Private Credit Crisis in Mexico: Risks and Consequences

As the bond market and precious metals are no longer a risk-free haven for investors, and there is a growing trend of various investments in corporate stocks, the market needs better measurements for stock market and debt asset risks, such as private credit, which was largely off the radar. The consequences of this crisis for the global economy are still difficult to predict. No one knows the size of the private credit sector under stress. From this perspective, the prudential criteria of Consar have limited the impact this type of investment can have. That said, it is important to develop new risk measurements for these emerging credit industries that operate 'in the shadows,' especially when, as after the 2008-9 crisis, financial regulation believes it can completely avoid certain credit practices. These are loans made by non-bank companies to medium-sized businesses. Due to their size and sector, they are riskier than what the traditional banking sector can absorb after the prudential regulations of the 2008-9 crisis. This means the size of the stressed assets is, roughly speaking, between one and two times Mexico's GDP, which is also roughly one-twentieth of the U.S. economy. What is private credit? The industry's common rule of thumb is to return a maximum of 5% of the investment to investors each quarter. Investor doubts are emerging given that Claude and ChatGPT, two popular AI systems from Anthropic and OpenAI, can write software at lightning speed, and it's possible that the old software companies that originally raised capital are no longer relevant in the tech industry due to AI disruption. Could Mexican Afores be exposed to these re-evaluations of private credit? Recently, a fund called ODBC2 from a company called Blue Owl (300 billion USD in assets under management) had an episode of distrust among its investors, who demanded the liquidation of their investments and the return of their capital. They decided to close ODBC2 and other funds, liquidate the assets, and start paying investors, but this event triggered doubts in the private credit industry, where retail investors began asking delicate questions about asset quality and whether it's necessary to re-value their investments through these types of vehicles. Some of these loans are held by insurers and pension funds, which focus on the long term and have no immediate liquidity needs. However, as retail investors doubt the quality of the assets, it is highly likely that institutional investors will catch the panic, as it's unviable to ignore the noise of retail investors rushing for the exit. The Inside Economics report is a video blog that The Economist is producing for subscribers through its app, sponsored by Anthropic, the company that recently generated controversy by refusing to let the U.S. Department of War's Pentagon use its AI technologies for unsupervised military decisions. This is an interesting data point because a significant portion of the stressed private credit assets (between a quarter and a third, according to Inside Economics) belongs to software companies. In fact, it's likely that the same bankers who made these operations from regulated banks jumped to this non-bank lending sector after the crisis, according to a report from The Economist (Inside Economics, March 31). There are estimates of more than double that figure. While there may be risks, it's also important to remember that Afores can only invest 20% of their portfolio in foreign assets, and there is a 5% limit for a single international issuer. Estimates are at 1.5 trillion. We will keep an eye on this. These are not very liquid investments. But Blue Owl, in this particular fund, said 'no more redemptions of capital'.