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The very public problems within the secretive world of private credit are about to escalate, quickly.

About half a dozen of these non-bank lenders have either stopped or restricted their investors from retrieving their own money following the collapse of property developer Bathla this week.

They include names such as MA Financial, CVS Lane, Centuria Bass, Merricks and Longreach Credit.

Others such as Balmain Private and Credit Connect have faced a flurry of calls from concerned investors, while another, 360 Capital, requested its shares be suspended from trading on the ASX.

Some, like MA Financial, aren’t even exposed to Bathla.  But fear sweeps across the financial landscape like a wildfire, engulfing everything in sight.

There are good reasons these firms have put the brakes on redemptions, but investors were probably unaware of the dangers when they signed up for what was most likely touted as strong returns on assets “as safe as houses”.

Private credit operators overwhelmingly lend to property developers, many of whom can’t borrow from traditional banks because the sector is deemed too much of a risk.

That higher risk that allows private credit lenders to charge a much higher interest rate, an alluring prospect for investors when the good times are rolling.

Once investors have put their cash into a private credit fund the fund manager would then loan that out to, hopefully, a variety of developers to spread the risk.

In MA Financial’s case, it lent out 95 per cent of the cash on hand, leaving only a small amount of cash available for investors who wanted to retrieve their investment.

Any kind of run on redemptions, however, would quickly deplete that. 

So it has restricted redemptions to 1 per cent of the fund per month until October to give itself some breathing space.

Other private credit providers, such as CVS Lane, which this morning froze redemptions on some of its funds, seem to be in an even tighter position

It’s likely that they are either fully extended, or their investors have already depleted the available cash. The funds can’t simply retrieve the loans from the developers because the projects aren’t complete and the cash has already been committed.

In bank speak, the assets that private credit investors ultimately have lent their cash, are illiquid. They can’t easily be sold.

Many of these funds expect a relatively large degree of defaults within their portfolio. But the exorbitant loan rates they charge developers makes up for it.

Until things turn sour, like now.