Sometimes Not Liquid at All
Doug Nolan
Crisis dynamics gained important momentum this week.
“Blue Owl Shares Post Worst Month Ever on Private Credit Fears.”
“KKR BDC Slides on Rise in Troubled Loans.”
“BlackRock Private Debt Fund Slumps After Slashing Dividend.”
“Apollo’s MFIC Slashes Dividend, Marks Down Assets, Announces $100M Buyback.”
“Private Credit Firm Invico Calls Investors to Manage Exodus Risk.”
“No Fed, No Safety Net: Why Private Credit’s First Real Recession Will be its Moment of Truth.”
“Blackstone Private Debt Fund Sees More Stress in Software Assets.”
“Bain Warns Software Default Rate Risks Hitting Double Digits.”
“Blackstone’s Schwarzman Reaped Near-Record $1.24 Billion in 2025.”
Blue Owl’s 2.4% decline this week pushed y-t-d (2-months) losses to 29.4%.
KKR sank 13.3% (down 31.2% y-t-d), Ares Management 9.1% (down 30.7%), Apollo Management 12.6% (down 27.7%), and Blackstone 6.5% (down 26.5%).
These stocks are sending a strong Credit cycle signal.
Bloomberg:
“Bank Shares Walloped by More ‘Cockroach’ Credit Woes, AI.”
“Banks Trade Like We’re in the Midst of Crisis.”
Ominously, the KBW Bank Index sank 5.9% this week, boosting losses from February 10th highs to double-digits (10.4%).
It was the index’s largest decline since ‘liberation day’ week (April 4th).
PNC Financial dropped 8.9% this week, Wells Fargo 8.2%, Zions Bancorp 8.4%, Goldman Sachs 6.8%, Bank of America 6.1%, Morgan Stanley 5.1%, Citigroup 5.0%, and JPMorgan 3.4%.
The Broker/Dealer Index fell 2.4%, with losses since February 10th at 7.9%.
The KBW Index’s 5.1% Friday slump was the largest single day decline since April 4th.
Concerns were not limited to the goliath “money center banks”.
The KBW Regional Bank Index was clobbered 7.1% this week, with losses from February 9th highs at 10.0%.
Key individual bank CDS prices posted their largest gains since April.
Morgan Stanley CDS surged 11 bps to a nine-month high of 66 bps – the biggest move since “liberation day.”
Citigroup CDS rose eight to 61 bps; Goldman Sachs seven to 64 bps; Wells Fargo five to 54 bps; Bank of America five to 60 bps; and JPMorgan four to 45 bps – all to highs since November.
February 26 – Bloomberg (Constantine Courcoulas, Donal Griffin, and Scott Carpenter):
“As Market Financial Solutions Ltd. hurtled toward collapse in London, the setting was new, but the themes felt familiar.
Like US auto lender Tricolor Holdings, MFS was a nonbank finance firm looking to fill a gap that major banks had ignored or shunned, while tapping those Wall Street giants for the cash to do it.
And like auto parts supplier First Brands Group, the banks took comfort in tangible collateral, only for accusations of double-pledging to rattle that assurance.
Even some of the names were the same: Banco Santander SA and Jefferies Financial Group Inc. — both stung by First Brands in recent months — are once again scrambling to recoup whatever money they can from an embattled company.
This time, they’re alongside the likes of Apollo Global Management Inc.’s Atlas SP Partners, Barclays Plc, Wells Fargo & Co. and Castlelake LP.
‘For the last six months the market has been constantly talking about how to prevent fraud,’ said Nicole Byrns, founder of asset-based finance fund Dumar Capital Partners.
‘Task forces have been put together.
New anti-fraud products have developed.
And yet this shows how there may still be weaknesses in the ability to spot it’.”
February 26 – Bloomberg (Constantine Courcoulas and Donal Griffin):
“Barclays Plc and Atlas SP Partners are among Wall Street firms that helped arrange more than £2 billion ($2.7bn) of loans to a UK mortgage-finance company that has unraveled amid allegations of financial irregularities.
Market Financial Solutions Ltd., or MFS, collapsed into a UK form of insolvency Wednesday, with the judge overseeing the case citing accusations of fraud and double-pledging of assets.
