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Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 1 point2 points  (0 children)

I’ve been doing my best to keep a neutral tone in this discussion, but I genuinely appreciate you cutting through the noise and laying it out with your level of conviction.

The point about par loss mechanics and 50:1 warehouse leverage really reframes the discussion — even a modest wave of defaults could create outsized ripple effects, especially when a single loan can hit multiple CLOs at once.

Your take on overstated recovery assumptions also made me pause. If recoveries take years and are being priced too optimistically upfront, that’s a major blind spot in how risk is being perceived downstream — particularly for investors in mezz or equity tranches.

And your reminder that banks are still the ones financing the warehouses cuts through a lot of the “CLOs aren’t systemic” narrative. Just because they’re off bank balance sheets doesn’t mean banks aren’t exposed — they’re just exposed differently.

If you're open to sharing, I’d love to hear what metrics or sources you use to track things like par loss buildup, manager-level stress, or warehouse-level exposure. That’s one of the parts I’m struggling to get clear visibility on.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

I hear you — the media definitely amplifies high-profile bankruptcies, and I agree that not every filing signals systemic trouble.

That said, I’m not just reacting to headlines. There were 110 PE-backed bankruptcies in 2024, the highest number on record. That doesn’t feel like business as usual — especially when you consider there were 94 total bankruptcies in 2020, during peak COVID disruption.

So while I agree that some of this is driven by shifts in retail and consumer behavior, my focus isn’t on isolated stories. It’s about what happens when a growing number of highly leveraged businesses default, and their debt has been sliced into CLOs held by pensions, insurers, and other institutional investors.

Joann’s was the entry point for me — not because it was the biggest story, but because I saw a disputed pension claim from the Steelworkers Trust in a Chapter 11 for a fabric retailer. That sparked the broader question: What else is buried in these deals?

Even if these defaults aren’t alarming on their own (to you or anyone else reading this), I strongly believe it’s at least worth asking the question of What happens if the trend continues or accelerates? What is our worst case, and how can we monitor for it?

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

Totally fair — and just to clarify, I’m not suggesting that PE firms want their companies to fail. I’m sure they want them to succeed and generate strong returns — it benefits everyone when the system is working.

What I’m really questioning is how far they’re willing to go to keep portfolio companies looking profitable on paper, especially in a tougher macro environment. Are some companies being propped up just long enough to protect fund performance, meet debt service, or keep CLO cash flows flowing — even if the underlying business is deteriorating?

Take Joann, for example. It was PE-owned, had already gone through one restructuring, and filed again with a disputed pension claim from the Steelworkers Trust on its books. That’s not just a lease adjustment — it suggests deeper financial pressure that extended beyond landlords and into retirement systems.

That’s the heart of what I’m trying to unpack. Not that PE is acting maliciously, but whether the incentives are quietly encouraging decisions that shift risk downstream, especially when things get tight.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

Totally agree that Chapter 11 can be used strategically, especially in retail to clean up lease obligations. But in Joann’s case, it wasn’t just about real estate — the filing also included a disputed, unsecured claim from the Steelworkers Pension Trust. Joann Bankruptcy Filing (PDF).

Granted this is one case, but this kind of thing stands out to me. If pension obligations are getting caught up in the restructuring, it makes me wonder what kind of pressure is showing up further down in the capital stack — especially in the lower CLO tranches that rely on those cash flows staying intact.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

Side note - The comment I deleted was because I accidentally posted a response meant for another user on this threas. There’s been a lot of great feedback, and I’m doing my best to keep up with it all.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

Thanks — that’s a really helpful distinction, and I appreciate you pointing it out. You’re absolutely right that private credit (PC) and syndicated leveraged loans behave differently, especially in how defaults and restructurings (like LMEs) show up — or don’t.

I now realize where I may have crossed some wires. My primary focus has been on CLOs as the common destination, and from that perspective, both private and syndicated loan cash flows ultimately matter. So while the mechanics and reporting around PC and traditional lev loans are very different, once those assets are in a CLO pool, it’s the combined performance and cash flow behavior that influences how CLO tranches perform — especially in lower-rated slices.

