alt Hacker NewsUS private credit defaults hit record 9.2% in 2025, Fitch says
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So, if I’m following: Banks are lending to private equity firms to fund purchases of businesses.
Many of these businesses are SaaS which means their valuations are tumbling.
It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and take operational control? Will the banks renegotiate terms such that the private equity owners are incentivized to continue as stewards? Or, will they prefer to force a business sale immediately?
Misleading title*
> The default rate among U.S. corporate borrowers of private credit rose to a record 9.2% in 2025
Emphasis added. Headline makes it sound like retail credit, not corporate specifically.
*Edit: Not misleading, just an unfamiliar term/usage from my perspective. I'm not a finance guy so didn't know the difference and assumed others wouldn't either. Mea culpa.
Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.[a]
tick-tock, tick-tock, tick-tock...
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Reason this number caught my eye: last year the Fed's stress tests found "loss rates from [non-bank financial institution] exposures (i.e., the percentage of loans that are uncollectible) were estimated at 7%, under a severe recession in scenario one" [1].
That's the scenario in which unemployment goes to 10%, home prices crash by 33%, the stock market halves and Treasuries trade at zero percent yield [2].
[1] https://www.mfaalts.org/industry-research/2025-fed-stress-te...
[2] https://www.federalreserve.gov/publications/2025-june-dodd-f...
Unless I'm misunderstanding something, this isn't that big of a number in the larger scale of US banking; According to the numbers in the article that's only about 2.5% of all bank lending (300B/1.2T, with the 1.2T being ~10%)
Oh, that's why they were pushing so hard to get private equity into 401k's. They wanted to pass the bag to regular folks.
For those that want a broader context on private credit, the Bank for International Settlements has been publishing some great material on the topic, including the connections between private credit and other corners of the financial system. Some examples follow.
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[0] https://www.bis.org/publ/qtrpdf/r_qt2503b.htm [1] https://www.bis.org/publ/bisbull106.pdf [2] https://www.bis.org/publ/work1267.pdf
Ok, I think I now got where all the AI money was coming from.
For the OP: what’s your view on the overall private credit situation? Who are the bag holders and how bad is the contents of the bag?
You seem to be answering a number of other questions in the post so interested to hear your impetus for sharing in the first place.
nb: thank you for being an ongoing contributor to the site! I see your handle cropping up a lot in substantive conversations
> the top five lenders in the private credit market include Wells Fargo, which leads the way with $59.7bn (£44.8bn) in lending
anything Wells Fargo leads in must be bad
Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.
tick-tock, tick-tock, tick-tock...
The concern here seems to be that the credit risk on the underlying borrowers is being transferred to banks through the loans made by the banks to the private credit firms. But the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers (the same regulations and constraints that led them not to lend to the underlying borrowers in the first place). When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans.
Private credit is cracking and lending standards are tightening behind the scenes. If you’re not building cash reserves right now you’re going to wish you had. The distressed opportunities ahead go to whoever kept dry powder while everyone else was chasing growth.
If your business is light on free cash flow (ie everyone in AI at the moment) buckle up as there are storm clouds ahead. If you’re running a business that relies on external cash (VCs, loans/bonds, etc) to keep things going things will get very ugly.
Last year Jamie Dimon said there were some going to be some “cockroaches” found lingering unattended to in lots of private credit portfolios— the implication at the time was not that it was systemic and deep, merely that various incentives and market forces have meant a shakeout of either the incremental as-it-happens variety or slightly larger ones of multiple happening at a time.
Since then I’ve seen small things indicating lots of people quietly checking their books for such.
In the last week or two this has accelerated. A lot. Every few days there are ratchets tightening things up. Dimon just put some hard limits on some private credit lines and what they could take out. A few other banks trying to take other precautions.
"Most of the private credit loans were floating rate and tied to the federal funds rate, which has persisted at a high level over the past three years. Fitch pointed to this as a catalyst for last year's defaults."
