"The interest rate being offered for credit facilities extended to some special purpose vehicles that are set up by BDCs and hold a pool of the funds' loans – a type of back leverage – has climbed to as much as 2 percentage points over the Secured Overnight Financing Rate benchmark, from around 1.8 percentage points since November last year, one of the people familiar with the matter said.
Another source said the rate for such credit facilities had gone from 1.75 percentage points around November last year to 1.85-1.90 percentage points. Back leverage is a type of financing in which private credit or other debt managers borrow money from banks, using their existing portfolio of loans as collateral, and is widely used to provide credit lines to private credit funds, the sources said."
So as I understand it, private credit companies lent money to software companies and other tech ventures which are now underwater. Investors in the private credit companies are worried and now trying to pull out their investments, and private credit companies are borrowing from banks to cover their expenses and continue lending while using these initial risky loans they took out in the first place as collateral?
How is this not a house of cards waiting to implode?
How is the Back Leverage mechanism used by private credit not a scam?
byu/Remote_Ad_6049 inAskEconomics
Posted by Remote_Ad_6049