Margin Call Has Sounded! The "Domino Effect" of U.S. Private Credit is Collapsing Sequentially

The U.S. private credit market is facing a severe liquidity crisis. As the value of underlying assets plummets, investors are rushing to redeem, and the risk is quickly spreading from the shadow banking system to traditional banks.

Earlier reports from Wallstreetcn mentioned that Deutsche Bank, due to exposure of approximately $30 billion in private credit-related risks, saw its stock price drop as much as 6.1% in Frankfurt trading, marking its largest single-day decline since April last year.

This indicates that the brewing private credit crisis is not limited to the shadow banking system; its impact on traditional banking has already begun to surface.

In recent weeks, the speed of crisis spread has been astonishing. Blue Owl has been selling loans at a discount to meet redemption demands, which the market sees as the “margin call moment” for private credit. Subsequently, BlackRock reduced a loan’s face value to zero within just three months, becoming the last straw that broke the market. Following that, several institutions including Cliffwater and Morgan Stanley announced restrictions on investor redemptions.

The core trigger of this crisis lies in the rapid deterioration of underlying assets and liquidity exhaustion. The market is experiencing a vicious cycle from “asset sell-offs” to “full redemption restrictions,” with investors facing direct impacts of significant asset devaluation.

Meanwhile, data shows that U.S. banks have unextracted loan commitments to non-deposit financial institutions (NDFIs) totaling up to $2.8 trillion, raising concerns about the crisis spreading to the broader financial system.

From “margin calls” to full-blown panic

The spark for the crisis can be traced back to the beginning of the year. According to reports from Barclays and UBS, the private credit industry has significant exposure to loans to software and tech companies, with some portfolios comprising up to 55% such assets. With breakthroughs in AI technology, market doubts about the long-term viability of these software companies and the stability of their cash flows have caused their stocks and bonds to plunge.

As the truth about the deterioration of underlying assets surfaced, panic among investors quickly intensified, leading to a surge in redemption requests. Blue Owl, managing over $300 billion in assets, was among the first to respond, selling $140 million in loans at 99.7 cents to meet redemption needs. However, this move not only failed to calm the market but also exposed the lack of liquidity in the secondary market.

Just days later, a similar situation occurred with BCRED, a private credit fund under Blackstone, one of the world’s largest asset managers. Facing massive redemption pressure, its senior partner used $150 million of its own funds to cover redemptions, attempting to avoid restrictions.

But things worsened shortly after. Hours after Blackstone announced its solution, BlackRock revealed it would write down a $25 million subordinate debt to zero within three months, and imposed a 5% redemption limit on its $26 billion HPS corporate loan fund, despite shareholders requesting a 9.3% redemption rate.

If Blue Owl’s decision to sell loans was the “margin call moment,” then BlackRock’s move to write down loans to zero was the last straw that broke the camel’s back.

A Zerohedge article pointed out that BlackRock did what Blue Owl and Blackstone desperately wanted to avoid, because they knew that doing so would trigger more redemptions, forcing more sell-offs, and causing share prices to fall from $100 to even lower, creating a vicious cycle. At this point, everyone was truly fighting their own battles.

Dominoes Falling One After Another

BlackRock’s write-downs quickly triggered a chain reaction. Its $26 billion HPS corporate loan fund faced a 9.3% redemption request and ultimately set a redemption cap at 5%. Soon after, Cliffwater, a senior interval fund manager, experienced a record 14% redemption request and was forced to “pull the gate,” limiting quarterly redemptions to 7%.

“If Cliffwater is the canary in the coal mine and the first domino in the ‘bank run,’ I wouldn’t be surprised,” warned David Rosen of Rubric Capital. Indeed, his concerns proved justified. Morgan Stanley’s nearly $8 billion North Haven private income fund also followed, setting a 5% redemption limit, returning only about $169 million—less than half of investor requests.

What’s more shocking is that, according to the Financial Times, JPMorgan has begun impairing collateral on its private credit loans and restricting its lending to these clients. This move undoubtedly intensifies liquidity pressures on private credit funds.

Banking Sector Sounds Alarm

The turmoil in private credit has inevitably spilled over into the traditional banking sector that funds it.

Deutsche Bank disclosed in its annual report that its private credit exposure, calculated at amortized cost, has risen to €25.9 billion (about $30 billion), accounting for 5% of its total loans. The report also shows that its exposure to the tech sector (including software) has increased to €15.8 billion.

Deutsche Bank is not alone. FDIC data indicates that U.S. banks’ loans to NDFIs are growing rapidly, reaching $1.4 trillion by the end of 2025. Even more concerning, banks have up to $2.8 trillion in unextracted loan commitments to these institutions. This means that if private credit institutions face liquidity shortages and start drawing down these credit lines en masse, banks could face enormous default risks, with potential exposure totaling up to $4.2 trillion.

As the crisis continues to unfold, markets are closely watching upcoming Q1 fund flow disclosures. Barclays warned that a series of negative fund outflows could further widen spreads and intensify market fears. In this $2 trillion market upheaval, the firewall between private credit and traditional banks is under severe test.

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