Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Reshaping the Strategic Borrowing Playbook
Transcript
- Lucas: Luna, I've been digging into corporate borrowing patterns this week, and there's a shift happening that I think a lot of retail investors are missing. Luna: Okay, you've got my attention. What kind of shift? Lucas: So the headline is that companies are refinancing debt at a record pace right now. Even though the Fed hasn't cut rates — the effective fed funds rate is still at 3.63 percent, flat since June — corporate bond yields have actually fallen below where they were in 2019. The average investment-grade bond yield is around 4.2 percent now, down from 4.8 percent a year ago. Luna: That's interesting because you'd think with rates staying higher for longer, borrowing costs would be elevated. So what's driving the compression? Lucas: Two things. First, the bull market has created enormous demand for yield. Pension funds, insurance companies, sovereign wealth funds — they're all piling into high-quality corporate debt. Second, companies are being strategic. They're locking in these lower spreads now because they fear rates might not come down soon. So it's a preemptive refinancing wave. Luna: And I assume that's playing out across the whole market, but I've been reading about a specific trend in private credit. Is that where the real action is? Lucas: Exactly. The private credit market is booming. In Q2 of this year, we saw about 47 billion dollars in new private credit issuance — that's up 32 percent year over year. And the really interesting part is the size of these deals. Companies like Airbnb and Uber have each secured over a billion dollars in private credit facilities. They're bypassing traditional bank loans entirely. Luna: What's the appeal? Is it speed, flexibility, or just that banks are pulling back? Lucas: All of the above. Banks have tightened lending standards significantly since the regional banking crisis in 2023. Their balance sheets are constrained. Private credit lenders like Apollo and Ares Management don't have the same regulatory constraints. They can move faster, structure bespoke deals, and offer floating-rate terms that match the current environment. Luna: But floating-rate cuts both ways. If rates do eventually come down, those borrowers benefit. But if rates stay high, they're stuck with rising interest costs. Doesn't that create risk? Lucas: It does, and that's the trade-off. But what's interesting is that many of these private credit deals are also covenant-lite, meaning fewer protections for lenders. So if a company hits a rough patch, the lender has less recourse. That's a vulnerability that hasn't really been tested in a downturn yet. The private credit market is now over 1.5 trillion dollars — it's systemically important. Luna: So you're saying the bull market is encouraging riskier lending structures because everyone's confident earnings will keep growing. But we've seen this movie before. Lucas: Right. And that's why I think it's worth watching. But for now, companies are taking advantage. And the data this week reinforces the trend. Big banks are about to report earnings — JPMorgan, Goldman Sachs, Bank of America — and analysts are expecting strong revenue partly because of investment banking fees from M&A and debt underwriting. But the private credit boom actually eats into their market share. Luna: So banks are losing the corporate lending business to asset managers. That's a structural shift, not just cyclical. Lucas: Exactly. And it's been accelerating. Five years ago, private credit was about 10 percent of total corporate borrowing. Now it's closer to 20 percent. If this bull market continues, that share could keep growing. And that changes how companies think about their capital structure. Luna: Let's talk about a specific example. You mentioned Airbnb. They're a profitable company with strong cash flow. Why would they go to private credit instead of issuing bonds? Lucas: Great question. Airbnb did a 1.2 billion dollar private placement in June. The terms were a floating-rate note tied to SOFR plus 175 basis points. That's competitive with where investment-grade bonds would price, but the advantage is that they didn't have to go through a lengthy SEC registration process. They got the funds in three weeks instead of three months. For a company that wants to finance strategic acquisitions or buybacks quickly, that speed is valuable. Luna: And the lenders like it because they get a premium over public bonds and a long-term relationship with a high-quality borrower. So it's win-win in a bull market. Lucas: Exactly. And the same dynamic is playing out with smaller companies too. In the micro-cap space, which we talked about a few episodes ago, private credit has become the primary source of debt financing. Traditional banks have largely abandoned that segment. So it's filling a real gap. Luna: But what happens when the cycle turns? If we get a recession or a credit event, these private credit funds could face redemption pressures. They're not as liquid as bond ETFs. Lucas: That's the key risk. Many private credit funds are structured as closed-end funds or business development companies with quarterly liquidity. If a wave of defaults hits, investors might want to pull money faster than the funds can sell assets. The Fed has flagged this in its financial stability reports. But for now, the music is still playing. Luna: And companies are dancing. Speaking of which, I saw that the big bank earnings are coming out this week. Given this private credit shift, what should we be looking for? Lucas: I'd focus on two numbers. First, commercial and industrial loan growth at the big banks — that tells you how much traditional lending is actually happening. Second, the investment banking fees from debt underwriting. If those are down despite high volumes, it suggests that banks are losing market share to private credit. I expect we'll see that. Luna: So the bull market is not just lifting stocks — it's fundamentally changing how companies finance themselves. And that has long-term implications for everyone. Lucas: It really does. And that's why I think we should keep an eye on this. If you're an investor, understanding where companies are getting their capital tells you a lot about their risk profile. A company that relies on private credit might have more flexibility today, but less stability in a downturn. Luna: And that's the kind of insight we try to bring to you every episode. If our money conversations have helped you think about a decision differently — whether it's how you evaluate a company's debt or just understanding market trends — we want to keep doing this without any ads getting in the way. Lucas: Yeah, that's important to us. We don't run ads because we think the content should speak for itself. If you appreciate that approach and want to support the show, the link is buy me a coffee dot com slash fexingo. It's a simple way to help us keep going. Luna: And we really mean it when we say every bit helps. Thanks to those who already do. Lucas: So back to private credit — one more thing I think is worth noting. The market for collateralized loan obligations, or CLOs, is also booming. These are bundles of leveraged loans that get sliced into tranches. Issuance in the first half of 2026 hit 85 billion dollars, the highest since 2021. Luna: And that's reminiscent of what we saw before the global financial crisis, right? Not exactly the same, but the structures have parallels. Lucas: Right. The risk is more contained this time because the underlying loans are generally to larger, more resilient companies. But the leverage is building. The average debt to ebitda ratio in new CLO deals is around 5.5 times, which is high historically. If earnings growth slows, that leverage becomes a problem. Luna: So the bull market creates the conditions for more borrowing, but it also plants the seeds for the next cycle. It's a classic pattern. Lucas: Exactly. And I think the key takeaway for listeners is this: the bull market of 2026 is not just about stock prices. It's reshaping the entire credit ecosystem. Companies have more options, but also more complexity. And investors need to look beyond the equity market to understand where risk is building. Luna: Which is exactly what we'll keep doing here. Thanks for being with us.