View / Banks pay backhanded compliments to private credit

The narrative about private credit is familiar by now — it’s a garbage heap of bad loans, waiting to ignite. A tiny corrective comes from a strange place: the industry’s biggest competitors.

Big banks have been busy refinancing loans made by private-credit firms. By putting their own balance sheets and brand names behind these deals, banks are validating the very underwriting they’ve spent months criticizing for being full of cockroaches.

Deutsche Bank is selling $3 billion of fresh debt to refinance a loan that accounting firm Baker Tilly took out just a year ago from Blackstone, Blue Owl, and others. JPMorgan and Morgan Stanley are working on a $4 billion loan to drug manufacturer Catalent that would replace a private-credit facility, with early price talk similarly around two points lower, according to people familiar with the matter. Alera replaced a 2021 private-credit loan with a cheaper one arranged by Goldman Sachs and Bank of Montreal.

Banks were always the cheaper option for borrowers; private-credit firms charged a premium for the certainty they offered, which mattered in volatile moments like the weeks after President Donald Trump’s “Liberation Day” tariffs when Baker Tilly came knocking. But it’s notable that banks are stepping in again: If they believed these borrowers were headed for trouble, they wouldn’t be fighting to lend to them at tighter spreads than even a broadly improving credit market would justify. These are bets on healthy companies.

Banks are almost certainly cherrypicking. The deals getting refinanced are not, you’ll notice, the software companies threatened by AI or the leveraged buyouts sitting on shaky ground. The weakest private-credit loans remain exactly where they started. And the real risk for private lenders is a slow-motion adverse selection: Their safest, most bankable borrowers get taken, leaving them holding the rest.