Barclays and Atlas, the structured-credit arm of Apollo Global Management Inc., each lent hundreds of millions of dollars.
Jefferies Financial Group Inc., Banco Santander SA, Wells Fargo & Co. and Castlelake LP are also among the lenders…”
International cockroach sightings.
European (subordinated) Bank CDS jumped seven Friday to 101 bps – the biggest daily move in five months.
Signaling serious trouble, U.S. leveraged loan prices sank 80 cents this week to 94.57 - the low since April 9th – and only 16 cents off “liberation day” period lows.
Loan prices were down $1.17 during February, the worst month since September 2022 (UK gilt deleveraging crisis).
High yield CDS surged 24 this week to a three-month high of 331 bps - the largest weekly gain since October 10th (up 25 bps on China trade war worries).
Oracle CDS jumped seven to 164 bps – up 112 bps in five months to the high since the Great Financial Crisis.
Treasuries enjoyed notable safe haven demand.
Ten-year Treasury yields sank 15 bps to a four-month low of 3.94%.
Five-year Treasury yields fell 15 bps to an almost 17-month low of 3.50%, and two-year yields dropped 10 bps to 3.37% - the low back to August 2022.
High yield spreads-to-Treasuries widened 21 this week to a three-month high 291 bps – the largest increase since October.
Interestingly, investment-grade spreads caught fire this week.
The seven bps increase was the largest widening since “liberation day” (to a 3-month high 291bps).
February 24 – Bloomberg (Yash Roy and Bruce Douglas):
“A few weeks ago, analysts at UBS Group AG laid out a worst-case scenario for defaults in the private credit sector.
Their outlook just became more grim.
Strategists including Matthew Mish say private credit could see default rates surge as high as 15%, two percentage points more than the firm forecast less than a month ago, if artificial intelligence triggers an ‘aggressive’ disruption among corporate borrowers.
‘What is new: a clearer catalyst — rapid, severe AI disruption,’ according to the UBS strategists...
Direct lenders that took a lead role in financing software companies in recent years now look dangerously exposed to AI’s impact, stirring comparisons to the 2008 financial crisis.
Some estimates suggest that the firms have 40% of all sponsor-backed loans tied up in the software industry.”
“What is new: a clearer catalyst — rapid, severe AI disruption.”
It’s certainly reasonable to target AI disruption risk as a catalyst.
The critical unfolding issue is destabilizing tightening of Credit and liquidity conditions that commenced with last fall’s late-cycle cockroach sightings (i.e., First Brands and Tricolor).
Late-cycle high-risk lending is inherently susceptible to abrupt shifts in perceptions.
Notions of endless marketplace liquidity ensure loose Credit standards and aggressive lending – and consequences.
Yields associated with high-risk lending offer exceptional profit opportunities throughout the daisy chain of Wall Street loan intermediation – lending, structured finance, leveraged speculation, insurance, and asset management.
So-called “private Credit” ranks high on the list of history’s greatest high-risk lending and speculative Bubbles.
And as financial flows inundated the sector, “subprime” corporate Credit enjoyed an extended period of unprecedented access to finance.
This boom held delinquencies and defaults at artificially low levels.
Investor/speculator returns remained artificially elevated – providing Wall Street quite an earnings bonanza.
Things, as they will do, got way out of hand.
February 23 – Axios (Emily Peck):
“Private credit was hot, and now it’s not.
That has some parts of the financial world on edge.
A few trends — the AI scare trade and the retail investing boom — are colliding at once and stressing a trillion-dollar-plus piece of the economy…
Facing high demand from investors in one of its funds to get their money back, Blue Owl sold off assets.
It also changed the way redemptions at the fund operate, setting off alarm bells.
Asset managers like Blue Owl, as well as better-known firms like Blackstone and KKR, take in money from investors to create funds that typically lend to mid-market businesses, like smaller nonpublic companies that don’t issue high-grade bonds.
That investor money gets locked up for a while.
Historically, that was OK because investors were often deep-pocketed institutional types, insurance companies or pension funds not apt to need to cash out very often.
The dynamic started shifting about five years ago when retail stock investing started booming, and everyone seemingly had a Robinhood account and a stock strategy.”
