The key question arising from the Tricolor and First Brands debacles is whether these are isolated failures, mere anecdotes in a vast financial landscape, or the first hard data points of a gathering storm? The media, with its innate bearish bias, often leans towards the latter. After all, the old adage holds that “if it bleeds, it leads“. The temptation to extrapolate a pattern from discrete incidents is powerful, fuelled by media catnip soundbites like Jamie Dimon’s recent invocation of “cockroaches” in the system.
Yet, as any seasoned market participant knows, the press has a stellar record of predicting 10 out of the last two recessions. This leaves the capital markets banker in a familiar quandary: how to contextualise the torrent of bad news.
The press has a stellar record of predicting 10 out of the last two recessions
The fundamental truth is that at this juncture, no one knows whether Tricolor and First Brands are the proverbial canaries in the coal mine or simply idiosyncratic casualties of their own specific circumstances. I have no idea, and most so-called experts haven’t a clue, either.
Private credit, by its very nature, is opaque. The terms of these privately negotiated loans are not publicly disclosed or subject to the same widespread scrutiny as syndicated bank debt or high yield bonds. This lack of transparency can mask a multitude of sins, from overly optimistic covenant structures to a gradual erosion of lending standards in a highly competitive chase for yield.
The concern, of course, is that these two cases are not outliers but rather the most visible symptoms of a broader complacency, where abundant capital has encouraged laxity. And then there is concern about contagion. Could distress in a few highly leveraged companies trigger a reassessment of risk across the entire private credit spectrum, walloping otherwise healthy companies and creating a cascade of funding issues?
In my view, the banker’s role is not to prophesise but to pragmatically manage the present while stress-testing for the future. The first imperative is almost banal in its perennial nature, and yet carries exceptional weight today. If the capital markets window is open, clients must be advised to hit it. The old maxim to strike while the iron is hot has never been more apt. Uncertainty about the future is precisely why securing funding now is paramount. This is prudence in an environment where market conditions can turn on a dime.
The second imperative demands a more nuanced approach to risk. In a world where the distinction between anecdote and data is blurred, a binary attitude to risk is useless. You have to have a hyper-conscious, scenario-based analysis. The nature of the risk must be dissected. A roll-on, roll-off risk, such as that associated with an equity block trade, is a world away from the warehousing risk inherent in leveraged finance, where a loan may sit on a bank’s balance sheet for weeks or months awaiting syndication. The latter exposes the institution to a deterioration in market sentiment precisely when it is most vulnerable.
This does not mean retreating into a risk-averse shell, but rather thinking through every conceivable scenario with brutal honesty. What if funding markets freeze for a week, a month, or a quarter? What if the syndication process for that large buyout loan grinds to a halt? The pricing of risk must now explicitly factor in these tail risks, which may feel remote but the probability of which is rising.
This line of questioning leads directly to the third and most critical point for corporate clients. Many businesses require that — and can only function if — the capital markets remain open and liquid.
They rely on this liquidity to refinance maturing debts, to fund acquisitions, and to manage their day-to-day operations. The crucial scenario analysis, therefore, must focus on corporate resilience in a liquidity drought.
What happens if the path to refinancing is blocked for six months? Does the company have sufficient cash reserves, undrawn credit lines, and operational flexibility to survive? For the banker advising them, this is the area of focus to add real value.
What happens if the path to refinancing is blocked for six months? Does the company have sufficient cash reserves, undrawn credit lines, and operational flexibility to survive? For the banker advising them, this is the area of focus to add real value
In the end, the speculation over whether Tricolor and First Brands are a pattern or a coincidence is somewhat academic for those who must act today. The prudent course is to operate on the assumption that they could be a pattern, without panicking or being paralysed by fear.
This means aggressively accessing available capital while it is still available and cheap, underwriting with a heightened sensitivity to balance sheet risk, and rigorously stress-testing for a world where easy money is no longer a given.
The opacity of private credit means the full picture will only become clear in hindsight. By then, however, it will be too late to act. Clients must swim in the water of the capital markets even if there are suspicious looking fins to be seen poking above the surface. The discipline now is to prepare for sharks, while hoping for dolphins but calmly, deliberately making the most of the tide.