STUDYING THE IMPACT OF GULF COUNTRIES GETTING CLOSER TO BEIJING AS A RESULT OF THE IRAN WAR

USD RECYCLING AND BASE CURVE

Bonds are unlikely to like the outcome of the war because growing ties from Gulf countries to Beijing means the USD recycling is affected in military equipment purchases but also in flows in AI, biotech, etc., and USTs.

IMPACT ON CREDIT CONSIDERING THE MOST SENSITIVE, THE LENDERS AT THE MARGINS, THE ABSORBER OF NEW CAPITAL

How does it tie to credit?

Crisis always comes when the capital absorption stops, as explained by Juglar. And clearly, from the last couple of quarters' reports from the FDIC, the NDFIs were the absorber of capital at the margin, and more specifically private credit.

The problem is that the largest variable, according to a recent survey, is the base rates.

So less dollar recycling is unlikely to make the base rates fall, everything else equal.

WEAKER COMPANIES IN BDC

The BIS warned that many companies in BDCs are weak and levered.

This was explained in the BIS paper on private credit.

But also in the annual report from the BIS 2024.

And now it seems that we are on the other side of the cycle, with reverse flows exacerbating those credit weaknesses.

In good times everyone wants to be a yield pig and lend anyway. But in bad times, as investors run or maybe jog to the exit, the tight relationship on spreads between public credit and private credit breaks down.

COST OF CAPITAL CONSIDERATION

The NDFIs / BDCs index BDCZ was already tanking and diverging since July–August 2025. For an entire index it means the cost of capital of BDCs is increasing.

And the BDCZ index tanking was doing so for the same reason that the spreads on private credit were widening.

UNPACKING THE PAPER ON PRIVATE CREDIT FROM THE BIS

https://www.bis.org/publ/qtrpdf/r_qt2503b.htm

UNPACKING THE BIS PAPER ON PRIVATE CREDIT

What the paper covers

Key points from the paper:
Private credit has exploded in size.
AUM grew from about $0.2 trillion in the early 2000s to more than $2.5 trillion today.
Most private credit is in the US.
Roughly 87% of global private credit loans originate in the United States.
Drivers of growth identified by BIS
Low policy interest rates
Tighter bank regulation after the financial crisis
Less efficient banking sectors in some countries
Rising leverage among non-financial corporations
Funding advantage narrowing
Private credit vehicles (especially BDCs) have seen their cost of equity fall, while leverage increased, reducing banks’ funding advantage.
Financial stability issues
Loan portfolios are highly concentrated by industry, which could create risks during sector downturns.
Institutional investors therefore searched for yield and moved into:
private credit funds
BDCs
direct lending vehicles

Typical yields offered:

Asset Yield (2015–2021 range)

Investment grade bonds ~2–3%

High yield bonds ~4–6%

Private credit / BDC loans 7–10%+

So pension funds, insurers, endowments allocated capital to BDCs and private credit funds.

This flood of capital increased BDC AUM massively and capital appeared cheap for companies with dubious credit.

Lower rates reduced BDC funding costs.

BDCs themselves borrow money to lend (they are leveraged vehicles).

Low rates therefore also:

reduced cost of debt financing
increased valuation of BDC equity
compressed required equity returns

This lowered their weighted average cost of capital (WACC).

Simplified mechanism:

Channel Effect

Lower policy rates Cheaper debt funding

Yield hunger Higher BDC equity valuations

More inflows Larger funds / scale

Result: cheaper capital for BDCs to deploy.

That allowed BDCs to compete with banks.

Because their capital became cheaper, private lenders could underwrite loans that banks previously dominated, especially:

middle-market leveraged buyouts
sponsor finance
unitranche loans

Large private credit lenders such as:

Blackstone
Apollo Global Management
Blue Owl Capital

scaled rapidly in this environment.

The BIS paper’s key point

Low interest rates did not only push investors into private credit.

They also lowered the cost of capital of private credit lenders themselves, which accelerated the growth of the asset class.

In other words:

Low rates expanded both the supply and demand for private credit.

But a move towards China, and the impact on recycling, have at the margin an inverse impact. Also, the price of oil is tying the hands of the Fed on policy rates.

