Credit markets are tightening. Private equity will feel the squeeze.

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Aug 01, 2023 View in browser   By Sam Sutton Presented by Structured Finance Association Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. QUICK FIX If the wall of debt coming due in commercial real estate was keeping you up at night, there’s trouble brewing in the $1.4 trillion leveraged loan market as well. Cheap debt helped private equity firms deliver powerhouse returns to public retirement systems and other institutional investors over the last decade. A lot of those deals were financed with floating rate debt that became much more expensive as the Federal Reserve raised borrowing costs to the highest level since your MM host was depositing his busboy paychecks at Washington Mutual. What’s more: More than two-thirds of the $1.4 trillion leveraged loan market wasn’t hedged to protect against possible losses from higher interest before rates started climbing, debt specialists at Oaktree Capital Management pointed out in a recent research note. Those borrowers might need a break from their lenders — or their private equity backers — and that could “further limit the capital available for new deals,” according to Oaktree. That could create significant headwinds for PE-backed companies that represent a significant swath of the U.S. economy — they generate $1.7 trillion of GDP, by Ernst & Young’s estimate — and employ north of 12 million American workers. In other words: “Some of the PE guys just didn't plan for this,” Michael Feroli, the chief U.S. economist and head of global economic research at JPMorgan Chase, told our Victoria Guida on Monday. There are already some signs of trouble. The share of loans that are trading at distressed levels has climbed, Apollo Global Management chief economist Torsten Slok pointed out in a recent blog. More U.S. corporations defaulted in the first half of 2023 than at any comparable period since 2010, according to S&P Global Market Intelligence data. The Fed’s quarterly survey of bank lenders won’t offer much solace. Even as Wall Street grows increasingly bullish on Fed Chair Jerome Powell’s ability to stamp out inflation without driving the economy into a recession, banks are saying they expect to tighten lending standards through the back half of 2023. As Powell pointed out last week, bank lending is actually up compared to last year. But if lenders truly begin to turn off the spigot, private equity firms will have to manage their companies through a much more challenging environment in the near term. IT’S TUESDAY — How should policymakers be thinking about the corporate debt overhang? Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com   A message from Structured Finance Association: Did you know? Your mortgage, credit card, or small-business or car loan probably has a lower interest rate because of securitization, the bundling of your loan with other loans for added safety by members of the Structured Finance Association. Learn more at www.structuredfinance.org.   Driving the day The Labor Department reports June job openings at 10 a.m. … The ISM Manufacturing survey is out at 10 a.m. … Treasury holds a closed meeting of the Debt Management Advisory Committee meeting at 10:45 a.m. DeSantis, DeCoupling — The WSJ’s Alex Leary: “Ron DeSantis outlined a broad economic policy here Monday, calling for a tougher stance on China, including ending normal trade ties, and taking a confrontational approach with the Federal Reserve.” — Speaking of which: Reuters on Monday reported that China “announced export controls on some drones and drone-related equipment, saying it wanted to safeguard ‘national security and interests’ amid escalating tension with the United States over access to technology.” — Our Declan Harty reports that DeSantis also vowed to end President Joe Biden's “war on bitcoin and cryptocurrency” if elected to the White House.” Wall Street shows up for Christie — Chris Christie was a Wall Street fundraising powerhouse as a two-term Republican governor of New Jersey. He’s still got plenty of friends there. Cliff Asness, Stanley Druckenmiller, Bruce Kovner, David Tepper and Jeff Yass each gave $250,000 to the Tell it Like It Is PAC, according to an FEC document filed on Monday. Paul Tudor Jones chipped in $150,000. Former Trump official Anthony Scaramucci — who told your MM host about his support for Christie earlier this year — contributed $100,000. More legal battles for the CFPB — Our Katy O’Donnell: “A federal court in Texas on Monday suspended enforcement of the CFPB's small business data reporting rule for members of the American Bankers Association.” ICYMI — Our Brittany Gibson: “Congressional Democrats are getting a directive from the party’s top super PAC: brag more about the economy when you’re home for the August recess.”   YOUR TICKET INSIDE THE GOLDEN STATE POLITICAL ARENA: California Playbook delivers the latest intel, buzzy scoops and exclusive coverage from Sacramento and Los Angeles to Silicon Valley and across the state. Don't miss out on the daily must-read for political aficionados and professionals with an outsized interest in California politics, policy and power. Subscribe today.     Crypto Punch spilled at crypto’s victory party — Our Declan Harty: “A federal judge on Monday rejected the underlying premise for the cryptocurrency industry's biggest legal win to date, while ruling that the SEC's case against Terraform Labs founder Do Kwon can proceed.” But is it a security? — Our Brian Faler: “The IRS said Monday that people who receive cryptocurrencies as rewards for ‘staking’ owe tax when they receive them. The relatively rare piece of crypto guidance from the agency comes as the IRS battles in court over when those rewards are taxable.”   A message from Structured Finance Association:   In the markets Surge — Bloomberg’s Ritz Nazareth: “Stocks finished higher in the final day of July as the S&P 500 notched its longest streak of monthly gains since August 2021, defying worries about an overheated market.” Housing vibe check — Bloomberg’s Paulina Cachero: “Low rates have been an economic gift for many homeowners, a benefit that few want to give up. But for some owners, the situation has left them feeling stuck.”   HITTING YOUR INBOX AUGUST 14—CALIFORNIA CLIMATE: Climate change isn’t just about the weather. It's also about how we do business and create new policies, especially in California. So we have something cool for you: A brand-new California Climate newsletter. It's not just climate or science chat, it's your daily cheat sheet to understanding how the legislative landscape around climate change is shaking up industries across the Golden State. Cut through the jargon and get the latest developments in California as lawmakers and industry leaders adapt to the changing climate. Subscribe now to California Climate to keep up with the changes.     Fly Around Deflation — The WSJ’s Jason Douglas and Stella Yifan Xie: “Signs of deflation are becoming more prevalent across China, heaping extra pressure on Beijing to reignite growth or risk falling into an economic trap it could find hard to escape.” Peso — NYT’s J. Edward Moreno: “The peso’s soaring value means the money that Mexicans in the United States send home doesn’t go as far as it used to.”   A message from Structured Finance Association: When loans are bundled together – a process called securitization – the result is less risk and lower interest rates for American families and small businesses. Securitization provides $15.6 trillion in financing and last year funded over half of U.S. household debt. Members of the Structured Finance Association give individuals and businesses access to essential credit at a lower price through securitization. Learn more at www.structuredfinance.org.     Follow us on Twitter Mark McQuillian @mcqdc Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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