basically the confirmation of the final stage. So yes, Apollo's 16.8% redemption number for the second quarter is an incredibly important figure because what it says is that investors are not buying the reassurances and you have to ask yourself why this keeps happening. What is it that they're afraid of and why are they afraid in increasing and escalating numbers? They are no longer simply accepting the private credit industry's message that everything is fine. They're asking for liquidity. The private credit boom promised high yield, low volatility and stability. Now the market is beginning to test every part of the other side of that promise, the stability. It's already happening as we just went over deeper in the shadows. Look at Apollo. All of Apollo, Investors want out at the front door while the insurance tightens up at the back door. Neither door is buying the spin that everything is grand and the fundamentals are solid. They're preparing for when more people find out they're not. That's the contagion risk and Apollo, it's not the entire story. It's just one key important chapter in it because Apollo's redemptions may be the clearest sign yet that the credit cycle downturn, the bust, the crisis may have reached a more dangerous phase because the question now is simple. Is that 16.8% the peak or just the next step? As if this one credit cycle downturn isn't enough, there's a somewhat parallel one taking place over in China, which just flashed a key Eurodollar warning that's all in the video link below. As always, thank you very much for joining me. Join me June 28th for our webinar. Link in the description to sign up. Huge thanks to Eurodollar University members and subscribers. And until next time, take care.