Damon's "cockroach theory" is coming true? JPMorgan Chase tightens lending for private credit funds, PIMCO warns of industry "liquidation" at hand.

Against the backdrop of rising pressure in the private credit market, JPMorgan Chase (JPM.US) has begun restricting loans to some private credit funds due to the bank's downgrade of the value of certain loans in its portfolio. In addition, there are reports that JPMorgan Chase is reevaluating the value of its private credit investment portfolio on its balance sheet and actively lowering the valuations of related assets. At the same time, senior executives at The Pacific Investment Management Company (PIMCO) have strongly criticized the industry for years of lax underwriting standards and are now facing a "reckoning." According to sources, JPMorgan Chase's actions involve loans to software companies, an industry that has recently been a focus of investor concerns about the potential impact of artificial intelligence (AI). Reports suggest that JPMorgan Chase CEO Jamie Dimon stated in a meeting last week that the bank will be more cautious when providing loans for software assets. Dimon had previously warned in October last year that in the once booming but opaque private lending sector - where prices are typically not disclosed publicly - there would be more "cockroaches" appearing. In recent weeks, concerns have escalated, partly due to investors' anxiety about the risks AI poses to some borrowers and also concerns about valuations. Last month, a fund from Blue Owl Capital (OWL.US) suspended quarterly redemptions and began selling assets to return funds to investors. However, sources say that JPMorgan Chase's actions are precautionary and not the bank's first reevaluation of assets. Unlike most competitors, JPMorgan Chase retains the right to reevaluate private credit assets at any time, whereas other banks typically need to trigger default events (such as missing payments) to take action. Currently, no other bank has followed a similar approach. This incident has once again raised concerns about the $1.8 trillion industry. PIMCO President Christian Stracke bluntly stated in a recent podcast that the market is undergoing a "reckoning." "This is not just a confidence crisis, but a crisis brought about by appallingly loose underwriting standards," Stracke pointed out, noting that years of relaxed credit standards are now leading to pressure, especially after some prominent companies encountered problems, exacerbating concerns about loan quality and exposure to risks in software companies. The market's nervousness has triggered a series of chain reactions. A $33 billion flagship fund from Cliffwater LLC is facing redemption requests. Previously, BlackRock, Inc. (BLK.US) had capped monthly redemptions at 5% for its HPS Corporate Loan Fund to address the surge in withdrawal requests. Blackstone Inc. (BX.US) has also allowed investors to redeem record shares from its flagship credit fund. Stracke expects default rates to rise to the mid-single digits in the coming years, with investor returns possibly dropping from around 10% to 6%. However, he emphasizes that this is not likely to trigger a broader credit crisis. He notes that the lack of transparency in the sector may lead some investors to "hastily assume that all assets are as bad as those that have been written down to zero," but that is not the case. He believes that as long as the U.S. economy remains strong and the Federal Reserve leans towards cutting rates or keeping them steady, there is unlikely to be a spiraling credit crunch. Wall Street banks have long been the most steadfast financial supporters of the private credit industry. A report from Moody's Corporation in October last year showed that as of the end of June, these banks had provided around $300 billion in loans to credit funds, with JPMorgan Chase's exposure reaching $22.2 billion. Banks have found that providing financing to private credit firms is a safer way to share in the rapid growth dividends of this asset class compared to lending directly to high-yield and unrated borrowers. With the recent collapse of the UK mortgage lender Market Financial Solutions Ltd. (MFS), the stability of this strategy is now being tested. MFS borrowed over 2 billion (approximately $2.7 billion) from supporters including Barclays PLC Sponsored ADR (BCS.US) and Apollo Global Management Inc (APO.US) under the Atlas SP Partners division. The company claimed to be one of the largest short-term bridging lenders in the UK until it collapsed on February 25. This collapse has dealt a fresh blow to banks and private credit firms. As one of the early critics of private credit, PIMCO has always been attentive to this sector. Analysts Lotfi Karoui and Gabriel Cazaubieilh wrote in a report earlier this month that the record fundraising frenzy after the 2008 financial crisis means that direct lending instruments are now facing a true stress test.