The taste of 2008! Bank of America recommends shorting "European private credit-related assets," including Deutsche Bank.

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Bank of America Securities is currently recommending clients to short stocks with exposure to European private credit, with institutions such as Deutsche Bank and Partners Group among those targeted. Goldman Sachs had earlier begun marketing derivative tools for shorting corporate loans to hedge funds. The successive moves by two Wall Street giants to set up short positions in the private credit market have sharply heightened market concerns over the systemic risk of this asset class.

According to the Financial Times on Thursday, BofA warned clients that, compared to their US counterparts, European private credit-exposed stocks face a 30% “downside risk," as they have yet to fall as much as American peers. BofA has thus built a special short basket of 17 European financial stocks, including not only Deutsche Bank and Partners Group, but also insurers Axa, Legal and General, Aviva, and pension group Aegon.

This move comes as stress continues to pile up in the private credit market. After Blue Owl announced a permanent freeze on redemptions from one of its funds, the sector was hit by heavy sell-offs—Blue Owl’s market cap has evaporated by about 40% year-to-date, with Blackstone down by 27%. The fact that Wall Street is acting as a provider of short-selling tools during risk accumulation has reminded some market watchers of the run-up to the 2008 financial crisis.

BofA builds 17-stock short basket, targets European exposure

The logic behind BofA’s short recommendation centers on the idea that valuations for European private credit-related stocks have yet to correct. The bank believes that, compared to significant corrections already seen in the US, European stocks are lagging in their declines, resulting in about 30% potential downside.

The short basket curated by BofA for clients covers 17 European financial stocks, spanning sub-sectors like banking, insurance, and asset management. Deutsche Bank and Partners Group are named as the most exposed to private credit shocks, while insurers Axa, Legal and General, Aviva, and pension group Aegon are also included.

Notably, BofA itself has not shunned the private credit market. Just last month, the bank announced plans to deploy $25 billion in the private credit lending field, even as market concerns over credit quality and liquidity had begun to rise.

At the same time, analysts within BofA's research department said Wednesday that media attention on private credit remains "excessive," focusing on "low value data points"—which they believe is driving the current sell-off, characterizing the situation as a “fire sale buying opportunity.” The internal split at BofA regarding private credit reflects the deeply divided market views on this asset class.

Goldman Sachs has already entered, with total return swaps as shorting tools

BofA is not alone in this move. According to a previous Wallstreetcn article, Goldman Sachs has already recommended a short-selling strategy on corporate loans to hedge fund clients, using a derivative tool called the “total return swap,” which allows investors to profit if loan prices fall.

According to sources, Goldman has recently received related inquiries from several clients and has proactively contacted hedge funds interested in shorting tech company loans, but no actual trades have been completed yet. The main logic driving hedge funds to short is the dual risk exposure of private credit and the software sector—Blue Owl, heavily involved in lending to the software industry, is at the center of the storm, with worries about the long-term viability of software companies amid AI advances directly triggering the fund’s redemption freeze.

The consecutive moves by two top Wall Street institutions to set up short channels for clients shows that institutional investor demand for risk hedging in private credit assets is rapidly rising, with the market seeking more structured tools to express such views.

Frequent stress signals, European bank executives strive to reassure

Warning signs in the private credit market have been flashing. In addition to Blue Owl's redemption freeze, Blackstone’s private credit fund received a record 7.9% redemption request, BlackRock has announced restrictions on redemptions for its $26 billion corporate loan fund, and PIMCO has warned that direct lending faces a "full-scale default cycle."

Facing external doubts, European bank executives have collectively spoken up this week, seeking to stabilize market expectations. Deutsche Bank CEO Christian Sewing said on Tuesday that the bank hasn’t lost “a penny” in over a decade of private credit business, and after disclosing a €26 billion private credit exposure last week, emphasized: “I do not see this as a particular risk for us.” He also said Deutsche is a “very solid underwriter” in this business.

Partners Group chairman Steffen Meister told the Financial Times last week that the private credit default rate could double over the next few years, but also stressed that institutions employing strict “private equity-style” underwriting standards could still achieve strong credit returns.

A mirror of 2008? Wall Street again plays both sides

The current situation feels like déjà vu to some market watchers. On the eve of the 2008 financial crisis, Deutsche Bank trader Greg Lippmann’s team marketed as much as $35 billion in credit default swaps (CDS), helping clients short subprime mortgages and ultimately earning Deutsche Bank substantial profits in the crisis. Wall Street’s role as a provider of shorting tools during periods of risk build-up seems to be repeating itself—now in the corporate loan market.

This comparison is not without controversy. Today’s private credit market differs fundamentally from the 2008 subprime market in terms of size and structure, and European bank executives are emphasizing the robustness of their portfolios. However, with Goldman and BofA both entering the field and building shorting tools for clients, investors are once again reassessing the risk pricing of private credit assets—especially in Europe, where stock valuations may only just be starting to adjust.

Risk warning and disclaimerThe market has risks, investment requires caution. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, viewpoints, or conclusions in this report are suitable for their specific circumstances. Investment is at your own risk. ```