An Integrated Framework for Robust Credit Risk Assessment and Management in Private Credit

Private credit is here to stay: We expect further rates cuts are likely to flow through private credit borrowers’ financials, thereby providing relief via lower funding costs and improved coverage ratios. In addition, competition and convergence between public and private markets is expected to continue, thereby offering diversified funding avenues to borrowers. Lastly, we believe newer opportunities by way of expansion into asset-based finance, project finance, and infrastructure financing will continue to rise. Nonetheless certain headwinds will continue to affect smaller and risker companies relating to:

• Uncertainties and extent of future interest-rate cuts
• Broader financial market volatility
• Concerns over U.S. administration's tariff and tax policies

Greater Need for Differentiated and Objective Credit Risk Assessment for Private Debt

Credit is Credit: While lack of systemic transparency and limitations on information availability remain a key challenge in credit risk assessment of private debt, the consistent growth in private debt issuances have heightened need for differentiated and objective credit risk assessment in this space. We believe fundamental risks to assessing private debt remain the same as public debt. Nonetheless, some key factors which need greater attention while assessing private debt are shown in Figure 2 below.   

Figure 2: Cash flow analysis is a key driver in credit risk assessment of private debt

Scorecards: An effective tool to assess credit risk with confidence, consistency, and convenience

S&P Global Market Intelligence’s Credit Assessment Scorecards provide credit and risk management professionals with essential tools to identify and manage default risks of private, publicly traded, rated and unrated companies, across a multitude of sectors. Our Scorecards provide an effective framework to assess low-default portfolios that, by definition, lack the internal default data necessary for the construction of statistical models that can be robustly calibrated and validated. Scorecards are easy-to-use tools that combine quantitative factors with forward-looking qualitative factors to provide a full picture of credit risk. Some of the ways in which Scorecards enable efficient credit risk assessment are shown in Figure 3 below. 

Figure 3: Key benefits of Scorecards in credit risk assessment

 Figure 4: Sample Corporate Scorecard

Steady growth in Infrastructure and Real Estate to continue

Some low-default portfolios which are likely to witness strong growth over the medium term in the private credit space are infrastructure and real estate. Our specialized lending scorecards (Project Finance and Real Estate Asset Finance) along with the Sector specific scorecards (Infrastructure, Utilities and Real Estate) are based on S&P Global Ratings’ detailed credit assessment framework and would be fit for purpose to assess such exposures (refer Figure 5 below). 

Figure 5: Scorecards can assess risks specific to Infrastructure and Real Estate

Importance of going beyond obligor assessment into facility risk assessment

An Issuer rating assesses a company’s overall capacity (likelihood of default) to pay all financial obligations whereas an Issue/ Facility rating assesses timeliness of repayment and likelihood of default associated with a specific debt.

While assigning issue ratings, low ranking obligations are at a disadvantage as a smaller pool of assets is available for repayment after meeting priority claims. Hence, it is important to assess the priority in bankruptcy and practice in the legal jurisdiction that governs a specific instrument while assessing facility risk.  Some of the aspects which need to be considered are:

• Contractual subordination (senior/subordinated)
• Security against obligations (secured/unsecured)
• Structural subordination (operating subsidiary/holding company structure)
• Economic value which determines what is available to creditor post default  

Figure 6: Debt ranking based on priority of repayment

S&P Global Market Intelligence’s Loss given default (LGD) framework is an asset-based assessment which considers what stressed assets remain to repay outstanding facilities. In other words, LGD, which is normally expressed as percentage of the exposure at default, is the proportion of the exposure at default that is not expected to be repaid post-default. This assessment enables differentiation of various debt issues and their recoverability depending on where the debt sits in the company's capital structure (refer: Figure 6 above). 

Do Macro-level risks matter for Private Credit? 
(Author: Michelle P Cheong, Head, Thought Leadership, Credit Solutions. Contact: michelle.cheong@spglobal.com)

The private credit market has grown to over USD 2.1 trillion, with North America leading. Europe and Asia are expanding at 17% and 20% annually[1], driven by the search for higher yields and alternative financing. This growth occurs amid macroeconomic uncertainty, though private credit may be less affected than public debt.

