A mounting systemic risk in the credit markets is being overlooked, according to Bill Bymel, founder and CEO of First Lien Capital LP. He points to two intersecting problems: a surge in collateralized loan obligations (CLOs) and approximately $1.5 trillion in loans from banks to non-bank financial institutions that he describes as opaque and potentially hazardous.
“We are seeing the largest CLO lending year over year for the last five years of any time in history,” Bymel says. “This is very similar to what happened in the early to mid-2000s with mortgage-backed securities.”
CLOs pool loans from private lenders and are sold to investors with investment-grade ratings, a shift that now places them in pension funds, insurance portfolios, and even retail accounts. Bymel warns that rating agencies are again treating these products as safer than they are, echoing the pre-2008 pattern in which subprime mortgage securities were given top-tier ratings.
He argues that this mispricing could soon become evident as weaker CLOs begin to fail. Such failures, he says, could trigger systemic concerns and force a sharp market repricing, similar to the disruption that followed the collapse of overrated mortgage-backed securities in the last financial crisis.
CLO issuance has reached record levels over the past five years. Bymel describes “bubbles in so many ways” across the credit markets. The entry of retail investors – who may not fully grasp the underlying credit quality – adds risk that was largely absent in prior cycles, when institutional investors were the primary buyers.
Adding to the CLO risk is what Bymel describes as a structural problem in how banks lend to non-bank financial institutions. In 2024, the Federal Reserve required banks to reclassify about $1.5 trillion in loans that had been labeled as commercial and industrial debt but were actually extended to other lenders. These “non-depository financial institution” or NDFI loans often support private-market lenders operating in areas where banks themselves would not lend directly. Bymel notes that this means the underlying credit standards are lower than traditional bank criteria, yet banks still treat these loans as high-quality assets – an opacity he sees as a growing source of concern.
Banks extend these loans to private lending institutions, merchant banks, auto lenders, and real estate finance companies that operate in segments where banks themselves would not lend directly. By definition, these non-bank lenders are accepting credit standards lower than banks would typically allow. Yet, these loans have been treated on bank balance sheets as if they were high-quality commercial credits.
Recent failures in the private credit market underscore the risks Bymel raises. He notes that several large companies with supposedly asset-backed loans have collapsed in just the past two months, forcing banks and major investment firms – including BlackRock, Apollo, and Jefferies – to write down loans worth $100 million or more to zero.
He lists examples: Tri-color, an auto lender; First Brands, an auto parts supplier; and Renovate Home Partners, a home upgrade company. Bymel argues these are not isolated incidents, but “the canary in the coal mine” for broader underwriting and funding problems in non-bank lending.
The lack of transparency compounds these failures. Bymel notes that many transactions occur off-market, leaving investors and regulators with little visibility into the true credit quality. As a result, problems often surface abruptly and with far greater severity.
Bymel also points to mounting risk in the derivatives market built on top of these credit instruments, warning that Wall Street is once again pushing products that are “close to rupture.”
He argues that inflated CLO ratings, opaque non-bank lending, and growing derivatives exposure together form a layered vulnerability that could force a sudden repricing across credit markets. In his view, multiple bubbles – ranging from asset values to affordability pressures – are now converging with a lending system that lacks transparency.
Bymel estimates there is a 75 percent chance that current “extend-and-pretend” strategies by banks and regulators will fail, forcing markets to reprice these assets. He believes the breaking point will come from bank lending to non-bank lenders, especially in the NDFI and CLO markets, rather than traditional bank lending.
First Lien Capital is navigating this environment by working directly with banks and private equity firms seeking to move distressed assets off their balance sheets before broader market repricing. The firm acquires troubled loans in off-market transactions, focusing on situations where the underlying asset remains solid despite structural financial problems.
“Finding somebody that has connections in the secondary market, directly to banks or private equity, someone like myself, is a key component, because the best deals kind of get traded off-market,” Bymel says. His strategy is to identify assets where fundamentals are sound, allowing for potential recovery even if credit markets deteriorate further.
Whether regulators and rating agencies will address these structural risks before failures become widespread is uncertain. Bymel suggests that market forces may resolve the issue first, likely through a sharp repricing event similar to 2008. If the trend of inflated asset ratings, opaque lending, and hidden leverage continues unchecked, the risk of sudden disruption grows.
The current environment, according to Bymel, is defined by record CLO issuance, increasing retail investor exposure, and a vast, largely hidden segment of non-bank lending that lacks transparency. Recent company failures serve as early warnings. As the credit market’s vulnerabilities become more apparent, investors and policymakers may soon face the consequences of risks that have been building quietly for years.
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