Private credit turns to financial alchemy as an antidote to 'peak anxiety'

Ghosts of the 2008 financial crisis are haunting Wall Street as private equity firms are pooling and repackaging troubled corporate debt in a bid to raise liquidity. Redemptions from private credit funds have been spiking on fears of potentially bad loans in application software and other sectors, driven by the ascent of artificial intelligence and hurt by a higher-for-longer short-term interest rate regime. Private equity firms are securitizing those loans, and combining them with higher quality debt into larger investment vehicles in order to extend their shelf lives ahead of maturities. They're also selling off portions of larger funds to manage exposures. "This obviously is an attempt to take the proverbial sow's ear and turn it into a silk purse," Westwood Capital cofounder Dan Alpert told CNBC. "That follows the same pattern that we saw during the 2008 crisis: Let's see if we can take the remainder of the unleveraged portion of the private credit loan and package it in securitizations." Panelists at a private credit conference in Nashville earlier this month described the private credit environment as "one of 'peak anxiety,'" according to analysts at KBRA, a credit rating agency. While loan defaults haven't occurred en masse, default rates are elevated, multiple ratings agencies say. In the first quarter, a record number of companies were downgraded two or more levels in KBRA's default monitor range, the agency said Thursday. …