PROBLEMS OF ABSORPTION: WE HAVE A PIG IN THE PYTHON BECAUSE OF ACCOUNTING DESIGNED TO WINDOW DRESS ASSET VALUES

ASC 820 is a repeat of the FAS 157 farce of level III accounting that led to mark-to-fantasy assets followed by big pricing gaps.

The valuation was based on unobservable input, in other words input decided by the management, at the management’s discretion. In practice it means mark-to-fantasy to pump my bonus/NAV, cheat basically. Some assets are bifurcating widely with 20-point gaps.

We have discussed before the regulatory arbitrage at length, where the infamous manipulation of asset price to market-to-model with FAS 157 in banks under Basel II was completely discouraged in banks with Basel III, but NDFI and BDC are not banks, so they abused the system with a very significant amount of funds publishing NAVs without third-party review.

We have explained the regulatory arbitrage before and the NAV shenanigans in this post.

https://x.com/GraphCall/status/1979673257273139338

WE ARE NOW IN THE SAME AS 2008 PRICING DISLOCATION OF MARK-TO-FANTASY

(but not the same liquidity mismatch, thankfully. BDCs are not funded by deposits like banks are)

The Blue Owl “two prices for the same credit” episode (2026)

One striking case happened in early 2026 involving funds managed by Blue Owl Capital.

The discrepancy

A portfolio of loans was valued around 99.7 cents on the dollar in institutional transactions.

At the same time, shares of the vehicles holding those loans were trading or tendered at 20–35% discounts to NAV.

Interpretation

Pricing source Implied value

Internal/private institutional valuation ~99.7¢ on the dollar

Market price of fund wrapper 65–80¢ on the dollar

This created a valuation gap of roughly 20–35%.

The issue reflects a structural feature of private credit:

Loans are not marked to market like bonds.
They are valued using models and internal assumptions.

When the fund shares trade in the market, investors may apply a much lower value if they suspect the assets are overstated.

Specific loan example flagged by distressed investors

A distressed-debt manager (Glendon Capital) also highlighted a loan valuation anomaly inside a Blue Owl portfolio:

Blue Owl valued junior debt of Cornerstone OnDemand at ~90 cents on the dollar.
Yet more senior debt in the same company traded around ~78 cents in public markets.

Another related markdown shock (BlackRock)

A smaller but symbolic case involved BlackRock private credit funds:

A loan previously valued near par was suddenly written down to zero (Infinite Commerce loan).
The abrupt shift triggered concerns that losses were being recognized late.

This wasn’t exactly “two prices simultaneously,” but it reinforced the same problem:

valuations can lag reality in private credit portfolios.

So you can get three prices simultaneously:

Manager valuation (NAV)
Secondary market valuation (discounted fund shares)
Distressed market price for similar debt

When the market loses confidence, the gaps appear.

So we have a pig in the python, which is typical of late-cycle credit, as Juglar knows.

REVERSE FLOWS

Major Recent Gating / Redemption Limits in Private Credit

BlackRock — HPS Corporate Lending Fund (2026)

Fund size: ~$26B
Investors requested ~9.3% of NAV in withdrawals.
The fund capped withdrawals at ~5%, the standard quarterly limit.

This effectively gated roughly half of redemption requests, forcing investors to wait for future quarters.

This event was widely viewed as a stress test for private credit liquidity.

Cliffwater — Corporate Lending Fund (2026)

Fund size: ~$32.5B
Investors requested ~14% redemptions.
The fund allowed only ~7% withdrawals.

This is technically partial gating (not a full suspension) because redemptions exceeded the quarterly limit.

Blue Owl Capital — OBDC II (2026)

This is one of the clearest gating cases.

Fund size: about $1.6–1.7B
Withdrawals were restricted for months.
The manager decided to sell loans and gradually return capital instead.

In practice, investors were told:

redemptions would not reopen normally and capital would be returned over time.

This triggered a large drop in Blue Owl’s stock market value.

Morgan Stanley — North Haven Private Income Fund (2026)

Investors requested ~11% of shares.
The fund limited redemptions to the normal liquidity threshold.

