The turmoil in the private credit market has spread from BDCs (Business Development Companies) to the broader credit ecosystem. Although JPMorgan CEO Jamie Dimon believes it does not currently pose a systemic risk, the latest research reports from Barclays and UBS Group AG reveal an overlooked blind spot: the deep entanglement between the private credit and Collateralized Loan Obligation (CLO) markets.
As Business Development Companies (BDCs) face massive redemptions, private credit valuations may be forced to shift from &#34;mark-to-model&#34; to &#34;mark-to-market.&#34; Investors should be alert to the net asset value (NAV) impact caused by price declines in underlying assets, especially software/SaaS loans.
Meanwhile, spreads on BDC unsecured bonds have already widened significantly, while private credit CLO pricing has yet to fully reflect this reality. Barclays points out that BDCs are highly comparable to Single-A CLOs. As default rates for software loans rise, the CLO market is highly likely to become the next risk trigger point.
UBS Group AG warns that rising private credit defaults will lead to a sharp decline in leveraged loan and CLO issuance. Moreover, since investors in public and private credit markets overlap significantly, liquidity pressure could rapidly spread to the broader public credit market.
<h2>Origin of the Crisis: BDC Redemption Tide and Valuation Transparency Crisis</h2>
In the past two months, private credit-related assets have experienced sell-offs.
Investors in two private credit funds managed by Blue Owl (Technology Income Fund and Credit Income Corp) submitted redemption requests of 41% and 22% respectively, leading to record lows in multiple listed private credit/BDC securities.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/cf8542f9-5516-4f3e-a158-3176bbcd2c34.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/cf8542f9-5516-4f3e-a158-3176bbcd2c34.png"/>
JPMorgan CEO Jamie Dimon warned that &#34;private credit generally lacks transparency and rigorous valuation marking of loans,&#34; leading to current actual losses being higher than they should be under normal circumstances.
Dimon also cautioned that insurance regulators will eventually demand stricter ratings or write-downs, and if problems arise, retail investors will resort to legal action.
Data from Pimco clearly shows that publicly traded BDCs are trading at a significant discount to their Net Asset Value (NAV), and the valuation gap between the public and private markets continues to widen.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/87f04409-d34f-4afd-81ca-b2048b8ee85c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/87f04409-d34f-4afd-81ca-b2048b8ee85c.png"/>
Despite this, Dimon also stated that private credit &#34;may not&#34; pose a systemic risk due to its relatively limited size in the overall credit market—a judgment echoed by a previous report from Goldman Sachs.
<h2>Barclays Warns: CLO Pricing Severely Disconnected from Reality</h2>
However, the Barclays research report suggests that Dimon's judgment may overlook the deep interlinkages between private credit and derivative markets like CLOs.
Gavin Zhu, a credit analyst at Barclays, noted that unlike the significant sell-off in broadly syndicated loan (BSL) CLO assets, private credit CLOs have not experienced a similar situation.
So far this year, the price changes in private credit CLOs have been minimal: loans above par have only decreased from 42% to 39%, loans below 95 have only increased from 7% to 8%, and approximately 14% of loans remain unpriced.
In contrast, U.S. BSL loans above par have plummeted from 59% to 22%, and loans below 95 have increased from 13% to 19%. Barclays believes that current BDC pricing is severely disconnected from the reality of the CLO market.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6e992b6d-73e7-4102-9fd7-d7cd46251115.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6e992b6d-73e7-4102-9fd7-d7cd46251115.png"/>
<h2>BDC Asset Coverage Test Becomes Key Constraint, Single-A CLO is the Best Benchmark</h2>
To quantify the relative value of BDC unsecured bonds, Barclays constructed a systematic comparative analysis framework.
Barclays pointed out that spreads on BDC unsecured bonds have widened by 80 basis points (bp) year-to-date, currently hovering around 260bp, significantly underperforming the Investment Grade (IG) index (which widened by only 15bp to 92bp). To find a suitable relative value reference, Barclays turned its attention to CLOs.
Under the Investment Company Act of 1940, BDCs are strictly regulated by an asset coverage test, requiring their assets to cover at least 150% of their debt (i.e., a maximum leverage ratio of 2x).
