The Shadow Debt Crisis JUST Got Twice as Bad.

Private credit and the debt market are starting to fall off of a cliff. In this video, we're going to break down what this means for you and how bad is it really? Take a look at this. It's a big arrow going down. Spoiler alert, it's not good. Let's though first start with what JP Morgan just warned. Then we're going to talk about what's going on in the AI bond market and then we'll talk about what this means for us. So, first we've all heard of private credit already. A lot of private creditf funded companies started going bankrupt at the end of last year, leading to a big fear that uh-oh, we are just at the tip of that black swan event where we end up having some form of massive rolling level of bankruptcies that's only ultimately bailed out by the Federal Reserve. Well, so far, while there were a lot of companies that shuttered at the end of last year, a lot of them potential frauds allegedly fears of private credit haven't gone away. They've kind of really just been papered over. And so JP Morgan questioned, "Hey, this private credit issue, we keep getting told that stress is somewhere between 1 to 3%." But there are so many of these private credit companies. So, private companies that have taken on debt that are selling for less than they're worth or have payment inind deals or so to say extend and pretend style loans that the actual level of defaults is likely much higher. So, JP Morgan decided to go out on a quest and find out what is the likely actual level of the default rate when you factor in all of the so to speak shadow defaults. And that's where we get to the shadow default private credit crisis. That doesn't really roll off a tongue, but here it is. This chart right here is amazing and critical because it shows us that what we're being told in terms of the private credit risk is the loud story of one company going bankrupt and then people saying, "Don't worry, the rest of the ship is fine. Just because there are a few squeaky wheels, you know, we went ahead and replaced those. We papered over those. Those those are fine. As you can see right here, we're only writing off along this black line right here somewhere around 1 to 3% of deals. It's not a big deal. But then when you actually factor in distressed payment in kind deals, so basically companies that are paying with their equity as opposed to cash because they don't have any cash left and they're going bankrupt, they're trying to survive until rates come in lower. Those are starting to grow. You can see that red section, those PIKs, the PICSS, they're starting to grow. You've got maturity extensions. Those are also starting to grow. They used to be about 2% wide. Now they're sitting up here at about 6% wide. So, this is almost triple tripled this little blue section over here. And you can see restructured equity. So, hosing the internal owners of the company in exchange for helping the company get a bailout. And then if you add in on top of that companies that actually have their debt marked below 80%. In other words, it's selling for a 20% discount. Well, you're all of a sudden starting to get up to a shadow default rate in our market of about 16%. Mind you, there's about a $1.3 trillion economy for private credit. So, when we start looking at private credit, we go, uh-oh, there's a real debt problem here. Hopefully interest rates don't go up. Oh, wait. We all know the 10-year is sitting at over 24year highs. And it seems like it recently peaked, which is a little bit of a, you know, a breather. It gives a little bit of breathing room. But this the trend here is pretty obvious. Take a look at this. If we just draw sort of that total percentage line of shadow defaults, we've essentially seen a doubling of shadow defaults. And so a lot of people are wondering well what does this mean like is it just private credit or is the broader credit market also having problems and this is where you can look towards the public equity markets and the public debt markets. So how do you do that? Well there are two ways you could do that. One you could just go look at a stock like coreweave for example. Mind you Nvidia has invested in coreweave. They invested uh $2 billion at about $87 and another about uh well they invested more money before at a lower price. So they're still probably up on their stock at Nvidia that they bought in Coreavee. But the stock performance if you just zoom out for a moment here has been pretty bad coming off of a high of $187 trading now just for $77. And it's really been on a rough downtrend and kind of scraping along the bottom. Now, that doesn't necessarily just make the company bad. There are a lot of great companies that just it's not their turn in the sun, so to speak. So, that's where what I like to do is I like to look at what's actually going on with their corporate bonds. And that can sometimes be an early warning sign for risk in artificial intelligence. So, you got two things here. You got private credit debt risk, then you got artificial intelligence debt risk, which is what we're going to talk about now. Uh, and then of course you've got the government's debt. And everybody having all of this debt, this trifecta of debt, makes me want to have as little debt as possible. And me personally, I have no debt. I've gotten rid of all debt. I am very fearful of debt in this economy. People are like, "Kevin, aren't you aren't you worried about housing?" No. I think it's a great time to buy housing with no debt or little debt. We no debt. Uh, no