The week further confirmed that the high-risk lending cycle has decisively turned.
At this point, everything seems to point to a breakdown in high-risk loan intermediation – the miracle of Wall Street Alchemy.
Myriad risks have been revealed, speculative flows have reversed, liquidity dynamics have deteriorated, Credit has tightened at the margin, and Credit issues have begun to materialize in earnest.
February 26 – Bloomberg (Olivia Fishlow):
“A private credit fund overseen by Apollo Global Management Inc. cut its dividend and marked down the value of its assets amid signs of strain in parts of its loan book.
MidCap Financial Investment Corp., a business development company focused on direct lending, lowered its quarterly payout to 31 cents a share from 38 cents and wrote down its portfolio by about 3%, citing weakness in a handful of older investments and a reassessment of its long-term earnings power as interest rates shift.”
February 24 – Bloomberg (Rachel Graf and Olivia Fishlow):
“A potential migration of private credit loans from public business development companies into opaque debt vehicles could cause leverage to balloon tenfold while masking risk, Citigroup Inc. analysts warned.
BDCs, which are facing pressure to pay back investors, can seek relief in selling assets to collateralized loan obligations, which are financed with long-term funding that cannot be withdrawn on short notice.
But such a shift would trade public transparency for a much more leveraged and secretive structure, the analysts said...
‘This migration increases opacity in aggregate leverage in the ecosystem and dependencies amongst private credit, insurers, and securitization,’ Michael Anderson, Citigroup’s global head of credit strategy, wrote...
‘The public portfolio transparency that we have from BDCs would also be lost’.”
February 25 – Bloomberg (Edward Clark, Preeti Singh and Olivia Fishlow):
“A publicly-traded private credit fund managed by Blackstone Inc. said that it’s seeing continued signs of stress in one of its largest investments — software company Medallia Inc.
The Blackstone Secured Lending Fund has now marked the loan to Medallia at around 78 cents on the dollar…”
February 21 – Bloomberg (Scott Carpenter and Rachel Graf):
“Fear of rising defaults is spreading from the leveraged loan market to some of the retail funds that ultimately buy the debt as investors get choosier about taking on credit risk.
The biggest buyers of leveraged loans are money managers that bundle the debt into bonds known as collateralized loan obligations.
Some retail funds that buy the riskiest parts of CLOs, known as CLO equity, are slashing their dividends as loan yields fall and anxiety about future defaults mounts.
Investors are responding by heading for the exits.
Share prices of a handful of closed-end funds, including ones backed by the billionaire Koch family and Carlyle Group Inc., fell to all-time lows this week.”
February 25 – Bloomberg (Ameya Karve):
“Investors and managers are growing more cautious on collateralized loan obligations after a software-driven selloff in US leveraged loans eroded bond valuations, panelists said at SFVegas on Feb. 24.
Refinancing risk has become the market’s primary concern, even for borrowers still generating double-digit revenue growth.
The resulting selling has been broad, sweeping up stronger credits…
Roughly 15% of CLO collateral is tied to software, increasing to about 20% in private credit CLOs.
Panelists flagged potential rating actions as the next catalyst as several loans will see pressure to refinance by the end of the year.”
As high-risk lending booms go, this one seemed to last for an eternity.
And as things over recent years went to blow-off extremes, Wall Street shifted its focus to unsuspecting “retail” flows oblivious to Credit and liquidity risks.
February 26 – Bloomberg (Allison McNeely):
“Carlyle Group Inc. Chief Executive Officer Harvey Schwartz suggested that asset managers should have been more forthcoming about the relative illiquidity of investment funds sold to individual investors.
‘The industry did itself a bit of a disservice calling the vehicles semi-liquid,’ Schwartz said...
‘We just should have called them ‘sometimes not liquid at all.’
The industry’s push into retail wealth has attracted scrutiny over whether private investments are appropriate for individuals…
Retail products are sometimes marketed as ‘semi-liquid’ because they allow quarterly or monthly redemptions until they hit a certain limit.”
“Sometimes Not Liquid at All” is an almost unalarming comment with alarming ramifications.
Crises erupt when the perception of safety and liquidity is suddenly recognized as a misperception.