Another case of semi-liquid credit vehicles hitting redemption caps.

Blackstone — BCRED (2026 pressure episode)

This case is slightly different.

The $82B BCRED fund saw record redemption requests.
About $3.7B was withdrawn in Q1 2026.

Instead of gating:

Blackstone injected capital to meet withdrawals.

But it came very close to the redemption limit, highlighting liquidity stress.

Why gating is happening now

Several factors are driving these redemption spikes:

Retail investors entered private credit.
Private credit historically had 10-year lockups.
New vehicles (interval funds / non-traded BDCs) promised quarterly liquidity.
That created a liquidity mismatch.

Rising concern about loan quality

Some portfolios are heavily exposed to:

software companies
tech-enabled services
highly leveraged PE borrowers

These sectors are under scrutiny.

Higher interest rates

Higher rates mean:

borrowers face higher debt service
defaults are actually rising in BDC
investors worry about valuations.

Important structural point

This gating issue is exactly what the Bank for International Settlements has warned about.

The problem:

Illiquid loans + periodic redemption promises.

When flows reverse, the only tools managers have are:

redemption caps (5% per quarter)
gating
selling loans
using credit lines.

The recent gating episodes (BlackRock, Blue Owl, Cliffwater, Morgan Stanley) are not isolated — they are happening across the semi-liquid retail private credit ecosystem, which is roughly $400–500B of the ~$2T private credit market.

While not all the funds are semi-liquid, the mere gating and the attempt at dumping the assets in 401(k)s is indicating one thing for sure. We are not in the inflows period whatsoever, and as Juglar explained the credit music stops when there are issues of capital absorption and the absorber of capital at the margin was the BDC, the NDFI of the day, or the wildcat / country banks of the day if you take a longer perspective.

What gating tells you in a credit cycle

The gating events are important not because they are catastrophic, but because they signal flow reversal.

When:

inflows dominate
funds continuously raise capital

=> assets never need to be sold.

But when redemption pressure appears:

managers hit redemption caps
assets start being offloaded in secondary markets
loan marks begin to converge toward traded prices

This is precisely the point where credit expansion slows.

Why the gating matters psychologically

The real risk is not liquidity per se.

It is perception of liquidity.

Private credit markets rely heavily on:

model valuations
infrequent pricing
investor belief in stable NAV

Once investors start to believe liquidity may not be there, flows can stop quickly.

That’s when the marginal absorber disappears.

The “401 dumping” signal

It refers to Assets being pushed into secondary vehicles or continuation funds, sometimes purchased through retirement platforms like 401(k) alternatives allocations.

The mechanism:

Institutional LPs stop adding capital
Retail vehicles become the marginal buyer
Assets migrate into:

interval funds
non-traded BDCs
retirement platforms

This is classic late-cycle capital absorption.

The BIS warning

This dynamic is exactly what the Bank for International Settlements warned about in its private credit research.

Their concern is that:

private credit funds are credit creators
but they rely on continuous inflows

When inflows stop:

credit supply contracts abruptly

Why this fits Juglar almost perfectly

Juglar’s insight was:

crises occur when credit can no longer expand because the balance sheets that were absorbing capital are saturated.

The process usually goes:

credit expands rapidly
new intermediaries appear
capital floods into them
they become saturated (as many BDC as McDonald’s franchises)
flows reverse
credit tightens
downturn begins

We may currently be between steps 5 and 6 in private credit.

Why between 5-6 in the Juglar sequence?

Divergence between public credit and private credit stress

The first chart (from Bank of America research) compares:

CDX IG 5Y CDS Index → a liquid public credit risk gauge
BofA private credit proxy → stress indicators for direct lending / private credit

What the chart shows:

Public IG spreads are stable to tightening
The private credit proxy shows rapid deterioration

This divergence matters because:

Public markets reprice instantly
Private credit reprices slowly

So when private stress rises while public spreads remain calm, it usually means:

=> stress is building in the shadow-banking channel first.