bank debt. All right. Now, when we look at stocks, people are like, "But Kevin, aren't you worried about a bubble in the stock market?" I'm like, "There's no debt. I don't care. Just going to buy great companies." And the government, but I can't do anything about that. I tried in California. It didn't work out. Politics was something else. But hey, I gave it my shot. I gave it my all, baby. All right. So, what do we have here? Coreweave bond prices. Oh, that's not good. So, Cororeweave is currently trading with about a 15% actual yield on some of its debt, which basically puts it purely into the junk bond car uh category. In fact, if you look at some of the triple C's spreads, they're over a thousand now for Cororeweave, which I'll just put that in English. It's bad. It's basically trading for a junk level. And you can see recently it's really fallen off a cliff over here even more. Part of the reason for this coming off a cliff, I don't think it's necessarily an increasing default risk. I think it's just there's more issuance out there. See, I don't think cororeweave is more risky here than it was right here. Like I think it was just as crappy here as it is over here. So what changed then? We just issued a whole lot more debt. And when you issue more debt, you're kind of sucking up money from other places. People were like, "Why would I buy coreweave bonds if I could get new SpaceX bonds or new Broadcom bonds bonds that get me exposure to anthropic or open AAI? Why am I going to go buy coreweave bonds that get me exposure to 62% Microsoft as a concentrated customer?" Right? So, you have a little bit of that as an idiosyncratic risk which is basically saying, "Hey, like if people looking at core do saying, do I really want bond exposure to that company or would I rather pick a different company?" In fact, if you go look at Cororeweave's balance sheet, it's not good, man. They uh they've got about $5.5 billion of cash plus two and a half in receivables. They also just raised about $3 billion, which is fine. That puts them at about $10 billion of cash. But here's the problem, folks. These people have $18 billion in bills. So, like, let's make this really simple. If you have 10 and you need to pay bills of 18, you don't have enough money. [laughter] Okay, but this has been true since we first did this analysis on on Core Weef on this last earnings report which uh was at least a month ago. Oh, here the last when we opened this originally it was September 17th, but I'm pretty sure we also looked at this right when the company reported earnings in August and we saw the same thing. This file just happens to be from September 17th. And then I added these two little notes up here in red, just indicating that, you know, for the last eight months, this company's bonds have been selling off. And we're talking about the shorter term ones, the medium-term ones, the longer term ones, they've all been selling at a discount. People would rather roll out of coreweave at a loss potentially because of the risk that they see at this company than stick around. And this is coming again at the same time as shadow defaults are doubling. So you got a doubling of shadow defaults. You've got pain in the artificial intelligence uh debt market. At the same time, you keep issuing more. Now, this gets a little complicated, and I'm going to explain that, but it kind of goes along with other stupid things I'm seeing happening in the environment right now. Let me talk about some of those other stupid things, and then we'll talk about issuance because issuance gets a little bit more boring. But here's another example of something stupid. There's a company, a private equity firm, a partner from Seoia and and I guess they now run their own fund or whatever. Uh they decided to buy Bumble because they thought, "Oh, well AI is going to make human connection more important. So, we're going to go buy this money losing company at a 38% premium, like $68 a share, I think it was." And Bumble is literally dumping revenue. They're down 21.5% over the past two years. They're down 15% over the past one year. So the loss is accelerating. On top of that, if you actually look at the company's earnings calls, which I kind of start doubting that these people, these venture capitalists actually do. But when I go look at these earnings calls, I'm like, well, hold on a second here. What are we cooking up? Oh, Bumble is now going to try to get BFFs together. What? Yes, they're trying to get best friends forever together. That's going to be their new claim to fame. Hey, may maybe it'll work out, right? But it seems like a yolo on a whole new business model. See, Gen Z really prefers to meet with BFFs. We believe Bumble represents a natural bridge from meeting to socializing to then dating. We're already seeing signs of this in our initiative at BFF. We're starting to see a strong growth in both the number of active groups and average number of active members per group. It's very exciting. Great, especially with Gen Z women. Fine. But then we get from it's very exciting to hey is this going to make any money and when we get asked about is this going to make money in other words hey uh what's your tolerance for a decline in average revenue per user you know like when are we going to actually see some money here people like money and then right here they say well with average revenue per user you know on revenue on decline um you know we're working on things that are going to drive the business in other We don't really want to talk about