I guess it is fair to say the federal funds rate has persisted at a high level over the past three years now isn't it?
https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
Also interesting to note, "Fitch recorded NO defaults in the software sector last year. The rating agency noted it categorizes software issuers into their main target market sectors when applicable."
To private credit firms. Most of what banks do is private credit, the news is them funding private credit firms.
I wonder if anyone can say if there’s much risk of sub prime private credit? Not sure if that’s the right term. My understanding is that synthetic CDOs are the rise again, this backed by private credit - which the article is discussing
Since a lot of people here aren't familiar with the private credit situation, here's my understanding, which comes almost entirely from reading Money Stuff, a daily column by Matt Levine. If you are a tech person who wants to learn about finance, I recommend it! It's a lot more entertaining than most finance industry reporting.
"Private credit" is an idea that has been hot in finance for the last several years, originating from the great financial crisis (GFC). After the GFC, regulations made it very hard for banks to make business loans with any kind of risk anymore. So instead, new non-bank institutions stepped in to make loans to businesses. These "private credit" institutions raise money from investors, and lend it to businesses.
The investors are usually institutions who are OK with locking up their money long-term, like insurance companies and pension funds. This all seems a lot safer than having banks making loans: banks get their funding from depositors, who are allowed to withdraw their deposit any time they want. So a bank really needs to hold liquid assets so they are prepared for a run on the bank, and corporate borrowing is not very liquid. Insurance companies and pension funds have much more predictability as to when they actually will need their money back, so can safely put it in private credit with long horizons.
It's not quite so clean, though.
It's actually common for banks to lend money directly to private credit lenders, who then lend it out to companies. But when this happens, typically the bank is only lending a fraction of the total and arranges that they get paid back first, so it's significantly less risky than if they were loaning directly to the companies. Of course, the non-bank investors get higher returns on their riskier investment.
And the returns have been pretty good. Or were. With the banks suddenly retreating from this space, there was a lot of money to be made filling the gap, and so private credit got a reputation for paying back really good returns while being more predictable than the stock market.
But this meant it got hot. Really hot.
It got so hot that there were more people wanting to lend money than there were qualified borrowers. When that happens, naturally standards start to degrade.
And then interest rates went up, after having been near-zero for a very long time.
And now a lot of borrowers are struggling to pay back their loans on time. And the lenders need to pay back investors, so sometimes they are compromising by getting new investors to pay back the old ones, and stuff. It's getting precarious.
Meanwhile a lot of private credit institutions are hoping to start accepting retail investors. Not because retail investors have a lot of money and are gullible, no no no. 401(k) plans are by definition locked up for many years, so obviously should be perfect for making private credit investments! Also those 401(k)s today are all being dumped into index funds which have almost zero fees, whereas private credit funds have high fees. Wait, that's not the reason though!
But just as they are getting to the point of finding ways to accept retail investors, it's looking like the returns might not be so great anymore. Could be a crisis brewing. Even if the banks are pretty safe, it's not great if pensions and insurance companies lose a lot of money...
https://web.archive.org/web/20260312130613/https://www.marke...
^ Encase the link also responds with this for you:
Access Denied
You don't have permission to access "http://www.marketscreener.com/news/us-private-credit-defaults-hit-record-9-2-in-2025-fitch-says-ce7e5fd8df8fff2d" on this server.I've never heard the term private credit so I googled it.
> Private credit refers to loans provided to businesses by non-bank institutions—such as private equity firms, hedge funds, and alternative asset managers—rather than traditional banks .
Is that correct?
So if these companies go under does anyone care? If they go under are they a systemic risk to the economy like the banks in 2008 that got a taxpayer bailout?
Highly recommend listening to past episodes on The Real Eisman Playbook podcast for more info on this topic & banking in general.
https://podcasts.apple.com/bz/podcast/the-real-eisman-playbo...
He's one of the "Big Short" guys but more importantly he has great guests on. Everyone is trying to teach & inform, not sell.
He's been calling this risk out for over a year, especially once the White House started trying to allow retirement accounts access to private credit. For a lot of people that was the big alert, even before Jamie Dimon said he saw "cockroaches".
