The private-credit market may not have printed its final bad loan, but the bottoming process has begun. Financing capacity turned first. The institutional bid followed. Capital formation is returning. Credit metrics will turn last.
In the late 1970s, Wall Street’s accepted wisdom was that companies below investment grade did not belong in the public bond market. The speculative-grade bonds that existed were mostly fallen angels: companies that had once been investment grade and were later downgraded.
Michael Milken challenged that convention. His insight was not that weak companies were secretly safe. It was that risk could be financed at the right price. If a portfolio of below-investment-grade bonds offered enough additional yield to absorb expected defaults and recoveries, the category could be investable even when individual credits failed.
That idea, and the original-issue high-yield market Drexel Burnham Lambert built around it, changed corporate finance. As chronicled in The Predators’ Ball, high-yield bonds gave smaller companies, leveraged-buyout firms and corporate raiders access to capital once reserved for the largest investment-grade borrowers. Credit stopped being merely a defensive allocation. It became an instrument of corporate control.
The excesses eventually became inseparable from the innovation. Drexel collapsed. Milken went to prison. The junk-bond market seized. But high yield did not disappear, because the underlying economic function was real. The market went through a credit cycle, weaker structures were exposed, capital changed hands, and a durable asset class emerged from the wreckage.
That history matters now.
Private credit is experiencing its first real test as a mass-market asset class. The headlines are ugly, liquidity is being questioned and problem loans are still migrating into non-accrual. Yet the more important question is not whether additional credit losses are coming. They are. The question is whether today’s stress represents the death of the asset class or the painful transition into a better market.
I believe the bottom is forming.
