The global private credit market, which has surpassed $2.3 trillion in scale, is undergoing a resonance test from multiple shocks.
Persistently high interest rates, frequent landmark bankruptcy events, the AI wave reshaping software industry valuations, a surge in retail fund redemptions, and escalating geopolitical tensions in the Middle East are converging to push the U.S. private credit market to the forefront of public opinion. Its market vulnerability has significantly increased, and risk concerns continue to rise. A Merrill Lynch survey in February 2026 showed that 43% of fund managers have listed private credit as their most concerning source of credit risk.
In response to this situation, Huatai Securities' latest report provides a cautious judgment: Private credit is currently in a &#34;clearing phase,&#34; and short-term pressures will persist; however, under the baseline scenario of a soft landing for the U.S. economy in 2026, the systemic spillover risks to the financial system are generally controllable, resembling more of a &#34;storm in a teacup.&#34; However, if the U.S. economy falls into stagflation or the AI bubble bursts, the alarm sounded by this &#34;canary&#34; will suddenly amplify.
From an investor's perspective, current pressures are still mainly concentrated on high-risk assets such as leveraged loans. Although investment-grade credit spreads have widened somewhat, the overall extent is limited, and the transmission to the stock and broader bond markets remains controllable. As the market enters a deep clearing phase, the rising risk of stagflation and increased volatility in the AI sector are becoming the two key tail risks determining the scale of this &#34;storm.&#34;
<h2>Four Vulnerabilities Behind Prosperity: Risks Have Been Quietly Accumulating</h2>
The Huatai report points out that alongside rapid expansion, the private credit market has also accumulated a series of structural vulnerabilities that cannot be ignored, involving borrower quality, valuation transparency, product design, and rating ecology across multiple dimensions.
From the perspective of underlying assets, borrower qualifications are generally weak. The median revenue of private credit borrowing companies is only $500 million, far below the $4.6 billion for leveraged loan issuers and $4.5 billion for high-yield bond issuers. As of the first quarter of 2025, the average interest coverage ratio (ICR) for U.S. private credit borrowers is about 2.1 times, significantly lower than the 3.9 times for publicly traded companies; the net leverage ratio has reached 5.6 times, higher than the 4.6 times for publicly traded companies.
There is a transparency shortfall in the valuation process. Due to the lack of continuous trading and observable secondary market quotes for private credit loans, valuations heavily rely on manager models and internal assumptions. The International Monetary Fund (IMF) has explicitly pointed out that the private credit sector is prone to &#34;stale valuation&#34; issues, where asset prices fail to reflect real risk changes in a timely manner.
In terms of product design, payment-in-kind (PIK) terms are amplifying potential risks. The PIK mechanism allows borrowers to roll unpaid interest into the principal, temporarily alleviating cash flow pressures while effectively postponing and amplifying risks. Currently, the use of PIK in BDC loans within the software industry has risen to over 20%, while &#34;bad PIK&#34;—where companies are forced to adopt it rather than having agreed to it in advance—has increased from 36.7% in 2021 to 58.3% in the second quarter of 2025, reflecting that more companies are falling into the &#34;borrowing to pay interest&#34; predicament
There are also distortions in the rating process. As of the end of 2024, the amount of &#34;dry powder&#34; in the U.S. private credit market that has been financed but not used reached $277.9 billion, an increase of $181.7 billion over the past decade, accounting for 20% of the financed amount. Under pressure for capital allocation, some institutions have engaged in the practice of &#34;buying ratings&#34; from private rating agencies. Data from the National Association of Insurance Commissioners (NAIC) shows that the credit ratings provided by private rating agencies are, on average, 2.7 rating levels higher than those from NAIC's independent assessments, indicating that a significant portion of asset risks may be systematically underestimated.
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<h2>Fivefold Impact: The Trigger for the Private Credit Market Explosion</h2>
High interest rates continue to erode repayment capacity, a series of landmark bankruptcies and fraud incidents have triggered explosions, AI technology iterations have impacted software industry valuations, the trend towards retailization has sparked a wave of redemptions, and the geopolitical situation in the Middle East has heightened stagflation risks—under the intertwining of multiple pressures, the fragile links in the private credit market are being exposed one by one.