Traditionally, bank deposits and money market instruments have been the epicenter of the shocking and destabilizing realization that what was believed safe and liquid “money” was instead a risk asset vulnerable to significant losses.
During the mortgage finance Bubble period, I highlighted mounting risks associated with the “moneyness of Credit” – in particular the perception of safety and liquidity for “AAA” MBS, ABS, mortgage derivatives, and structured finance (i.e., CDOs/CLOs).
Over the global government finance Bubble period, I’ve often referred to the “moneyness of risk assets.”
Decades of Fed/government market backstops, liquidity injections and unending loose conditions ensured the perception of safety and liquidity for an ever wider swath of financial assets – certainly including shares of thousands of ETFs across various asset classes.
February 23 – Associated Press (Alex Veiga):
“For years, individual investors were dismissed by some on Wall Street as ‘dumb money.’
That typically referred to those prone to trading on hype, or chasing trends rather than company or industry fundamentals, or responding late to big market moves…
These investors… accounted for $5.4 trillion in trading activity in 2025 across stocks and exchange-traded funds, or ETFs, according to Vanda, an independent data and research firm.
That’s a nearly 47% increase from the previous year and the most going back to at least 2014.”
February 24 – Reuters (Suzanne McGee):
“Nearly 90% of all the trading in leveraged single-stock ETFs in the U.S. market can be traced to transactions by individual investors, according to…
Direxion...
The data shows that the proliferation of these exchange-traded vehicles, which allow investors to speculate on short-term moves in an underlying stock, has been almost entirely driven by their allure for these retail investors.
The study also found that last year trading in the leveraged single-stock ETFs accounted for 8% of total trading on all U.S. exchanges.”
Way too much Credit and liquidity risk has been distributed to the ETF complex.
This will come back to haunt system stability.
And it’s interesting to read about the recent forced loan sales from troubled “private Credit” vehicles sold to entities that appear ready to shift this risk to CDOs (collateralized debt obligations) and other structured Credit products.
Sure brings back memories of 2007/2008.
February 23 – Bloomberg (Silas Brown, Olivia Fishlow, Leonard Kehnscherper and Ellen DiMauro):
“Blue Owl Capital Inc.’s co-chief reeled off all the times he’d seen this type of fear before.
Covid.
Silicon Valley Bank’s collapse.
Liberation Day.
Marc Lipschultz was addressing analysts on the 11th straight day of losses for the firm’s shares, the worst streak since Blue Owl went public almost five years ago…
But as Lipschultz saw it, this was par for the course when markets get jittery…
It appears different now.
Blue Owl last week permanently shut the gates on one of those funds — preventing investors from withdrawing their cash every three months as they’d previously been allowed — and began selling assets to return investor capital.
It’s the latest sign of tumult in a $1.8 trillion market…
‘The red flags we are seeing in private credit today are strikingly familiar to those of 2007,’ said Orlando Gemes, chief investment officer of Fourier Asset Management.
He pointed to worsening lender protections and convoluted liquidity terms that ‘obscure the mismatch between what investors believe they own and what they can actually exit’.”
Understandably, Blue Owl’s Marc Lipschultz and others would like to believe that current “private Credit” instability is similar to market challenges previously surmounted – i.e., Covid, SVB, “liberation day,” etc.
But today’s backdrop is strikingly different.
I’ll posit that those past episodes were characterized by bouts of speculative deleveraging and attendant liquidity issues that risked bursting inflating Bubbles in high-risk leveraged lending and “private Credit.”
Deleveraging was reversed, and it was repeatedly off to the races.
It's the opposite today.
Importantly, faltering high-risk lending markets are at the cusp of triggering speculative deleveraging.
The resolution of deleveraging risk will not today resolve leveraged lending and “private Credit” issues.
Meanwhile, the unfolding de-risking/deleveraging dynamic will significantly exacerbate high-risk lending and liquidity risks.
February 24 – Bloomberg (Caleb Mutua, Jeannine Amodeo and Aaron Weinman):
“Leveraged-loan traders are slashing their exposure to software debt — much of which entered 2026 priced at or near par — in a sign of how artificial-intelligence fears are rippling across the market. Broadly syndicated loans for software businesses… had slumped between 1 to 3 points in the secondary market from Friday to Tuesday…
Those loans were all being quoted around 100 cents on the dollar as of Dec. 31.”
