(Bloomberg) — Anxiety about the quality of underwriting has put private credit in the hot seat on Wall Street. Yet some of the same banks raising the alarm are the ones fueling growth in the asset class.
US banks have lent about $300 billion to private credit providers as of late June, while lending to all non-depository financial institutions, a group that includes hedge funds, private equity firms and pension funds, has surged to $1.2 trillion, according to a report from Moody’s Ratings on Tuesday. The report relied on data from the Federal Reserve’s Board of Governors.
Among banks lending to private credit suppliers, Wells Fargo & Co. leads with around $60 billion in exposure to what Moody’s categorizes as “business credit.” This bucket includes loans to private credit funds, direct lenders, business development companies, as well as securitized products like collateralized loan obligations.
Rather than taking on the risk of lending directly to high-yield and unrated borrowers, banks have found that financing private credit lenders offers a safer way to reap the benefits from the rapid growth of the asset class.
As broad fears swirl around credit quality and due diligence, driven in part by the same banks, such lending is now facing increased investor scrutiny. The recent collapse of subprime auto lender Tricolor Holdings and auto-parts supplier First Brands Group has left many credit investors’ wondering where the next crack will emerge.
Lending to non-bank institutions has become one of the fastest growing segments and now comprises over a tenth of all bank loans, Moody’s said. Private credit assets in the US have tripled in the past decade.
Exposure to private equity funds has also increased, with bank exposure totaling around $285 billion. JPMorgan Chase & Co. leads the way for sponsor lending, with approximately $47 billion in credit facilities dished out as of June.
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