Credit Trends and Private Credit Evolution | Global Conference 2025

Market Context and Economic Outlook

• Credit markets are currently trading wider than early-April lows but remain distinct from liquid equity market rallies (NASDAQ-led), with high-yield spreads hovering around 350 basis points and investment grade spreads near 100 basis points.
• U.S. Investment Economics teams forecast a base case of a "very modest recession" despite positive hard data and strong earnings, with guidance pulled from some industries.
• Default rate forecasts from S&P and Moody's are rising; panelists anticipate U.S. default rates could reach 5% this year, potentially climbing to 12–15% cumulatively over three years, with historical low recoveries (e.g., leveraged loans recovering ~40 cents on the dollar).
• Tariffs and policy uncertainty introduced in April have caused a temporary pause in new deal origination, though the market is slowly healing as secondary supply diminishes.

Private Credit Evolution and Competitive Dynamics

• Giant private credit firms (e.g., Ares, Apollo) are deploying hundreds of billions, driving terms and displacing traditional banks in the middle market.
• Direct lending competition has intensified, leading to "lender-on-lender violence" (Liability Management Exercises or LMEs) post-COVID, though recent court cases (e.g., Fifth Circuit overturning Sirta) have made these outcomes less surprising and more negotiated.
• Panelists suggest LME activity in the U.S. may have peaked due to tighter covenants and "lender cooperation agreements," but activity is expected to escalate in Europe.
• Private credit documentation is converging with public credit standards through specific provisions (e.g., CHIWI, ACERTA, J.Crew) and intentional limitations on LMEs to protect senior creditors.
• Misalignment risks exist in liquid markets due to varying stakeholder cost bases, whereas private credit lenders typically enter at par, aligning interests more closely.

Risk Management and Underwriting Standards

• Private lenders must underwrite to maturity (6–7 years), necessitating stress testing for full economic cycles rather than relying on short-term liquidity signals.
• Underwriters are increasingly differentiating pricing between strong and weak credits; weaker deals are gapping out or failing to close, correcting previous periods of muted spread dispersion.
• Investment strategies are shifting away from standard direct lending due to tight spreads and high retail capital costs; interest is pivoting toward special situations and asset-backed strategies with shorter durations (1–2 years).
• Liability Management Exercises are viewed as a "bridge to nowhere" strategy, with over 50% of companies executing LMEs requiring hard restructuring within two years.

Bank-Private Credit Partnerships and Systemic Risk

• Banks are not exiting the space but evolving into "originate to distribute" models, forming Joint Ventures (JVs) with private credit firms to offload risk while retaining origination access and traditional banking services (hedging, M&A).
• Bank leverage facilities for private credit pools are generally structured at 1–2x leverage (first lien), making a systemic unwinding scenario less likely than in the 2008 crisis; a >50% default rate would be required to trigger bank capital losses in these structures.
• Regulators generally support the current structure as it moves highly leveraged, unrated deals (e.g., 8x LBOs) off bank balance sheets and into alternative vehicles, though they monitor exuberance and asset-liability mismatches.
• Banks face a "cannibalization" narrative regarding underwriting fees but argue the risk-adjusted returns of holding a pool of loans at 40% LTV are superior to the old originate-to-distribute model where they held the full balance sheet risk.

Liquidity, Valuation, and Regulatory Frameworks

• The concept of "private credit" is expanding to include large corporate direct lending, with 30+ lenders creating potential for tradability, though small-ticket direct lending ($200M) will likely remain illiquid.
• Valuation marks in private credit remain discretionary; while public high-yield funds showed volatility (dropping to 77), private funds often hold assets at par, raising concerns about potential "haircuts" if liquidation occurs.
• Retail access via ETFs and interval funds (e.g., Apollo/State Street) is growing to meet demand, though this introduces new asset-liability mismatch risks that require rigorous liquidity management.
• Rating agencies currently limit syndication capability for deals exceeding certain leverage thresholds (e.g., below B3), acting as a de facto cap on transaction structures despite potential regulatory flexibility on leverage guidelines.
• The "maturity wall" of debt raised in 2021 at low rates will force refinancings at higher rates, likely driving more restructuring and creative solutions (e.g., debt-for-equity swaps) rather than purely traditional LMEs.