High interest rates continue to erode repayment capacity. Private credit generally adopts floating rate pricing based on SOFR, with a spread of 600 to 700 basis points over SOFR. Although the Federal Reserve has begun a rate-cutting cycle, the federal funds rate is still expected to remain at a relatively high level of 3.5% to 3.75% until the end of 2025. The pressure on the corporate side has become evident: Fitch's Private Credit Default Rate (PCDR) is expected to rise to 5.8% in January 2026, far exceeding the 2% to 4% range from 2023 to February 2024; U.S. corporate profit growth is also expected to slow from 12.8% in 2023 to -1.3% in 2025.
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Landmark bankruptcies and fraud incidents have triggered a crisis of trust. From September to October 2025, First Brands and Tricolor entered bankruptcy proceedings one after the other. During the same period, Zions disclosed approximately $50 million in write-offs related to fraud, while Western Alliance sought to recover nearly $100 million in loans and alleged fraud by the borrower, both cases involving funds associated with Cantor Group. In February 2026, the UK real estate lending institution MFS collapsed due to suspected double pledging, with the &#34;real value&#34; of collateral corresponding to approximately £1.16 billion in loans being only about £230 million, resulting in a potential gap of up to £930 million, with institutions such as Barclays, Santander, Wells Fargo, Jefferies, and Apollo's Atlas being involved.
AI technology iterations impact software industry valuations. Software services are the highest exposed industry in private credit, with BDC exposure to software services reaching 20.2% as of the fourth quarter of 2025. Since 2026, the rapid development of AI technology has prompted a reassessment of profit models in the software industry, with JPMorgan having downgraded the valuations of some software loans held by private credit institutions and tightened related financing conditions
It is worth noting that the outstanding loans of private credit to AI-related industries have risen from nearly zero in 2015 to over $200 billion by 2025, accounting for nearly 8% of the total outstanding loans in private credit, with the correlation between technological iteration and credit risk deepening.
The trend of retailization triggers a wave of redemptions. The proportion of retail channel funds in the sources of private credit funding has risen from zero to 13%, corresponding to a scale of approximately $280 billion. Changes in the funding structure are bringing liquidity pressure: the average redemption rate of U.S. BDCs reached 7.6% in the first quarter of 2026, a significant increase from 1.2% in the second quarter of 2024. Blackstone's flagship private credit fund (BCRED), with a scale of $82 billion, faced a record 7.9% redemption demand in the first quarter of this year; Blue Owl announced a permanent halt to redemptions of its OBDC II fund, later selling the loan portfolio under that fund at a 99.7% discount; redemption demand for BlackRock's HPS fund also surged to 9.3%.
Middle East situation raises stagflation risks. Geopolitical factors are transmitting to the macro outlook through energy price channels. If the average Brent crude oil price reaches $80 per barrel in 2026, it is expected to drag global economic growth down by 0.1 to 0.3 percentage points and raise global inflation by 0.5 to 0.6 percentage points; if it rises to $100 per barrel, it would drag down by 0.5 to 0.8 percentage points and raise by 1.5 to 2.0 percentage points, at which point U.S. inflation would return to above 3%. For the private credit market already in a high-interest-rate environment, a stagflation scenario means a dual squeeze on corporate profits and financing costs.
<h2>Assessment of Three Transmission Channels: Why It Is Still a &#34;Teapot Storm&#34;</h2>
Will the risks in the private credit market spread to the broader financial system? Huatai Securities' report systematically assesses this core issue from three dimensions: bank channels, non-bank institutional channels, and market price transmission. The conclusion shows: Currently, risk transmission remains limited, but some weak links require continuous attention.
Bank Channels: Limited Exposure, Manageable Risks.
In terms of scale, banks have very limited direct exposure to private credit. Research by the Federal Reserve shows that bank borrowings in private credit account for less than 1% of their total assets. In terms of asset quality, research by the Kansas Federal Reserve indicates that the default rate on bank loans in private credit is only 0.2%, lower than the 1% for industrial loans; the loan recovery rate is 85%, higher than the 82% for industrial loans. Further research by the Boston Federal Reserve points out that 96% of bank loans to BDCs are first-lien secured loans, providing a sufficient safety cushion.
