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

Bank of America Securities is actively recommending clients adopt a strategy of shorting European private credit exposure stocks, with institutions like Deutsche Bank and Partners Group prominently listed. Goldman Sachs has previously begun marketing derivatives for shorting corporate loans to hedge funds. The two Wall Street giants sequentially entering the private credit market with short positions has heightened concerns about systemic risks in this asset class.

According to a report by the Financial Times on Thursday, Bank of America issued a warning to clients that European private credit exposure stocks face a 30% “downside risk” compared to their U.S. counterparts, due to their smaller declines so far. To this end, Bank of America has constructed a short basket of 17 European financial stocks, including Deutsche Bank and Partners Group, as well as insurers Axa, Legal & General, Aviva, and pension group Aegon.

This move comes amid ongoing pressure in the private credit market. After Blue Owl announced the permanent closure of a fund’s redemption channel, the sector experienced a large-scale sell-off—Blue Owl’s market value has evaporated by about 40% since the start of the year, and Blackstone’s decline has reached 27%. As risk accumulates, Wall Street’s role as a provider of shorting tools has reminded some market observers of the pre-2008 financial crisis environment.

Bank of America constructs a 17-stock short basket targeting European exposure

The core logic behind Bank of America’s short recommendation is that valuations of European private credit-related stocks have not yet fully adjusted. Compared to the significant pullbacks experienced by similar U.S. assets, European stocks have lagged, creating an estimated 30% potential downside.

The tailored short basket includes 17 European financial stocks across banking, insurance, and asset management sectors. Deutsche Bank and Partners Group are highlighted as the most exposed to private credit shocks, with insurers Axa, Legal & General, Aviva, and pension group Aegon also included.

Notably, Bank of America itself has not avoided the private credit market. Last month, the bank announced a $25 billion investment in private credit loans, amid rising concerns over credit quality and liquidity.

Meanwhile, internal analysts at Bank of America argued on Wednesday that media focus on private credit remains “overdone,” emphasizing “low-value data points” as the main drivers of the recent sell-off, and viewing this as a “buying opportunity.” The internal disagreements within Bank of America regarding private credit reflect a high degree of market divergence in assessing this asset class.

Goldman Sachs previously entered the market, using total return swaps as a shorting instrument

Bank of America’s actions are not isolated. As reported earlier by Wallstreet.cn, Goldman Sachs has already begun promoting short strategies on corporate loans to hedge fund clients, primarily through a derivative called “total return swap,” which allows investors to profit from falling loan prices.

Sources say Goldman Sachs has recently received multiple inquiries from clients and has proactively contacted hedge funds interested in shorting tech company loans, though no actual trades have been completed yet. The core rationale for hedge funds seeking shorts is the dual risk exposure of private credit and the software industry—Blue Owl’s large lending to software companies is central to this turmoil, and concerns over the survival prospects of software firms driven by AI advancements have directly triggered the fund’s redemption halt.

The sequential entry of two top Wall Street institutions into providing shorting channels indicates that institutional investors’ risk hedging demand for private credit assets is rapidly rising, and the market is seeking more structured tools to express this view.

Market stress signals intensify; European bank executives seek to reassure

Signals of stress in the private credit market have continued to emerge. Besides Blue Owl’s redemption closure, earlier reports indicate that Blackstone’s private credit fund faced a record 7.9% redemption request, BlackRock announced restrictions on redemptions for its $26 billion corporate loan fund, and PIMCO warned of an impending “full default cycle” in the direct lending industry.

In response to external doubts, European bank executives have spoken out collectively this week to stabilize market expectations. Deutsche Bank CEO Christian Sewing on Tuesday stated that the bank has not lost “a penny” in its over ten years of private credit operations, and after disclosing €26 billion in private credit exposure last week, emphasized: “I believe this does not pose a particular risk for us.” He also described Deutsche Bank as a “very solid underwriter” in this business.

Last week, Steffen Meister, Chairman of Partners Group, admitted in an interview with the Financial Times that private credit default rates could double in the coming years, but also stressed that for institutions employing strict “private equity-style” underwriting standards, strong credit returns are still achievable.

A mirror of 2008? Wall Street’s double role reemerges

The current situation evokes a sense of déjà vu for some market observers. On the eve of the 2008 financial crisis, Deutsche Bank trader Greg Lippmann’s team marketed up to $35 billion in credit default swaps (CDS), helping clients short subprime mortgages, ultimately earning substantial profits during the crisis. Wall Street’s role as a provider of shorting tools amid risk accumulation appears to be repeating itself in the corporate loan market.

This analogy is not without controversy. The scale and structure of today’s private credit market differ fundamentally from the 2008 subprime mortgage market, and European bank executives emphasize the resilience of their portfolios. However, the fact that Goldman Sachs and Bank of America are entering the market and constructing shorting tools for clients is enough to prompt investors to reassess the risk pricing of private credit assets—especially in Europe, where valuation adjustments may just be beginning.

Risk warning and disclaimer

Market risks are present; invest cautiously. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.