Important to note that this is about "U.S. corporate borrowers of private credit", so companies and not individuals.
Luckily debt will be solved by the power of AGI, right? Just one more data centre! One more GPU! It can nearly write a basic three tier application with only 10 critical security vulnerabilities all by itself!
Definitely think we’re in for a rough year financial prospects wise, and doesn’t even feel like we recovered from the 2008 crash properly.
Banks are following incentives that exist because of government policies, and in doing that they create significant moral hazard.
The finance industry's main innovation is rent seeking.
We all know what is going to happen, it's just a question of when.
I'm not surprised. Weren't we getting signals like 3 or 4 months ago that used car repossessions were ticking up? That's a breaking point for folks. The economic boulder keeps rolling and I'm not wearing any shoes. Spiking the price of oil is definitely going to help. This too shall pass?
Skip the blogspam and read the original article: https://www.reuters.com/business/us-private-credit-defaults-...
There is so much misinformed fear-mongering about private credit right now.
Important Facts:
1) The majority of private credit funds are classed as "permanent capital". When you put money into these vehicles, you give the Asset Manager discretion over when to give the money back. Redemptions are often gated at ~5% per quarter.
(So there cannot, by definition, be a run on the bank)
2) Credit is senior to equity, so if you expect mass defaults in private credit, it means the majority of private equity is effectively wiped out. Private equity has to be effectively a 0 before private credit takes any losses.
3) The average "recovery rate" for senior secured loans is 80%. Even if private equity gets wiped to 0, the loss that private credit incurs is cushioned significantly by the collateral backing the loan. These are not unsecured loans the borrower can just walk away from.
(The price of senior secured loans dropped by ~30% in 2008, as a worst case datapoint)
4) Default rates on many of the major private credit managers is ~<1% in recent years. There are other estimates stating higher default rates, but that often classifies PIK income as a default. A loan modified and extended with added PIK that ultimately gets repaid is not a "true" default.
5) Finally, it's true that NAVs are likely overstated, but generally it's by a modest amount. Every Asset Manager today could go out tomorrow, mark NAVs down by 20% and suddenly there is no crisis.
(The stocks of Asset Managers have already traded down such that this seems expected and priced in anyway)
I have been following this development for a couple weeks, and now it's on HN. How long until the elevator guy tells me about it?
is this not the subprime mortgage problem all over again?
Unemployment increasing, CPI fairly stable, and credit tightening will cause the Fed to open the spigot. Here is a good entry for precious metals.
People have cried wolf or been wrong about incoming crashes and bubble pops so many times that this signal -- whether it's a good signal or not -- simply won't change anything I do.
I'm sure someone somewhere could make a trade off of this article and this signal is definitely for them.
What the hell ?! Nearly 10% ?! How can it be?! World wide, it seems to be around 4% since 2004.
Page 22 (French but it's just numbers, you can read it). <https://www.eib.org/files/publications/thematic/gems_default...>
Go figure. Employers don't want to pay living wages or hire.
Related:
Veteran fund manager George Noble warns that a private credit crisis may be unfolding in real time
https://finance.yahoo.com/news/veteran-fund-manager-george-n...
Looks like we have another problem in the banking system once again, even before AGI has even been fully realized.
We are definitely in the year 2000 in this cycle [0] and between now and somewhere in 2030, a crash is incoming.
Let's see how creative the banks will get to attempt to escape this conundrum. But until then...
Probably nothing.
Having worked in IB / PE my whole career (both buying & selling businesses and distressed debt, primarily in the middle market) it is always fun when my area of domain hits the front page and I can read the confident opinions folks have on my industry.
I think most people in this thread are missing the boat.
First, it’s important to realize that “default” does not imply wipeout. Default just means that you’ve violated a credit agreement, and that can be solved many different ways. Sometimes it’s solved by the sponsor restructuring the debt (injecting equity, asking for covenant/interest relief); sometimes it’s a true Ch 11 bankruptcy; in very rare cases, it can be a true Ch 7 liquidation. But even in those destruction-of-value scenarios, first-lien recoveries run 50-70% of “par value” borrowed. Lenders are smart, their job is to underwrite these deals, and they’re compensated for this with healthy interest rates - typically S+500-650 plus fees, which comes out to 10–12% unlevered returns. So they are basically pricing junk bonds, and in exchange get senior secured risk with real covenants around what the business can / can’t do.
