The Dividend Cafe - Private Credit Contagion Risk and All the Lies

Episode Date: March 20, 2026

Today's Post - https://bahnsen.co/47xUXzF David Bahnsen hosts this week’s Dividend Cafe, briefly noting ongoing Iran-related market volatility but avoiding a third straight week of geopolitical speculation, criticizing market pundits for pseudo-military commentary. He instead addresses private credit, arguing mainstream narratives wrongly conflate liquidity/redemption features with claims of current, broad credit distress. He says reported loan issues are being overstated, noting a $600 million sale from a multi-billion-dollar portfolio cleared at 99.7% of par, and that future defaults—if they rise—won’t be monolithic and require manager-, collateral-, and portfolio-level nuance. He outlines five points: avoid simplistic AI/software assumptions; recent loan sales were near par; losses fall on investors, not banks, making risk non-systemic; a washout of weak managers can strengthen capital allocation; and investors should distinguish good vs bad and aligned vs non-aligned managers. He adds software loan yields rose while total loan yields are lower than a year to 18 months ago. 00:00 Welcome and Market Volatility 00:42 Why Not Iran Again 02:51 Private Credit Enters Spotlight 03:25 Defaults vs Liquidity Confusion 04:57 What the Facts Show 06:11 AI Software Loan Hype 07:06 Five Key Takeaways 08:56 Systemic Risk Myth 10:20 Alignment Matters Most 11:28 Chatter vs Reality 12:37 Chart and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividing Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello, and welcome to this week's edition of the Dividend Cafe. I am your host, David Bonson, and we are actually not going to spend a lot of time today in the Dividendon Cafe talking about Iran and the ongoing military issues there. It remains the case, as has been now for three Fridays in a row. It was the case two weeks ago, which was our first week after the military operation had begun, and then on into the next week. And here we are again and continue to be dealing with the volatility that comes with all this and playing out as we would have expected.

And I'll say some more on Monday in the Dividend Cafe. I have a different topic I want to cover today. But I do want to just stay off the top. There is a reason I'm not going to go do a third week in a row on the Iran case that right now I'm seeing more and more market commentary coming from people that are trying to do some sort of pseudo military commentary necessary to predicate their market perspective. And when I say pseudo, it's because it's pseudo. Because if you're a market pundit, then you do not know where things are going militarily or geopolitically because if you did, you would. would not be a market pundit. This is true of the media.

By the way, the media is the source of most market punditry as well when it comes to the military or geopolitical strategic aspects of where things are going. I do accept that there are base cases that one could form as to market reactions to various elements of Strait of Hormuz and other elements of where this whole conflict is going. and there are probabilities that one could assign within a degree of rationality. But that is different than what I think we're seeing right now, where there's just an excess of chatter where I do see more and more people wanting to play, make-believe military strategists,

and act as if there is some sort of special access to the Pentagon War Room that I assure you there is not. Therefore, I'm going to talk about, I have a credit today and where things remain relevant in the Iran discussion and particularly impact on oil markets and the economic ramifications of all that, we'll be talking about. We've talked about a ton over the last few weeks and we'll continue doing so. Today, though, in the dividend cafe, and I'm actually pleased to say it's a little bit shorter of an addition than I often have done lately, all the ones that I normally do, their length is

longer, it isn't because that is the normal aspiration for what I want the dividend cafe.com to be. It's because I basically go over what I wanted to be every week. And yet this week, I think that there is a message that we want to cover here today, which I believe is important because a topic has now been brought into the mainstream of investment and economic conversation made to be relevant to the mainstream. that is not. And what I mean by this is people can say, oh, boy, there's this private credit thing.

It's getting bad. It's a issue. And they can be right or wrong about that. And then they can do what I wrote about a few weeks ago, which is conflate two different stories and say, oh, there's a lot of default risk and credit risk going on in the private or non-bank lending world. And then simultaneously say,

are challenges for investors to get some of that money back to get liquidity, and they can create this as if it were one conflated story, and I believe in so doing, it is fallacious. But then I would argue that in the conflation represents one error, but so are the facts of each of these two claims, not merely that they're conflated together, which is bad and erroneous enough, but that in what they're saying, I argued a few weeks ago that the liquidity and redemption dynamics are a feature of the asset class, not a bug. But then in stating that there is this credit risk itself, they are confusing a prediction from a description that we may very well end up with more. But if we have more credit impairments, defaults, issues that

surface, that will be a future event, not a current event. And even then, it doesn't tell us who is receiving credit problems in their portfolio of loans, what the recoveries are at the size of these issues relative to an entire diversified portfolio of loans, et cetera. So what right now would you get and what I very much expect you'll continue to get is when there is a loan default, it will be a front page headline story as if it were news. when in fact the only thing we've actually seen in real life, not predictive, but descriptive, is that where $600 million of a couple billion loan portfolio was sold, it was sold at 99.7% apart, not merely off to themselves,

