Bank of America Targets European Private Credit with 30% Downside Warning

BofA Recommends Shorting 17 Stocks, Citing 30% Risk

Bank of America Securities is actively recommending clients short a basket of 17 European financial stocks, warning of a 30% "downside risk" stemming from their exposure to the private credit market. The bank's core logic is that these European equities have not corrected as sharply as their U.S. peers, creating a valuation gap. The targeted portfolio includes major institutions such as Deutsche Bank and asset manager Partners Group, alongside insurers like Axa, Legal & General, and Aviva.

This advisory follows a similar move by Goldman Sachs, which has begun offering total return swaps to hedge funds, enabling them to bet against corporate loans. The creation of these short-selling instruments by two of Wall Street's largest firms indicates rising institutional demand to hedge or speculate on a downturn in the private credit sector. This comes even as BofA's own asset management division announced a $25 billion allocation to private credit lending just last month, highlighting internal divisions on the asset class's risk profile.

Redemption Freezes Signal Deepening Market Strain

Pressure on the private credit market is intensifying, with multiple funds now limiting investor withdrawals. Blue Owl Capital recently triggered a sector-wide sell-off after it permanently halted redemptions for one of its funds. Similarly, Blackstone's private credit fund reported a record 7.9% in redemption requests, while BlackRock announced withdrawal limits on a $26 billion corporate loan fund. PIMCO has compounded these fears by warning that the direct lending industry faces a "full-blown default cycle."

In response, European banking executives are attempting to calm investor nerves. Deutsche Bank CEO Christian Sewing stated on Tuesday that the bank has not lost "a single cent" in its decade-plus of private credit operations, describing its €26 billion exposure as not constituting a "particular risk." Meanwhile, Partners Group Chairman Steffen Meister acknowledged that default rates could double but maintained that institutions with strict underwriting standards would still see strong returns.

Strategists See Ominous Parallels to the 2008 Crisis

The current market dynamics are prompting analysts to draw comparisons to the period preceding the 2008 global financial crisis. Bank of America strategist Michael Hartnett has highlighted that the combination of spiking oil prices and private credit concerns ominously resembles the 2007-2008 environment, which saw the initial "subprime tremors" before the collapse. In that era, Wall Street firms famously profited by creating and selling credit default swaps (CDS) that allowed clients to short the subprime mortgage market.

Today, the role of banks providing tools to bet against a stressed asset class is being reprised in the corporate loan market. While the scale and structure of private credit differ from the subprime market, the actions by BofA and Goldman serve as a powerful signal. They suggest institutional investors are actively seeking ways to protect against, or profit from, a potential repricing of risk that many believe has only just begun in Europe.