Rising rates put legacy private credit loans at risk of refinancing stress
Private credit borrowers that took on debt during the low-interest-rate environment of 2021 and 2022 face increasing refinancing risks as their loans approach maturity, with investors warning that defaults across the asset class remain elevated, according to a report by Bloomberg.
Borrowers who took on private credit loans during 2021 and 2022, when interest rates were low, now face the risk of refinancing stress as their loans near maturity, according to a Bloomberg report. Steve Kuppenheimer, a partner at Lord, Abbett & Co, stated that loans taken at near-zero base rates could be particularly burdened by higher interest rates as borrowers seek to refinance. Default rates are currently around 3% to 4%, compared to the typical 2%, the report cites.
The warning comes as the $1.8 trillion private credit market faces increased scrutiny due to concerns about borrower quality, fund outflows, and exposure to AI-disrupted software companies, especially in the US. Recent corporate failures, including UK lender Market Financial Solutions, have raised questions about underwriting standards and risk management. In Australia, regulators have tightened oversight with temporary restrictions on private credit products.
Private credit borrowers may struggle to refinance at higher rates due to declining asset valuations relative to outstanding debt, according to Brigitte Posch, a partner at Apollo Global Management. The ability of private equity owners to sell underlying businesses could impact recoveries, as lender influence over exit timing is limited.
Despite the challenges, investors see higher base rates as offering attractive returns for private credit lenders, with market volatility prompting greater focus on underwriting discipline, covenant protections, and portfolio construction.
Written by urgent.news from Private Equity Wire's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
