Private Credit

The private credit market has grown in breadth and depth, providing a stronger relationship between borrowers and lenders. By offering an alternative avenue for corporate, infrastructure, and financial companies to secure debt funding, private credit now competes with loans and bonds issued to fund large corporate transactions.

The narrowing of spreads between private credit and broadly syndicated loans over the past few years reflects not only the increased demand for private credit, but is also the result of a change in the composition of private credit borrowers. Following a decade of expansion as an important source of funding for small and middle-market borrowers, private credit is now lending to larger borrowers and funding larger loans for mergers, acquisitions, and leveraged buyouts. Yields on megadeals may be closer to those on offer to broadly syndicated borrowers than to smaller middle-market borrowers.

The exponential growth of credit estimates mirrors the overall expansion of direct lending—and our analysis of credit estimates, which we believe covers entities that receive a sizable portion of capital deployed in private credit, provides transparency on this asset class.

We provide credit estimates (a point-in-time confidential indication of the likely long-term credit rating) to collateralized loan obligation managers for unrated entities whose loans securitize in the middle-market CLOs that we rate. Most CLO managers for which we issue credit estimates manage other vehicles and funds in the private credit space.

Credit estimates have more than doubled since 2021—from 1,200 then to over 2,800 now—in tandem with the strong formation of middle-market CLOs over this period and due in part to robust issuance in 2023. Through the third quarter of this year, S&P Global Ratings has completed an aggregate 2,590 credit estimates, of which 634 are new and the remaining refreshes of existing estimates.

Private credit’s continued growth is highlighting the potential for systemic risk in this largely opaque market, especially when private credit maturities are set to peak in 2028 (with $49.5 billion likely to come due). The credit risk factors associated with private credit are largely the same as those for mainstream public market, but the weight of different aspects will differ depending on where a borrower sits on the credit spectrum, as well as broader credit conditions.

Against the backdrop of current credit headwinds, our corporate default studies and middle-market credit estimates both show defaults and negative rating transitions at multiyear highs although tapering—and it remains to be seen whether this “golden age of private credit” can continue.