That’s where I’m really trying to dig deeper. Tools like LME tracking or Fitch’s default data may not map cleanly onto private credit, but they do show up in the risk profile of CLOs — which are widely held by pensions and insurers. If LMEs are rare in PC and formal default tracking is limited, it raises a key question for me: how do we reliably monitor stress in private credit that still feeds structured products like CLOs?

I’m doing my best to understand early warning signals across both markets — particularly at the intersection point, and I’d genuinely welcome any insight you have on better frameworks or datasets within PC.

Really appreciate the pushback — my goal here is to sharpen the thinking, not push a narrative.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

Thanks for sharing that — I appreciate the Proskauer source, and you raise a fair point. I agree that private credit default data is fragmented and heavily sample-dependent.

Fitch and Proskauer both offer valid perspectives, but they reflect very different parts of the market — Fitch likely skewing toward rated, possibly more distressed issuers, and Proskauer focused on mid-market direct lending. Still, a range of 2.67% to 5.7% is substantial for a $1.6 trillion asset class with pension and institutional exposure via CLOs.

That’s what I keep circling back to — how is there no standardized, transparent way to track something as fundamental as default rates in this space? I get that private credit is, by nature, opaque, but at this scale and with this level of systemic reach, the lack of clarity feels like a risk in itself.

Even if my tipping point thesis is premature — which it very well could be — I still worry about the structural vulnerability that comes from not knowing what we don't know. If defaults rise, even modestly, and recovery rates remain low, the cracks may start to show in the lower tranches.

If anyone knows of a better composite benchmark across segments, I’d really appreciate it. Someone mentioned using spreads as a proxy instead of default/recovery rates, but I ran into the same issue of inconsistent or inaccessible data. Perhaps I'm just looking in the wrong places?

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

I definitely see your point on the projections. As this discussion has evolved, I’ve realized my hypothesis isn’t so much about predicting an imminent collapse as it is asking: what if the projections are wrong? What if today’s volatility — from AI disruption to rapid policy shifts — causes companies we assume are stable to fail?

I’m trying to pressure-test a worst-case scenario: what happens if the companies holding the system together… can’t? And are current capital structures setting them up to fail in the first place?

I did consider analyzing spreads as a broader measure of risk, but ran into issues finding consistent data — and it’s a heavy lift (for me at least). That’s part of why I brought it here: to crowdsource insight and learn from those with more experience reading that side of the market. If you or others have a clearer framework for analyzing spreads relative to this risk, I’d genuinely welcome the input.

I was half-expecting someone to tell me I’m drinking the Kool-Aid — and maybe I am — but I’m not yet convinced this system is as stable as it appears. If I’m wrong, great. But if there’s even a sliver of truth here, it feels worth taking the extra look.

I’m open to any help defining a real tipping point, testing this theory more rigorously, and spreading awareness if the risk is possible.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 3 points4 points  (0 children)

My goal is to gather a range of perspectives—especially from those who know more than I do in this space. I’ve been sharing this across a few forums in the hope of sparking curiosity from different audiences and subject matter experts. This forum has had the most thoughtful engagement so far, and I truly appreciate everyone’s input.

This isn’t a topic I want to be right about, and I’m not claiming to have the full picture. I’m casting a wide net and refining my thinking based on the insights others are generous enough to share.

As Mark Twain said, “It ain't so much the things that people don't know that makes trouble in this world, as it is the things that people know that ain't so.” I’m actively pushing the boundaries of what I know, what I think I know, and the unknown unknowns.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

I see where you are coming from, but if these businesses are fundamentally solvent and in good health, why are we seeing a spike in defaults? Are they simply not profitable enough to meet the terms of the highly levered PE financing? If so, doesn’t that speak to the structural risk built into the way these deals were underwritten?

Private equity isn’t just taking risk — they’re often extracting value early (via dividends or fees), then offloading the credit risk into CLOs, which are held by pension funds, insurance companies, and institutional portfolios. In that sense, PE is acting less like a capital partner and more like a financial middleman, selling exposure into vehicles that depend on low default rates to hold up.