that right now. We're not really to talk about we're not ready to talk about that cuz we're kind of sucking wind over here and we're still trying to figure it out. Okay, that's to me this is just a little bit of a sign that some of these people are reckless. Like sorry Ravi Gupta, maybe you're a nice person. Okay, I'm sorry I dumped on you and and tagged Seoia in here because you know you say you're a partner there. But I think this is crazy. Over the past six months, we've looked at hundreds of companies asking which businesses could become more valuable as AI advances. Right. So, you're looking for a business that you say could become more valuable as AI advances. Yet, over the last two years, as AI has been advancing, their revenue has been falling off a cliff. Got it. Bumble stood out. As intelligence becomes more abundant, we believe connecting with the right person and forming meaningful relationships will become even more pressure. And our purpose is to apply frontier technology to things that matter. We acquire enduring businesses and transform them with technology. Oh, my bad. All Bumble needed was more technology. They just didn't have enough technology. This is the stuff that drives me nuts nuts. Like any and I say this, so this isn't a pitch. I'm just trying to I think this is educational and this is my point of view. So, one of the reasons we're launching what we call the stocks and research terminal is because there is so much artificial intelligence slop out there. What in my opinion you actually need are humans who can actually cater you real bottom lines about what the houble hockey sticks is going on out there. We're actually going to be hiring in 2027 for this uh quite I I think quite a bit. I I really think we're going to grow a really sick research team and all that research will be available in our uh uh terminal. So if you are if you like researching, you like reading and you like studying uh and uh and you like chips like analysis on semiconductors or memory or or the Federal Reserve or whatever, hey, send us an email. Email staff reinvest one.com. give us a little pitch, a resume, a little video, whatever, you know, but uh no no AI slop. You AI slop me, it is the first red flag, son. And I got a slap detector. [laughter] It just gets slop. Uh but anyway, so like again, the point of me saying this is I think people believe that technology solves a bad business. And I think people forget that it's not technology that enhances a bad business. Technology enhances a great business. A techn technology and AI makes a great business better. Adding AI to a bad business leaves you left with a bad business. It's just like having a bad prompt or, you know, a bad strategy. If you're relying on that, it ain't gonna get better just because the model got better. All right, enough of that. So that pisseds me off and makes me think that we're still sort of in like the early drunk days of the cycle where even though there are issues with credit starting to prop up and yes, even though there are more and more fears about this shadow debt rising and more and more short sellers are putting out pieces like this, I don't know if George Noble is actually shorting right now, but but you know, he's making these exact lineby comparisons to Exodus Communications that you basically collapsed in 2001. And so, you know, they're line by line going, "Oh, they sell essential infrastructure, sells essential infrastructure, extremely high capex, extremely high capex, use heavy use of debt and asset back financing, heavy use of debt and mezzanine financing, blah blah blah." Which in fairness, that is a bit of a difference because Cororeweave's debt is backed by graphics, uh, GPUs, server racks. And frankly, my opinion is that if a company like Coreef goes bankrupt, somebody is going to be salivating at buying their assets at a discount. Those GPUs, those server racks, even if they're the H100s or whatever, the older chipsets, even if they're the older chipsets, as models compress, the older chipsets, ironically, become more valuable. So, the more we play with openw weight, the more valuable the older stuff gets. It is the most bizarre paradox. And I'll tell you, I've uh you know, I saw V for Vendetta. Okay, I'm I've unlocked the ability to use the word paradox, but I do think it is also quite odd that they would ask a masked man who he is. Oh, no, sorry, that's the wrong line. Uh it's also odd that you could see things like take my plane for example. Why is it that I bought a jet for $12.9 million, flew it around myself, stalling it, flying around, around with it, fly it around for $800 on the aircraft for 3 years, and then I sold it for $69,000 more than I paid for it. Obviously, expenses went into it, like fuel or whatever and maintenance, right? We took great care of the baby. I mean, who doesn't take care of their pee pee? >> [sighs] >> The point is that's weird. Generally, those things shouldn't go up in value. That's happening because there's a massive shortage in aircraft. But that's also exactly what's happening in the chip market, except it's even more extreme in the chip market. And so, like, I almost wonder if an early sign of manufacturing catching up is plane values coming down. Maybe when plane values roll over, it's a sign that manufacturing is finally starting to catch up. I don't know. Okay, that that might be a little bit of a stretch. But the point is we are seeing a lot of comparisons on red days especially to short sellers saying this is like 2001 all over again. And