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Pimco Prepares for Private Credit Showdown, Anticipating Market Cracks
Ticker Tea
January 31, 2024
💬 STOCKS MENTIONED: $BX
📝 SUMMARY: Pacific Investment Management Co. (Pimco) is positioning itself for what it perceives as an imminent reckoning in the thriving private credit sector, anticipated to unfold as early as this year. The investment behemoth, renowned for its profitable contrarian stances, such as the post-financial crisis bet on undervalued mortgage debt, is now preparing to navigate and potentially profit from the vulnerabilities of the $1.7 trillion private credit market.
While industry titans like Blackstone Inc. ($BX) and Apollo Global Management Inc. herald a "golden moment" for private credit, Pimco stands firm on the opposite side of the bet. The firm's executive committee member, Christian Stracke, warns of impending drops in private loan values should base rates persist, pressuring borrowers with soaring interest payments.
Private credit, a dominant force in riskier corporate lending traditionally handled by investment banks, has drawn a diverse investor base, including insurers and pension funds. Pimco's approach involves exploring aggressive distressed investing tactics, a shift from the discreet conflict resolution norm in private credit. This strategy may expose lenders who have been overly generous in valuing their loans, intensifying the anxiety among financial regulators.
Pimco's readiness to engage in such bareknuckle methods follows its historical trend of making bold, opportunistic investments. The company's intervention in situations like Envision Healthcare's $1 billion emergency refinancing and its involvement in aerospace supplier Incora exemplify its readiness to make assertive moves, even at the expense of other creditors.
The firm's vigilance for signs of distress in private credit-backed companies aligns with its broader perception of potential economic slowdowns in the US, Europe, and the UK. This cautious stance is echoed by other market observers, who recognize the increasing attention private credit attracts from bargain hunters due to the opacity in loan valuations and the heightened interest burdens on borrowers.
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