Macro risks impacting the default and recovery of private credit through various channels:

• Rising Interest Rates and Inflation: affect default risk of those refinancing with high leverage
• Economic and Industry Slowdowns impact earnings
• Liquidity Crunches for middle-market borrowers
• Investor Sentiment: affecting fundraising for private credit funds
• Geopolitical events disrupting business operations, supply chains and lower collateral valuations 

According to S&P Global Ratings, less than half of issuers within their credit estimates[2] universe are expected to generate positive free operating cash flow (FOCF) in a mild stress scenario (see article here)

A Comprehensive Approach for Scalable Macro Surveillance

We can leverage S&P Global Ratings’ framework on private credit to establish linkages between credit risks of private credit to macroeconomic factors and identify relevant macro-risk proxies and measures for assessing private credit.  This involves utilizing the five "Cs" of credit: Character (management/governance and financial policy), Capacity (competitive position and diversification), Conditions (country and industry risks – which increases in relevance as the mature stage of private credit), Cash, and Capital[3]

One such linkage is through Country and Industry risk scores[4], which proxy for economic conditions, financial systems, cyclicality, and growth, resulting in significant differences in credit risks among entities with similar financial standing[5]. 

Figure 7: Illustration of potential impact of changing country risk on default probabilities

As a first step in country-level macro risk surveillance, several Economic & Country Risk (ECR) capabilities are integrated into the Credit Risk Dashboard from Credit Analytics (figure 8).  These cover Political, Economic, Legal, Tax, Operational and Security risks.

Figure 8: Economic & Country Risk (ECR) Dashboard

To obtain further insights on evolving country and geopolitical risks, the Country Intelligence including its Research and Analytics provide detailed economic, industry and country risk forecasts, as well as market assessments and analysis (Figure 9).

Figure 9: Sample of Country Intelligence page from Connect by S&P Global

To measure the impact of events on industries and obtain context around evolving industry risk scores, text sentiment on Machine Readable industry commentaries and the underlying research can serve as an indicator of how industries compare against each other over time (see Figure 10 below) and early warning signals from RiskGauge Industry benchmarks (Figure 11 below) flag which industries merit further investigation.

Figure 10: Sentiment Scores of machine-readable commentaries bucketed by sector, as of June 2025

Figure 11:  RiskGauge median benchmarks for unrated Automobiles & Components Companies

CreditCompanion™ (Beta) can quickly provide context on industries by summarizing ratings research at scale – shortening the process of industry deep dives into minutes (see figure 12)

Figure 12: Illustration of how CreditCompanion™ addresses a hypothetical question on risks impacting the Automotives industry by summarizing research from S&P Global Ratings

For market color specific to private credit, Private Markets Monthly on RatingsDirect® from S&P Global Ratings provides insightful interviews with subject matter experts on what matters most across private markets. 

Figure 13: Sample Private Markets Monthly publication on RatingsDirect® on S&P Capital IQ Pro

Furthermore, given that private credit borrowers tend to be smaller in scale and less diversified, security incidents can materially affect their supply chains, earnings, infrastructure, and value of physical asset collaterals.  Geo-spatial data (Figure 14) can provide early warnings or be utilized during the due diligence process to mitigate concentration risks on locations.  

Figure 14:  An Example of Foresight Risk Analysis and Geospatial Data and Country Risk Research from Connect by S&P Global

Last but not least, ESG considerations of industries are also embedded in Country and Industry Risk scores in the 5C’s of credit (see article on ESG Principles in Credit Ratings).  The ESG Credit Brief on RatingsDirect® on S&P Capital IQ Pro provides insights into climate and transition risks and their impact on industries with a credit risk perspective, along with material ESG factors to monitor (Figure 15 is a sample of the Key Takeaways section for the Autos industry).

Figure 15: Extract from ESG Credit Brief on Autos industry

Conclusion

In this paper, we explore the impact of macroeconomic and industry risks on private credit markets, emphasizing the importance of monitoring credit conditions in today’s high-interest and volatile economic environment. By utilizing a framework that incorporates the five "Cs" of credit, we propose an holistic approach along with relevant proxies for macroeconomic and industry surveillance. Leveraging data and Generative AI enhances the scalability and efficiency of this process as the private credit landscape continues to evolve.

Related articles and webinars:

• Webinar Replay: Navigating Global and Asia-Pacific Economic Prospects Amid U.S. Policy Changes and Tariffs
• Revolutionizing Credit Surveillance I: Early Warnings in Changes in Credit Fundamentals
• Revolutionizing Credit Surveillance II: Does Generative AI Live up to the Hype?
• Harnessing Opportunities and Managing Risk in an Unpredictable Trade and Macro Landscape
• Harnessing Opportunities and Managing Risk in an Unpredictable Trade and Macro Landscape – reflections on the APAC & UAE Market Intelligence Roadshows

Disclaimer: This analysis has been written and published by S&P Global Market Intelligence, a division independent of S&P Global Ratings, and references in this analysis to “we”, “us” and “our” refer to S&P Global Market Intelligence. This research is differentiated from the credit opinions published by S&P Global Ratings.  See disclosures here