I agree that there is excess. I agree coreweave doesn't have the money. But I think the residual assets at this moment are still strong enough to argue that even if a company like this has higher debt costs, which ends up driving it into bankruptcy, the residual assets are valuable. They're actually more valuable at Coreweave than they are at some random private credit company. So, I would be more concerned about the private credit issues than the issuance issues we're seeing in AI. Boy, that's a mouthful. All right, let's understand issuance a little bit because somebody left me a comment. They're like, "Oh, but Kevin, if you know, people are buying bonds instead of buying stocks, wouldn't the yields, uh, you know, prices would be going up or the yields would be going down on these, right? Like, why wouldn't yields be tanking then if people are all of a sudden shifting to buying bonds instead of stocks?" It's a really fair question. And so, here's how it works. The key has to do with the word supply. So, let's say a market right now has $50 million of bonds outstanding and all of that $50 million of bonds are sold, right? Somebody holds all of them. If there's no new issuance and somebody comes in with $100 and there's no issuance, they might say, "All right, I could either buy one of those bonds at a discount or I could just buy some stocks on the open market." Right? And I'm going to oversimplify this intentionally just to make the point. Now, let's say an extra $100 of bonds get issued. Well, now let's say this life insurance company says, "Oh, I could get brand new bonds in this new fund raise." Okay, cool. I'm a life insurance company, whatever. I'm going to go ahead and buy those $100 worth of bonds. Well, because they're buying newly issued bonds, what happens to yields? Nothing. Okay, yields only move when the existing supply, so when this 50 million, that OG 50 million, if all of a sudden everybody comes in and buys this, you get 20% more buyers and this stuff is starting to sell for a premium. Yes, yields are going to tank, but we're not actually necessarily buying more of this stuff. In this example, what we're doing is if somebody comes out and says, "Hey, we have to issue a new $100 worth of bonds." And somebody says, "Okay, I'll buy that $100 worth of bonds." This is like a new market. It's a whole new product. It actually has very little effect over here on driving those yield. Certainly doesn't have effect on driving those yields down. If anything, it drives the yields up because now these aren't necessarily getting picked up on the used market and people are going buying the new cars. [laughter] Of course, these will be used at some point in the future, too. You know what I mean? So my point of bringing that up is if anything I think there's more of a risk in those private credit companies like JP Morgan is talking about when we see a doubling of shadow debt. That's bad. Those sort of companies going bankrupt don't necessarily affect you or I yet they affect us. Uh I guess technically it would be you or me. Those companies going bankrupt, they're the they're the subject. Yeah, those companies going bankrupt doesn't necessarily affect you or me. Those companies going bankrupt lead to layoffs. And because there's not necessarily residual business value in some of those businesses, the zombies that go bankrupt, they just sort of die and decay. There aren't like chips to go resell, those layoffs become permanent layoffs. That's when the labor market gets hurt. And that's potentially why the Fed is like, "Oo, yeah, this private credit issue is a is a problem." If Cororeweave goes bankrupt, the shareholders get screwed. Sure, but somebody's going to pick these chips up and the bond holders are going to get screwed to some extent as well, though they'll have the benefit of picking up the residual value on those chips. Uh, but really for the entire artificial intelligence market to roll over, there would have to be enough coming out of bankrupt companies like let's say a core and enough of those would have to fail to offset the demand for artificial intelligence hardware. right now at least at least until OpenAI and Anthropic roll over which they may never roll over. We're certainly spending more on these products than ever before. If they don't roll over, then they're just going to go, "Great. I would love to buy your H100s out of bankruptcy." It's like literally like getting a wedge deal on chip hardware. Uh and so just looking at the AI debt market and saying, "Oh my gosh, Corey is doing poorly," is not a sign that the entire AI market is falling off a cliff. That's my take. I think that's a reasoned take. Uh, and if you want to be part of that reinvest terminal, remember we are killing lifetime access to it. So, go to reinvest one.com. If you get lifetime access before the end of the year, you keep lifetime access, which is kind of cool, which just means if you buy in 2027 or on, you're going to have to pay a recurring fee to be a member. So, I encourage joining in 2026. Go check it out at reinvest one.com. We'll see you in the next one. If you like that video, check this one out. I think you're going to love it. Why not advertise these things that you told us here? I feel like nobody else knows about this. >> We'll we'll try a little advertising and see how it goes. >> Congratulations, man. You have [music] done so much. People love you. People look up to you. Kevin Praath there, financial analyst and YouTuber. Meet [music] Kevin. Always great to get your take.