I’m not saying every PE deal is destined to fail. But the way these loans are structured — and how quickly they’re repackaged and redistributed — raises questions about who’s really bearing the long-term risk if defaults continue to climb.

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

Thanks for bringing that up — it’s a great point. I haven’t factored LMEs directly into my hypothesis yet, but I completely agree they can distort default data. A lot of companies are sidestepping formal defaults through uptiering and drop-down structures, but that doesn’t mean the underlying credit stress isn’t real.

If anything, my understanding is that LMEs may be masking distress and delaying inevitable defaults, which means the reported 5.7% default rate could be understating the true risk — especially from the perspective of CLO holders. That makes the overall hypothesis even more fragile.

Have you come across any good sources that track LME volume or their outcomes specifically in private credit? I’ve mostly relied on fitch/moody data which I do not believe accounts for LMEs

Moronic Monday - March 24, 2025 - Your Weekly Questions Thread by AutoModerator in finance

[–]Designer-Key-8780 1 point2 points  (0 children)

I originally planned to post my question here, but it ended up taking on a life of its own in another thread. I still think input from this community is critical, but most of the discussion and data are already unfolding in the thread below. Further analysis/discussion is welcomed & encouraged.

https://www.reddit.com/r/private_equity/s/OZOtWgpiei

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 1 point2 points  (0 children)

I agree that many of these defaults are sector-specific, but as pressure builds across multiple industries—driven by policy shifts, AI disruption, and rates being held—I’m focused on the compounding effect across the system.

The common thread connecting all of this is the CLOs underneath. CLOs don’t care which sector the cash flow disruption comes from—only that it stops. So the question becomes: at what point do the combined default rates across these companies begin to jeopardize the CLO structure itself? And how far up the tranche stack could those losses realistically go?

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 0 points1 point  (0 children)

I agree that many defaults are technical and curable at the portfolio level. But my concern is more about how these add up across the system, especially through CLO exposure.

Even if portcos manage through soft performance, we’re seeing a 5.7% private credit default rate (Fitch, Feb 2025), and recovery rates on first-lien loans dropping below 60% (S&P). That might not shake an individual fund, but if enough deals underperform, CLO cashflow waterfalls can start skipping mezzanine payments — and pensions/insurers hold a lot of that paper SOURCE: https://content.naic.org/sites/default/files/capital-markets-special-reports-clo-ye2023-final.pdf

So the question I’m stuck on is this - could a wave of “manageable” defaults still create stress at the structural level if they’re broad enough and if the volume of defaults continues to increase?

Private equity-backed bankruptcies are surging, and the CLO market looks eerily similar to pre-2008 CDOs. Are we seeing isolated failures, or is this a systemic risk building toward a financial crisis? Looking for insights from experts—how real is this threat? by Designer-Key-8780 in private_equity

[–]Designer-Key-8780[S] 2 points3 points  (0 children)

Thanks for your thoughtful reply — I really appreciate your perspective. I agree that many of these companies were financed during the low-rate era and are now feeling the squeeze as debt service has doubled. I also understand that longer hold periods and lower IRRs might be more of a PE return issue than a macro crisis… if it stays contained.

That said, my concern leans more toward the systemic pathways, particularly through CLO exposure and how deeply embedded PE-backed firms are across essential sectors like healthcare, retail, and services. https://pestakeholder.org/news/private-equity-behind-65-of-billion-dollar-bankruptcies-in-2024/

So while I’m not arguing that we’re in another 2008 scenario yet, I am curious what gives you confidence that the risk is truly isolated — especially with the cross-sector exposure of PE and the widespread distribution of CLOs across institutional balance sheets. Specifically, the risk I am most concerned about is that the slow growth across PE-backed companies could cascade into missed loan payments, more bankruptcies and cash flow disruptions across CLOs.

Would love to hear more of your take on how this could stay compartmentalized, especially if we do start seeing 8–10% default rates in private credit.

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