Private credit crisis worsens? JPMorgan Chase leads the way in "cutting" loan limits, with a $1.8 trillion shock imminent

The pressure on the private credit market is spreading from within the industry to the traditional banking system. JPMorgan Chase has imposed restrictions on financing provided to private credit institutions, a move seen by the market as a reassessment by Wall Street’s major banks of the $1.8 trillion private credit industry’s risk exposure.

According to the Financial Times, JPMorgan has notified relevant private credit firms to lower the collateral value of some loans in their portfolios, mainly involving software companies. This valuation adjustment will directly impact the future financing amounts these funds can obtain from JPMorgan.

Meanwhile, the private credit fund Cliffwater has reportedly experienced over 7% investor redemptions, further fueling market concerns about liquidity in the industry. Multiple negative signals are stacking up, highlighting the fragility of the private credit market.

JPMorgan Takes Action, Software Loans Hit First

Reportedly, the loans JPMorgan has devalued are concentrated in the software sector. The bank believes that software companies are particularly vulnerable amid the AI boom, and such loans have accounted for a significant portion of recent private credit growth.

Sources say this valuation adjustment did not trigger margin calls for the affected funds but was a proactive measure by JPMorgan to preemptively reduce credit limits for these funds. “The goal is to act promptly when necessary, rather than waiting for a crisis to erupt,” a source said.

JPMorgan has a special clause in its private credit financing business—reserving the right to revalue assets at any time—whereas most other banks typically wait until triggers like default or missed payments occur. Private credit funds can dispute valuation results, but this process can take months and involve third-party appraisers, during which JPMorgan’s valuation remains effective.

Executives Were Warned Early, Attitude Shift Is Evident

JPMorgan’s restrictions on private credit financing are not a sudden decision. CEO Jamie Dimon has previously expressed cautious views on the private credit sector. Reports indicate that at a leveraged finance conference last week, Dimon told investors that JPMorgan is adopting a more cautious stance on collateralized financing of software assets.

Troy Rohrbaugh, Co-CEO of the bank’s Commercial Banking and Investment Banking division, also stated during the February earnings call that JPMorgan is becoming more conservative than its peers regarding private credit risks. “As the world becomes more turbulent… this outcome was expected,” he said. “I am surprised that people are surprised by this.”

One fund manager noted that JPMorgan has been “significantly more aggressive in providing backend leverage over the past three months,” and called it the bank’s “first real trouble” in this area.

Industry Expansion Under Pressure, Valuation Bubble Shows Signs of Deflating

The rapid expansion of the private credit industry largely depends on leverage financing from regulated banks. JPMorgan, Wells Fargo, and Bank of America have all extended large loans to this sector, partly because regulatory rules allow banks to hold less capital against such activities.

Since late 2020, private credit firms have raised hundreds of billions of dollars from wealthy individuals and institutional investors, quickly gaining the capacity to compete directly with banks in large-scale leveraged buyouts. Typical deals include Thoma Bravo’s $6.4 billion acquisition of Medallia and Permira and Hellman & Friedman’s $10.2 billion purchase of Zendesk.

However, much of these loans were originated during the high-valuation boom of software companies amid the remote work trend, with some assets rated overly optimistically by rating agencies. As corporate cash flow projections are revised downward, banks have begun to reprice loans held at face value significantly, sometimes down to near zero. Meanwhile, these debts will mature over the next few years, in a market environment vastly different from when they were issued.

Risks Persist, Market Watch Continues

Currently, private credit industry executives say they have not seen other banks adopt a stance similar to JPMorgan’s. But the market’s focus is on whether this attitude will influence other lenders.

Meanwhile, the news that Cliffwater’s interval fund experienced over 7% redemptions has drawn attention. Unlike products from BlackRock and other firms, interval funds cannot impose “gates” on redemptions, which puts greater pressure on liquidity management.

In the public markets, software stocks and related debt have fallen sharply this year. Private credit institutions tend to hold loans to maturity and have not yet marked down their portfolios accordingly. They maintain that software companies are still growing and that loans will continue to perform normally. But with JPMorgan taking the lead, market scrutiny of valuation transparency and liquidity risks in the private credit sector is expected to intensify.

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