Citi's Bhatia warns of private credit 'tourists' forced to sell

(Bloomberg) -- Private credit rookies selling into a downturn poses a potential threat to corporate debt, Citigroup Inc.'s Mickey Bhatia warned.

"If the cycle turns and these tourists, rather than working out loans, just start selling them at below the economic value — what happens to the rest of the market?" Bhatia, the firm's head of spread products, asked on the Bloomberg Intelligence Credit Edge podcast.

"That's a big worry," said Bhatia, whose remit spans global credit trading, financing and securitization.

Concerns about the fast-growing $1.8 trillion private debt market have bubbled up this year as redemption requests from retail funds accelerated. The industry holds more debt in software companies, which are at risk of being disrupted by AI, than other parts of credit and there are fears that direct loans are not being accurately valued.

JPMorgan Chase & Co.'s Jamie Dimon raised similar worries this week, warning that not all private credit managers will do well if markets slump. Some firms "may be brilliant, but, I guarantee you not all 1,000 of them are," Dimon said.

According to the US Office of Financial Research, there are more than 2,000 private credit funds. Fundraising has grown increasingly concentrated among larger, more established managers.

There's a danger that US retail jitters spill over to institutional investors, triggering a bigger retreat from the asset class. That would pressure companies that need to refinance loans made during the near-zero rates era earlier in the decade.

"That's the real risk of this whole retail-related news," Bhatia said. "I think it can happen globally."

Still, Bhatia, who's part of Citigroup's global markets leadership team, doesn't expect private debt stress to spiral into a broader credit problem. That echoes recent comments from Citigroup Chief Executive Officer Jane Fraser, who said the pessimism was overblown.

"The market having a big systemic issue right now — I'm not really worried about that," said Bhatia.

Even with at least $100 billion of exposure to private credit firms, Wall Street has so far demonstrated resilience. Citigroup held $22 billion of such loans in the fourth quarter and has reported zero losses over the life of the portfolio.

Meanwhile, in response to the growing unease about rising debt defaults and ballooning AI infrastructure spending the securities industry is offering clients new ways to hedge, including swaps to short leveraged loans.

But at Citigroup there's not much demand from clients for such tools. In Bhatia's view, corporate fundamentals are generally solid and credit markets will hold steady unless there's a hard landing in the US economy.

"You can buy protection on a high-yield index and that will be equally effective as anything else," said Bhatia.

--With assistance from Todd Gillespie.

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