News
Credit Cycle · Default Risk · Illiquidity · Private Credit
The article warns investors about the increasing risks in private credit, comparing it to the Titanic, as consumer, labor, and housing indicators weaken, leading to rising credit card delinquencies and a 4.6% trailing 12-month default rate for private credit by May 2025, with some portfolios exceeding 8%, as reported by Fitch.
Private credit, often marketed as a high-yield, low-volatility solution, possesses structural vulnerabilities including covenant-lite lending, layered leverage, and a "liquidity mirage" due to the absence of a reliable secondary market. The U.S. is exiting its longest credit cycle, with 694 corporate bankruptcies in 2024, the highest since 2010, and a 14.7% year-over-year increase in business filings through March 2025, according to ABI.
Jeffrey Gundlach, CEO of DoubleLine Capital, explicitly stated in January 2025 that "Private credit is today’s subprime." Current private loan spreads are only modestly above public high-yield debt, despite carrying materially higher illiquidity and structural risk. Valuations often rely on borrower-adjusted EBITDA and mark-to-model accounting, delaying the recognition of losses.
The article concludes that lifeboats are in short supply, urging investors to proactively reduce exposure, focus on high-quality credits, limit fund overlap, and demand real illiquidity premia.
Bank of America: Private Credit Stress, Defaults Rise
Private Credit Faces Titanic Risk as Defaults Rise(current)
