The tension between big banks and private credit giants is flaring up again. The latest tussle started as the chair of UBS warned about risks in the US insurance industry due to private financing.
Colm Kelleher warned that the "lack of effective regulation" in the insurance industry is causing a "looming systemic risk" as there's a "massive growth in small rating agencies ticking the box for compliance," on Tuesday at a conference hosted by the Hong Kong Monetary Authority.
"We're beginning to see huge rating agency arbitrage in the insurance business," he said. "In 2007, subprime was all about rating agency arbitrage."
Kelleher's comments come as the insurance industry — a major institutional investor that favors investment-grade debt for its steady returns — has piled into private credit assets. Private equity players have also bought or set up captive insurance lenders, such as Apollo's Athene, or partnered directly with large insurance providers to invest their capital.
On the private capital giant's fourth quarter earnings call, Apollo CEO Marc Rowan fired back.
"Colm is just wrong," Rowan said, using Athene as a reference point. Rowan said that 70% of Athene's assets have two ratings from the largest, most established rating houses: S&P, Moody's, and Fitch. Rowan had nice things to say about small ratings agencies like Kroll and DBRS, which the firm also uses, explaining that the firms "have most of the expertise right now in structured products."
Rowan was clear that not everyone had followed Apollo's lead, and that Kelleher was "not wrong to think about and talk about systemic risk." But to Rowan, the issue was not the ratings agencies.
"I do not believe that private letter ratings are where the focus should be," he said.
Within his industry, he said the issue is that businesses have been moving assets to jurisdictions like the Cayman Islands, which "have not produced the kind of regime that is consistent with US ratings and US state-based regulatory reform."
And more broadly, Rowan said that Kelleher is "not wrong" to talk about "systemic risks piling up" in credit, though he said that focusing on insurance was "an easy deflection and something one says at a conference."
"From my point of view, credit is credit," Rowan said, though later in the call, he made it clear that Athene's balance sheet is more than 90% investment grade, while banks are merely 60% investment grade.
Rowan said he was sorry to not be at the Global Financial Leaders' Investment Summit this year and that he "normally" would appear after Kelleher at the conference and mix it up with the chairman, who is "one of the most respected people in the banking industry."
Bad actors, not systemic risk
Rowan said the differentiation shouldn't be between whether a loan was public or private, or whether it was syndicated by banks or not. It should be the quality of the underwriting.
"I don't think we're talking about systemic risk," Rowan said, referencing the high-profile crackups of First Brands and Tricolor without naming them. "I think we're talking about late-cycle behavior and bad actors, I believe, are going to get called out."
Rowan said that one of his competitors did "an adequate job" explaining what was going on in credit in the earnings call on Monday.
On Monday, Ares CEO Michael Arougheti said that the concern around structural risks in credit is a "little bit of a headscratcher."
As the cycle continues, some "smaller players or new entrants" may take larger risks than they should in private credit, but the bulk of the industry has high standards, said Arougheti on the firm's earnings call.
"The industry is fairly well-concentrated in the hands of the largest platforms," Arougheti said. "65% and growing of the assets that get raised and deployed are in the hands of the large incumbents that I think are focused on the right types of risks and the right type of structures."