February 24 – Bloomberg (Tasos Vossos):
“An ‘AI bubble’ is the biggest concern of credit investors for the first time ever, according to a survey among Bank of America Corp.’s clients.
‘Few worry about geopolitics or a central bank policy error,’ BofA strategists… wrote...
Some 23% of survey’s investment-grade respondents saw the threat of an AI bubble as their top concern, up from 9% in BofA’s previous survey in December.
Worries over a potentially unsustainable surge in investment and valuations of AI companies overtook ‘Bubbles in Credit’ as the top concern…
Anxiety over trade tensions and a global recession had also been seen as the biggest perceived risk during 2025.”
February 26 – Financial Times (George Steer and Rachel Rees):
“Investors are riding out the ‘whack-a-mole’ software sell-off by loading up on protection against volatility and exploiting the divergence in sectors tipped to be either winners or losers from AI’s advance.
Some of Wall Street’s biggest players are turning to complex options and hedging strategies to navigate a market buffeted by blog posts and headlines that have recently wiped tens of billions of dollars off the value of some of the S&P 500’s largest tech groups.”
There are parallels between today’s faltering “subprime” Bubble and 2007.
Subprime blowup ramifications were widely dismissed throughout 2007 and into 2008.
Not appreciated was how high-risk mortgage lending had evolved to become the key marginal source of Credit sustaining housing Bubble inflation in key markets – and how huge quantities of risky loans had been intermediated into perceived safe instruments.
The collapse of subprime lending and loan intermediation triggered a dramatic tightening in Credit conditions at the “periphery.”
Mounting housing inventories and falling prices led to a contagious crisis of confidence in mortgage finance more generally (subprime to Alt-A to prime).
The harsh realization of Trillions of mispriced mortgage Credit instruments unleashed powerful crisis dynamics.
Today, the systemic importance of “private Credit” is similarly dismissed, despite markets for leveraged loans and high-risk lending having inflated so far beyond the subprime mortgage market.
Importantly, today’s deteriorating Credit market is on a collision course with the AI mania and arms race.
I couldn’t help but associate the poor response to blockbuster Nvidia earnings as confirmation that the market is increasingly questioning the viability of financing requirements for a $3 TN plus AI investment boom.
The bottom line is AI finance is high risk, and the marketplace is already chin deep in risky Credit.
South Korean stocks were up another 7.5% this week (48% y-t-d), with Japan’s Nikkei Index (up 16.9%) and the Shanghai Composite (4.9%) higher by 3.6% and 2.0%.
UK’s FTSE 100 rose 2.1%, while European equities for the most part enjoyed another solid week.
Global liquidity remains abundant.
But liquidity issues lurk.
The MAG7 Index was down another 1.8% this week, with the index now 6.8% lower y-t-d – to a level it traded at back in mid-September.
Bitcoin was $2,000 lower for the week to $65,800, having lost almost half its value from October highs.
Liquidity overabundance may persist globally, but speculative deleveraging has begun to gather momentum.
Credit tightening fears are enveloping the tech/AI Bubble.
And the historic AI Bubble has inflated to dominate the stock market, an equities Bubble integral to the entire maladjusted and over-indebted U.S. economy.
This week’s $171 gold price advance and 10.8% silver surge corroborate the acute financial structure fragility thesis.
February 25 – Financial Times (Claire Jones and Ian Smith):
“Global debt surged by almost $29tn to a record $348tn last year, according to an influential think-tank that expects the burden to worsen in the coming years as governments increase spending on areas such as defence.
The Institute of International Finance said… governments’ investments in national security were the primary driver behind last year’s $28.8tn rise, with spending on AI and similar technologies also contributing to what was the biggest annual increase in the global debt burden since the Covid-19 pandemic.
The IIF figures, which combine the debt burden for governments, companies and households, also showed that, as a share of global output, global debt ratios declined for a fifth consecutive year to around 308% of GDP.
The debt-to-GDP ratio is seen as a vital indicator of borrowers’ capacity to honour their obligations.”
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