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Bank of America has pitched clients a bet against European companies including Deutsche Bank and Partners Group, arguing they are among the “most exposed to private credit shocks”.
The US bank told clients that European stocks exposed to private credit had 30 per cent “downside risk” compared with US peers because their shares had not fallen as sharply.
BofA assembled a basket of 17 European financial stocks for clients to short, which also includes insurers Axa, Legal and General and Aviva, and pensions group Aegon.
US private capital groups Blue Owl and Blackstone have already shed 40 per cent and 27 per cent of their market value respectively since the start of the year as part of a wider sell-off in the sector.
Private credit has been under intense pressure since Blue Owl announced that it would permanently gate one of its funds, blocking investors from redeeming their holdings, after concerns that software companies could face an existential threat from advances in AI.
Blue Owl has been at the nexus of worries about private credit and software, as the private capital group lent heavily to the sector.
Hedge funds have been eager to find ways to trade the twin concerns of private credit and software, with banks coming up with creative approaches to structure the bets. Goldman Sachs has been pitching clients a wager against software loans using total return swaps, the FT previously reported.
Even as BofA pitched some clients on ways to bet against private credit groups, the bank has also been among the mainstream lenders that have pushed into the terrain.
Last month, the bank said it would commit $25bn to private credit loans, even as concerns had begun to swell over credit quality and liquidity.
Analysts within the bank’s research arm separately on Wednesday said that the media was “still obsessed with private credit” and was “focused on low-value data points”, which they believe had propelled the sell-off.
The team, led by Craig Siegenthaler, said that was driving a “fire sale buying opportunity”.
European bank executives this week insisted that they were seeing limited stress in their private credit portfolios.
Deutsche Bank chief executive Christian Sewing said on Tuesday that the bank had not lost “one cent” in more than 10 years of private credit, after last week disclosing a €26bn exposure to the sector.
“I think we are a very solid underwriter in that business,” he said. “I look at the portfolio, the transparency we have . . . and I don’t think that is for us a particular risk.”
The chair of Swiss private capital giant Partners Group, Steffen Meister, last week told the FT that private credit default rates could double in the next few years.
However, Meister said that there was still room for strong credit returns with stringent “private equity-style” underwriting of the type practised by Partners.
Additional reporting by Eric Platt, Simon Foy and Alexandra Heal