by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our perspective on why private credit exposure to software companies has attracted heightened scrutiny. We then examine how the White House is seeking to ease war-related supply chain stresses. Next, we highlight key market developments, including signs of a potential broadening of the Middle East conflict, rating agency views on software-sector debt, and new consumer efforts to secure tariff refunds. As always, we include a summary of recent US and international economic data releases.

Private Credit & AI: Concerns about private credit are deepening as AI-related risks to software companies weigh on sentiment. On Thursday, JPMorgan Chase announced it would restrict lending to several private credit institutions following a preemptive markdown of loan portfolios, particularly those exposed to the software sector. This tightening follows a turbulent few weeks for the $2 trillion market, with several major funds forced to cap redemptions or offload assets to manage a surge in withdrawal requests.

• JPMorgan’s decision to curb lending to certain private credit funds follows a move to mark down the value of loans linked to those vehicles on a portfolio-by-portfolio basis. Unlike typical markdowns driven by missed interest or principal payments, these adjustments are largely tied to loans made to software companies that the bank views as particularly vulnerable to disruption from advances in artificial intelligence, which has pressured valuations and collateral quality.
• The write-down appears to reflect the bank’s evolving view of AI-related risks. Under lending agreements with the affected funds, the bank can periodically re-evaluate leverage based on the overall quality and valuation of the collateral backing the facilities. In this case, the markdown was applied to a relatively small subset of borrowers and is therefore not considered large enough to pose any meaningful systemic risk.
• JPMorgan’s decision to limit lending underscores that, even if major banks are not the primary lenders in private credit markets, they still provide an important backstop by financing those lenders. Large banks supply critical liquidity to private credit funds through credit lines and other financing facilities, enabling those funds to extend loans, often on more flexible terms than tightly regulated banks can offer directly to borrowers.
• A pullback in this type of bank financing, therefore, points more toward a gradual tightening in overall financial conditions than an immediate deterioration in the underlying quality of corporate debt. However, the optics of the move are likely to compound negative sentiment, especially in the wake of recent stresses in parts of the consumer loan market. In our view, as long as credit remains accessible to private borrowers, any retrenchment by private funds should remain relatively limited in scope.

Resolving Supply Chains: The White House has explored alternative strategies to address disruptions in trade through the Strait of Hormuz, which have pushed crude oil prices above $100 per barrel for the first time since August 2022. The president has called for a temporary suspension of the Jones Act to facilitate additional crude shipments and, in parallel, authorized the purchase of Russian oil cargoes already en route. These measures aim to mitigate rising costs as supply disruptions from the ongoing conflict continue to worsen.

• The Jones Act is a century-old maritime law that requires cargo transported between US ports to move on vessels that are US-built, US-owned, and US-crewed. The proposed 30-day exemption would specifically apply to ships carrying petroleum products and would mark the first such waiver since 2022. The measure is expected to increase shipping capacity and ease bottlenecks by allowing a broader fleet to operate, particularly on routes serving East Coast ports.
• Additionally, mounting concerns over supply disruptions have encouraged the United States to modestly soften its stance on Russia. On Thursday, Washington issued a second authorization allowing the sale and delivery of Russian crude that was already loaded on vessels and stranded at sea. While most of these cargoes are not expected to head to the United States, they are intended to help ease global prices by enabling key buyers such as India to absorb the stranded barrels and reduce competition for new supplies.
• Beyond these measures, the White House is evaluating additional strategies to mitigate the supply-side shocks triggered by the conflict. The Department of Energy has already committed to releasing 172 million barrels from the Strategic Petroleum Reserve, with the potential for further drawdowns. Additionally, the administration is weighing an unprecedented move to intervene in financial markets by directly purchasing oil futures contracts to dampen price volatility.
• White House efforts to stabilize energy prices have created a temporary ceiling on volatility, with $100 a barrel emerging as a key pivot point for Brent crude. However, this stability is fragile. As long as the Strait of Hormuz remains blocked, the persistent deficit in physical supply will force increasingly costly supply chain adjustments, likely worsening the inflationary outlook for the coming months.

War Broadening: The conflict in the Middle East continues to show signs of spilling beyond the Gulf. On Friday, Turkey reported that NATO forces intercepted a third Iranian missile that had entered its airspace. These incidents are likely to reinforce concerns that the war will be prolonged and could draw in additional countries, with any further widening of the conflict likely to put upward pressure on oil prices by heightening the risk of new supply disruptions.

Software Assured? Ratings agency S&P Global has offered some reassurance that the debt backing software firms is unlikely to face broad, sector-wide downgrades. In a report published this week, it said that while AI has the potential to fundamentally reshape parts of the software industry, the impact on credit quality is expected to play out on a case-by-case basis and over a longer period, rather than triggering an immediate, uniform shock.

Tariff Refund: Retailers are facing a new wave of consumer litigation following the Supreme Court’s invalidation of IEEPA tariffs. A proposed class-action suit against Costco asserts that shoppers should receive any tariff refunds the company recovers from the federal government, arguing that higher retail prices effectively forced consumers to pay those duties. This case highlights the broader regulatory and accounting mess following the February ruling, as both the government and private sector struggle to interpret how to process and distribute refunds.

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