alt Hacker NewsOne interesting knock on from the hyperscaler growth we've seen is that the Mag7 have issued so much debt that they are crowding out other companies who would otherwise have no trouble issuing debt.
The private equity and private credit crowd is one of these groups that are currently running into this issue.
There is no way a growing company($15M to $500M in yearly sales is the sweet spot for these private credit companies) can compete with Google on debt terms so they have to raise their rates to compete suddenly, not because of all rates rising but strictly because we've just seen a huge debt issuance from some very solid credit companies.
We haven't seen a shock like this in 20+ years I've followed the credit market where a small group of companies issue so much high quality debt in such a short period of time, note there is also a lot of less high quality debt issued in this same time:)
So much has been issued that credit funds have run out of appetite to acquire Lowe middle market debt at their current spreads. This is just the way markets work so no one is crying in the casino but it is a big shock to the credit markets.
heck there was concern that the US government may have trouble issuing 5-10Y debt at rates they are used to because of the amount of GOOG, META,etc debt that is available at better terms.
Its a wrinkle to the markets that no one really predicted as a knock on effect of AI's growth.
This is all the back drop for BDC(Business Development Companies) and other private credit issuers who normally loan money for 5-7 year terms.
Those cheap 2021 loans to these small private companies are now coming due into this market with the additional head wind that the largest single sector that issued debt was venture backed software companies, who now face the head winds of the macro factors described above and the additional factor of AI commoditizing alot of hte software that these companies are building.
Private credit and equity are going to have a rough couple of years.
Things to watch out for are lack of IPO's and exist from venture/PE backed companies and a proliferation of continuation funds that kick the can down the road.
On the plus side, its a great time to be a credit trader, but not necessarily a credit issuer:)
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And it is bleeding over into equities as well. Between the SPCX and Anthropic IPO, and META approving an ATM offering, feels like we are seeing a really big strain on liquidity across the board.
Yes. And bear in mind than default create inflation naturally. When it's productive companies that default, the effect is increased. If PE can't roll their debt, i fear it will increase the dollar inflation really fast, which will have second order effect.
Also since idiots predicted hyperinflation 5-4 years ago and other idiots believed them, we're still before the 'bust' of precious metal prices (We're at the point where people invest in opening new gold/silver mines), which means it will be harded to edge against inflation than it used to be.
Maybe a naive perspective but I honestly would have thought that a larger credit market on high quality debt would actually enable a larger credit market on low quality debt. In other words the former would effectively expand money supply more reliably and therefore enable creditors to also support more speculative bets. Admittedly if there are higher ROI speculative bets to go after then maybe those just get pushed down the priority line. But I'm surprised that they're in direct competition with the high quality stuff exactly.
Something tells me not all of that debt is going to turn out quite as high quality as it appeared at the time of issuance.
The mere success of “AI” won’t be sufficient to repay those loans. Many of them only make sense in a world where AI is wildly transformative and profitably successful.