Second, the myth that PE firms can just saddle a company with debt at the lender’s expense with no skin in the game and walk away with a profit while the company files for bankruptcy is hilarious, in part because it obviously doesn’t hold up to the slightest bit of scrutiny. The typical PE firm is buying a middle market business for 10-12x EBITDA on average. In today’s world, lenders will usually let you put 4.5-5.5x EBITDA on the business as leverage (in the ZIRP era, you could push things up closer to 7x, sometimes above that if it’s a stellar business). So on a typical 10x deal with 5x debt, 50% of the capital structure is PE firm equity which gets wiped out first before the lender loses a dollar. If that happens, the PE fund’s investor returns crater, which means no more Fund II/III/IV, which means no more fees for them to generate.
(As an aside, the typical “fees” paid by portfolio companies to the PE firm are, at least in modern limited partner agreements, largely offset against management fees and recaptured by the fund’s investors. The PE firm is not getting rich off these fees, at least not anymore.)
Third, private credit is not your local commercial bank. Many of the largest private credit firms are actually PE firms themselves - e.g., Apollo, Ares, and Blackstone, who are all known as “private equity” have actually become more valuable to the public investor community due to their private credit business. These are not sadsack regional banks and credit unions getting hoodwinked by New York finance elites. In many cases, they are the same firms, with the same resources (in-house restructuring / “workout” teams, portfolio ops, etc.).
It’s important to realize that private credit funds raise capital from institutions and HNW individuals with locked-up commitments - it is the exact same investor base as PE, and fundamentally a very similar business, they just invest at a different part of the capital stack. Because of this, risk of contagion is very low. Bank exposure to private credit is something like 1.5% of their portfolio - it is tiny. The extent of the blowback will be that a pension fund investing in alternatives has a poor return in one asset class across a dozen - it’s not systemic risk.
Finally, what IS true is that pre-ZIRP portfolios and software-heavy credits (something like 15-20% of leveraged loans outstanding) are in a tough spot. These businesses are either failing or they have too much debt that has “re-rated” to higher interest rates as interest rate hedges fell off. What happens from here is that the companies with structural issues in their business model will cease to exist (e.g., certain SaaS businesses). This happens all the time - it’s capitalism. But the good businesses are not going to disappear because of a bad cap structure - they will just get recapitalized.
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The US Ponzi scheme coming to an end. It works great while everything is going up.
2008 Financial Crisis was triggered by Oil prices. There were lots of problematic structural elements that were fine if nobody looked close. Oil was just the sideway hit on the building to knock it over.
Just takes a nudge to collapse. And here we go again.
Government removes regulations, economy collapses, government bails out the wealthy, quants get ski trips and bonuses while families starve.
One guy has twice as much money as that. Can't be a big deal.
Go figure. Employers don't want to pay living wages or hire anyone these days.
Pretty sure the solution that US politicians will find will be to create new dollars out of thin air, so instead of increasing taxes they increase the money supply.
Of course this is going to increase prices, but then they can blame China / Russia / Iran whoever is the scapegoat at that time.
Stop paying rent. Stop going to work. Pirate everything. No constitution. No copyright. Starve the beast.
Don't let anyone who bought into this way of life get away with robbing the rest of us.
And don't let anyone who brought children into this cruelty hear the end of it: what they did was evil.
Yeah, I'm going down a bit of a rabbit hole this morning. Turns out Wells Fargo's $59.7bn of private-credit lending is equal to 44% of its CE Tier 1 capital [1]. Meanwhile, Deutsche Bank got back to being Deutsche Bank while I was not looking [2].
[1] https://www.sec.gov/Archives/edgar/data/72971/00000729712500...
[2] https://www.reuters.com/business/finance/deutsche-bank-highl...