Private Debt, Public Problem

The figure is dizzying: 1.7 trillion dollars. That is the size of the global private debt market, a segment of the bond market that has experienced exceptional growth over the past five years, particularly in the United States where it now reaches $1 trillion (+20% per year over the period). This asset class, generally discreet given the very nature of its operations, has been making headlines recently following two successive bankruptcies in the automotive sector (Tricolore and First Brands). Considering credit’s well-known “canary in the coal mine” behaviour—tending to foreshadow broader shocks—these two events raise questions about the quality of lending. Jamie Dimon, CEO of JPMorgan, gave his view on the matter: “When you see one cockroach, there are probably others. Everyone should be warned.” Even though the head of the world’s largest bank is known for that sort of alarmist remark, a sanity check is in order.

In practice, First Brands, an automotive parts supplier, was weakened by the sluggishness of its end market as well as by the tariffs imposed by the current administration. But beyond the side effects of government economic policy, suspicions of fraud also loom: in addition to traditional debt, the company also carried off-balance sheet debt through factoring and inventory financing. These inventories may have been refinanced multiple times, inflating the company’s leverage ratios far beyond usual standards. As for Tricolore, a company specialising in subprime auto loans*, it is easy to draw a link between the halt of its operations and immigration policy, as well as with the well-known K-shaped** consumption pattern in the U.S.

And while the analysis of these two cases shows idiosyncratic characteristics, a second warning came from the troubles of two regional banks (Zion Corp and Western Alliance) in U.S. commercial real estate. Even though the impact on the financial statements and capital positions of these two institutions remains limited***, the situation brings back memories of the collapse of another regional bank, Silicon Valley Bank, in 2023 following the rapid rise in the Fed’s short-term rates.

It is precisely in this type of environment that investors discover new acronyms. The latest is NDFI****—these “shadow banks” that have become a key link in financing the real economy after regulators drastically tightened capital requirements for traditional banks following the 2008 financial crisis. They are mainly investment funds, less regulated than the traditional banking industry, claiming to have exceptional expertise in assessing business models and therefore, ultimately, credit risk. But the bankruptcy of First Brands, to which they were the main lenders, suddenly makes the opacity of their operations embarrassing and raises concerns about potentially lax lending standards in the race for clients and high yields.

All the more so since, although these funds have taken over part of the economy’s financing from banks, they remain deeply intertwined with the global financial system. Banks have forged close links with these entities through financing, advisory services, and the development of the originate-to-distribute***** model. In this case, Jefferies and UBS appear to be the most affected banks through their asset management subsidiaries, with exposures of $715 million and $500 million respectively.

These examples highlight how difficult it is for investors to assess the chain reactions such failures may trigger. The IMF sees the light regulation of shadow banking and its ties with banks as a key vulnerability for the global financial system. Banking regulators share this view, despite having themselves fostered the industry’s development 15 years ago in an effort to de-risk bank balance sheets.

This series of credit events has heightened investor anxiety. In a classic “sell first, think after” pattern, investors have reduced their exposure to the riskiest segment of corporate credit (high yield), leading to a widening of spreads. On the equity side, they have adjusted their positions in private asset managers and bank stocks. The lack of detail on banks’ exposure to NDFIs makes the ongoing quarterly earnings season all the more crucial to identify the losers of this sequence.

More broadly, it is worth noting that the “quality” factor in Europe has significantly underperformed in 2025, despite resilient earnings in that segment. The current configuration of equity markets—characterised by high valuations and stretched technical indicators (distance from 50-day moving averages)—should naturally prompt investors to revisit this theme heading into 2026…

* Category of financially fragile clients
** Since the last stock market correction linked to Liberation Day, confidence among high-income households has risen while that of low-income households has weakened, producing the typical two-speed K-shape pattern
*** Zion Corp announced $60 million in provisions with a 7bp impact on its CET1
**** Non-Depository Financial Institution
***** Origination of debt and subsequent syndication

Pierre Pincemaille, General Secretary of Investment at DNCA. This article was finalised in November 14th, 2025.

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