Historically that has happened in:

structured credit 2007
S&Ls late 1980s
hedge funds / repo markets 1998

Contagion into public credit with CCC spreads confirm the lower-quality credit stress

The second chart from the Federal Reserve Bank of St. Louis (FRED) shows:

ICE BofA CCC & Lower US High Yield Index Option‑Adjusted Spread

This is effectively the weakest part of the public credit market.

Key signal in the chart:

spreads stopped compressing
they turned higher again into 2026

This is important because CCC issuers behave similarly to private-credit borrowers:

So rising CCC spreads often precede direct-lending stress.

NDFI clogging thesis

The marginal lender today is the non-bank system:

BDCs
private credit funds
CLOs
consumer ABS lenders

These institutions are collectively known as NDFIs (non-deposit financial institutions).

When the system works normally:

Savings → NDFI funds → leveraged borrowers

But when flows reverse:

Savings stop → funds gate → credit supply contracts

That’s the capital absorption limit.

The other weak link: ABS / consumer securitization channel

A lot of consumer lending today relies on:

auto ABS
credit card ABS
BNPL securitization
fintech loan ABS

If those markets widen, lenders lose their ability to recycle capital.

Are Banks Immune?

Unlike the 2008 crisis banks are not the prime targets of bad credit reversal, but they are nonetheless exposed and they are unlikely to extend more facilities to private credit entities at this point.

Why phase 6 (Juglar)

According to the framework of Clément Juglar:

Phase 6 = credit contraction begins.

Typical signs:

The absorber of capital is clogged.

The key thing to watch next

The next step that usually confirms the transition is secondary market discounts in private credit.

Specifically:

BDCs trading below NAV
secondary private credit loans trading 80-90 cents
continuation vehicles being created to delay exits

These are the mechanical signals that the marginal balance sheet is full.

BDC divergence vs Nasdaq

When BDC indices diverge from equities, it usually signals stress in the credit transmission channel.

Publicly traded BDCs include lenders such as:

Ares Capital
Blue Owl Capital
Blackstone (via BCRED ecosystem)
Apollo Global Management

BDCs are essentially equity wrappers around private credit portfolios.

When they start to underperform growth equities like the Nasdaq Composite, it often means investors expect:

slower credit origination
rising defaults
NAV pressure
tighter financing conditions.

This divergence appeared in prior cycles (2007, 2015 energy credit, 2020).

The BDC stocks tanking is signaling what’s going on in the underlying business of BDC lending and what’s going on with BDC cost cost capital, and the transmitted higher cost of capital to their clients.

“Pig in the python” dynamics

The phrase describes excess supply of assets that must gradually be digested by the market.

That can happen when:

funds experience redemptions
assets must be sold slowly
new issuance cannot clear.

In private credit that can show up through:

secondary loan sales
continuation funds
discounted portfolio transfers
NAV lending

It doesn’t necessarily mean a crisis, but it does mean:

=> price discovery begins to move from models toward market pricing. And that means that we have a Zombified market because there was cheat on NAV using ASC 820

Consumer securitization turning

Consumer credit relies heavily on securitization markets.

Key channels include:

auto loan ABS
credit card ABS
fintech loan ABS
BNPL securitizations

They are very sensitive to changes in these markets.

If ABS spreads widen, lenders lose their ability to recycle loans, which slows credit growth.

Oil shock channel

The possible impact of an Iran conflict.

A spike in oil prices typically transmits through:

Inflation pressure

Higher policy rates for longer

Tighter financial conditions

Oil shocks historically precede many credit tightening episodes.

For example:

1973 Oil Crisis
1979 Oil Shock

Both caused sharp increases in borrowing costs and credit stress.

Gulf capital recycling question

Historically, oil exporters have recycled surpluses into US assets through what economists call petrodollar recycling.

Countries like:

Saudi Arabia
United Arab Emirates
Qatar

have often invested in:

US Treasuries
private equity
venture capital
technology companies.

If geopolitical alignment shifts towards China from the GCC because China is perceived to be able to reign-in Iran.

Capital flows could change at the margin.

CONCLUSION:

The credit cycle is likely in phase 6 in the Juglar framework, the GCC revising their security architecture and maintaining stronger ties to Beijing as a way to limit their exposure to the US-Israel military campaigns should not be positive for dollar recycling.