Oaktree Capital Management co-founder and co-chairman Howard Marks has pushed back against claims that recent high-profile bankruptcies signal a “trend” in private credit, arguing that defaults are an “inevitable” feature of sub-investment grade debt.
Marks addressed growing concern following the collapses of auto parts dealer First Brands and auto lender Tricolor, which have prompted warnings about potential systemic risk in the private credit market. The debate was intensified by JPMorgan Chase chief executive Jamie Dimon who likened the situation to seeing “one cockroach”, implying there may be more to come.
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Critics of private credit have argued that the asset class has yet to experience a real downturn, suggesting that these recent failures could be early signs of market “cracks.” In a recent memo, Marks disagreed, saying that such assumptions overstate the significance of a few cases.
“No, I don’t think this is necessarily the beginning of a trend,” he said. “It’s not an indictment of the whole sub-investment grade debt market or the private credit market. Rather, it’s just a reminder that the yield spreads people care about so much are there for a reason, because sub-investment grade debt entails credit risk.”
Marks acknowledged suggestions that fraud may have played a role in some of the bankruptcies but emphasised that defaults are a “normal” part of credit markets, especially within the sub-investment grade space.
“There will always be defaults and, not infrequently, defalcations,” Marks wrote. “That’s true in the high-yield bond market and will especially be the case for sub-investment grade issuers.”
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The bankruptcies come as the private credit market has grown to roughly $3tn (£2.3tn), fueled by years of favourable conditions. During “bullish times,” Marks said, lending standards often loosen, a dynamic that inevitably leads to higher defaults and the occasional fraud when the cycle turns.
“Experiencing defaults, and even a few frauds, is an inevitable part of life when knowingly bearing credit risk for profit,” Marks added.
However, he stressed the importance of rigorous due diligence, citing Oaktree’s own review of companies like First Brands, which reportedly raised several red flags, including discrepancies between operating history and reported sales, limited references, and allegations of misconduct. “These observations hinted at weaknesses and suggested problems,” Marks noted.