but with other highly sophisticated buyers that were partyed to the transaction done, their own due diligence and so forth, then there's a link to that particular blue-out media coverage and divinitycafe.com today. So here's my point. Maybe things get worse, but where they get worse, it is not monolithic. Yes, there was an extended period of easy money. Yes, there was a popularity in the asset class that often leads to some dumb money coming in and getting dumb money in the hands of dumb managers who use excess leverage or reckless underwriting

practices. I don't know that won't happen. I do know that we haven't seen a ton of it yet. The AI software thing is one of the most ridiculous stories I've seen because it is, first of all, to the extent one believes AI is disrupting the entire SaaS space, these loans don't go bad until the equity is fully wiped. And so why would we not be assuming that these companies are going entirely down if the loans are going down? And how in the world do we want to treat? all of these loans the same with different collateral, different cash flows, different business strategies. It is just totally incoherent. There will be companies affected. There will be loans even affected, I imagine, but far less so than people are talking about. But ultimately, the inability

to distinguish from managers from the size of loans, the diversification of loans, both across sectors and issuers, it renders the conversation almost meaningless. So what I want to do is suggest five things today that I believe will be useful in how we think about this. None of it being a C-Y-A of, oh, hey, I just want to make clear there are some bad things that will happen. I say that there will be bad things that happen because I assume it is the case. with the popularity of the asset class and the amount of flows that came in, I never would have assumed that the best asset managers would be in the same position as the worst asset managers.

I assume the worst asset managers will do worse. You're welcome to think through that if you'd like. So when we see bad loans for a loan in default, and by the way, even that doesn't speak to a loss to an investor because of what your recovery will end up being, we don't have enough information. Here are the facts number one, that the disruptions that impact certain software companies

is a story that requires a lot of nuance. In public equity, just like private equity, and yes, just like private credit. It is stupid to say that this is an isolated story to private credit. The fact of the matter is that it requires something better than monolithic assumptions about AI and software. Number two, as I stated a moment ago, the only case so far, just as far as basic facts, where we've seen meaningful loan sales through this whole little brief period we've gone through the last couple months

to discussing private credit all the time. They were sold at basically 100% a par, 99.7% of par value. Number three, if indeed it ends up being the case. This is where I think this applies to everybody, not just private credit investors, that there were undisciplined managers who took on excess leverage and did worse underwriting than others. That risk is borne by investors, not banks. It is not in the deposit base of our financial system. It is not connected to the capacity of our financial system to extend credit.

It is not in the context of an asset that is held universally like residential housing was 18 years ago. It is a buyer-beware potential loss, but not systemic. There are not counterparties who then their risk repayment loss bleeds into other financial system concerns. This is a sensationalized and fictitious and, dare I say, silly. assertion. Number four, any potential washout of bad asset managers fortifies the system, dare I say, makes us more anti-fragile. As that, because of my belief that capital was always in forever looking for its most optimal home, this would reallocate capital more efficiently, more productively, and yes, make us more anti-fragile in the end. And finally, number five,

We're not only talking about this as good versus bad asset managers. That is one dichotomy. I'd recommend people make some sort of distinction between, but aligned versus not aligned. Some of the concerns in weaker private credit hands are with asset managers that had no multi-generational objective, no alignment, no balance sheet, no infrastructure that puts them aligned with the interest of investors.

But then other asset managers also have alignment that differentiates them from the bad managers. Alignment versus non-alignment and good versus bad are two distinctions that both need to be understood. And I think those with a 40-50-year track record, 40-50-year aspiration for sustainability, they underwrite differently versus those trying to capitalize in a bad or opportunistic way. balance sheet exposure is different than those that are just fee collecting and running away. My friends, there is going to be so much more talk on this private credit stuff in the months ahead. I'm preparing for the sheer exhaustion and exasperation that goes there with for somebody like myself who is both allocating real money for real people all the time and trying to comment on things

and offer hopefully helpful perspective. Many try to offer the perspective, pundits, media, newsletter. They don't actually run money and don't have to reconcile their predictive efforts with their descriptive efforts. When I descriptively evaluate the lay of the land, there have been a couple loans have gone bad, not necessarily held by good asset managers, and most certainly not producing a systemic impact into the financial system. But the chatter doesn't match the facts on the ground. Do I believe there will be some worse facts on the ground that will materialize? I do.

But do I believe that in the end, the opportunity here is to be aligned with a multi-generational success story, not a multi-drama and noisy story. I do as well. There's a chart of the week. I want to put up on the screen real quick just for your edification. We've seen the software loan yields go up, but the total loan yields right now going back a year, getting close to a year and a half, are actually lower than they were. This isn't a contagious event. It isn't systemic. And to the extent that it's being talked about the way it

is, please consider the incentives, not just of the asset managers who are out there deploying capital, but the incentives of those making noise. Thank you for listening. Thank you for watching. Thank you for reading the Dividing Cafe. I'll be back with you Monday for a discussion of all the things around the wharf. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free risk. There's no guarantee that the investment process or investment

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