In extreme scenarios, the results of the Federal Reserve's stress tests show that even in the case of an extreme recession and a comprehensive credit and liquidity crisis in non-bank financial institutions, the Tier 1 capital adequacy ratio of 22 large U.S. banks can still be maintained at 13%, fully capable of absorbing losses. The recent moderate increase in bank CDS also confirms that market concerns about risk transmission to the banking system are limited.
Insurance and Pension Channels: Low Proportion, Short-term Impact Manageable.
From a total perspective, as of 2024, private credit assets account for only about 3.5% of the total assets of global pension funds and insurance companies. In terms of funding attributes, pension funds and insurance companies have longer investment horizons, making large-scale asset sell-offs less likely; moreover, most private credit funds adopt a closed-end structure, which cannot be redeemed immediately, providing managers with a buffer space.
It is worth noting that U.S. life insurance companies have many indirect connections with private credit through structured tools such as BDC, JVLF, BSL, and MM CLO, and the credit risk and valuation fluctuations that penetrate these structures still need to be continuously monitored.
Market price contagion channel: has spread to leveraged loans, but has not yet expanded to the broader market.
Recently, early signs of risk transmission have appeared in the market. The yield on U.S. leveraged loans has risen significantly, once approaching the levels seen during the equivalent tariff period in April 2025, partly due to market concerns about the spillover of private credit risks. However, as of now, although investment-grade credit spreads have widened, the extent remains controllable; the rise in the VIX index and the MOVE index is more driven by geopolitical events in the Middle East, and the transmission of private credit risks to the stock and bond markets has not yet formed a systemic shock.
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<h2>Tail risks cannot be ignored: Two scenarios may change the overall judgment</h2>
Huatai Securities clearly points out that the current judgment of the &#34;teapot storm&#34; is based on the baseline scenario of a soft landing for the U.S. economy. Once the macro outlook deviates from this track, two tail risk scenarios will significantly increase the probability of private credit evolving into a systemic risk.
Scenario One: The U.S. economy falls into stagflation. If the Middle East conflict prolongs and drives up oil prices, or if trade policies turn aggressive again, the U.S. may enter a stagflation pattern characterized by rising inflation and economic downturn. This will constrain the Federal Reserve's space for interest rate cuts, further deteriorating corporate cash flows, putting even more pressure on already strained private credit, and potentially transmitting risks to the broader financial system through three channels: banks, insurance, and market prices.
Scenario Two: The AI bubble bursts. If the contribution of AI to economic growth significantly declines, the default rate of private credit will rise noticeably. Coupled with a decline in U.S. stocks and a contraction in investment, credit risks will resonate negatively with the economic downturn, amplifying the fragility of the financial system.
Overall, the clearing of the private credit market has not yet ended, and short-term pressures will continue. For investors, key signals to focus on currently include: whether the leveraged loan spreads further widen and spill over into the investment-grade market, whether the redemption rates of BDCs continue to rise, and the impact of the Middle East situation and AI industry dynamics on the macro environment.
In the baseline scenario, this storm may still be in the teapot—but the lid of the teapot is being pushed up by increasing pressure.

BIZD

The report from Huatai Securities indicates that the U.S. private credit market, with a scale exceeding $2.3 trillion, is facing multiple shocks including high interest rates, a wave of defaults, AI valuation reshaping, and retail redemptions, leading to a significant increase in vulnerability. The current risk is still in the "clearing phase," and under the benchmark of a soft landing, systemic spillover is controllable, resembling more of a "storm in a teacup." However, if the economy falls into stagflation or the AI bubble bursts, the alarm of this "canary" will suddenly amplify, potentially evolving into systemic risk

- The global private credit market, now exceeding $2.3 trillion, faces significant pressures from high interest rates, bankruptcy events, AI valuation shifts, retail fund redemption trends, and geopolitical tensions.  
- According to Huatai Securities, the market is in a "clearing phase" with manageable systemic risks, but downturn scenarios like stagflation or an AI bubble burst could escalate concerns significantly.  
- The report warns that structural vulnerabilities, including borrower quality and valuation transparency, coupled with rising leverage risks, necessitate close monitoring for investors.

U.S. Private Credit: A Tempest in a Teapot or the Canary in the Financial System?