If a default occurs, a BDC may be unable to issue new debt or pay dividends, and may even lose its status as a regulated investment company (RIC) and become a cash-taxable entity. Currently, the average/median regulatory asset coverage for investment-grade BDCs is 205%/191%.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/74dbb6b9-83ba-45c2-ba42-a3f729e42ebb.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/74dbb6b9-83ba-45c2-ba42-a3f729e42ebb.png"/>
Barclays estimates that to breach the 150% threshold, the median BDC asset value would need to decrease by 21%. This attachment point is closest to the Single-A tranche in a standard BSL CLO structure. Therefore, Single-A CLOs serve as the best benchmark for evaluating the relative value of BDC unsecured bonds.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f8c276d4-cff3-498a-8e1b-4d5f13a26325.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f8c276d4-cff3-498a-8e1b-4d5f13a26325.png"/>
<h2>Quantitative Impact of Software Loan Sell-off and Relative Value Calculation</h2>
Barclays conducted quantitative calculations regarding the current depreciation of software/SaaS assets, driven by AI disruption.
In U.S. BSL CLOs, direct software exposure is approximately 11-13%, with a comprehensive exposure of about 22%. In the current environment, assuming a 1-point drop in the price of software loans (with non-software loans falling by 0.2 points synchronously), the spreads of Single-A CLOs would widen by 4bp.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3d48562d-a2e4-419e-95c6-e526d6d76fa2.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3d48562d-a2e4-419e-95c6-e526d6d76fa2.png"/>
In contrast, BDCs have a higher software exposure (around 20%). Barclays estimates that under the same shock, the spreads on BDC unsecured bonds should widen by 4.8bp (about 20% higher than CLOs).
The research report states that, based on actual market performance: recent Single-A CLO spreads have widened by approximately 20bp to 195bp; while since January, BDC unsecured bond spreads have widened by nearly 75bp to 270bp on a Z-spread basis.
According to Barclays' model, a 20bp widening in Single-A implies a 24bp widening for BDCs. This means that BDC unsecured bonds have underperformed Single-A CLOs by approximately 50bp in substance. As investors search for the next credit weakness, attention will inevitably turn to the CLO market, which has so far been largely unaffected by the BDC collapse.
<h2>UBS Group AG: Transmission Channels of Private Credit Crisis to CLOs and Public Markets</h2>
The UBS Group AG credit team, in its latest report, provided systematic answers to seven core questions raised by clients, three of which are directly related to CLOs and broader market risks.
Question 1: Potential Impact of Rising Private Credit Losses on the Structured Finance Market?
UBS Group AG expects leveraged loan issuance to shrink by about 20% to $360 billion in 2026, and CLO issuance to fall from $208 billion for the full year 2025 to approximately $150 billion. In a tail risk scenario, leveraged loan issuance could decline by 50-75%, and CLO creation volume would further shrink to $100-110 billion.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7613e632-c726-4d47-89de-fcb858f81ad3.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7613e632-c726-4d47-89de-fcb858f81ad3.png"/>
Regarding credit quality, UBS Group AG analysis shows that approximately 11-12% of U.S. and European leveraged loan portfolios are in highly AI-disrupted industries with lower ratings, and about 8% face the risk of being downgraded to CCC within the next two years. This will increase the concentration of CCC ratings in CLO portfolios, which is currently at 4.5-5.5%, approaching the 7.5% limit.
In terms of rating stability, S&amp;P stress tests indicate that the loss threshold causing an average downgrade of the BBB rating category is in the low to mid-single digits for leveraged loan CLOs and in the high single digits for middle-market CLOs. UBS Group AG's baseline/tail scenario loss forecasts are: 2.6%/6.75% for U.S. leveraged loans in 2026, and 7%/12.4% for private credit, implying substantial rating downgrade risks in the next year.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/378e88b6-2271-475a-8a5e-81a6d860b4a8.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/378e88b6-2271-475a-8a5e-81a6d860b4a8.png"/>
Question 2: Spillover Channels from Private Credit to Public Credit Markets?
UBS Group AG identified four main transmission channels:
<blockquote>
<ul>
<li>Investor Overlap: Insurance companies, foreign investors, and retail investors hold substantial positions in both private and public credit markets;</li>
<li>BDCs Hold Syndicated Loans: BDC portfolios hold an average of about 10% exposure to syndicated leveraged loans, which may be sold more aggressively once net redemption pressure arises;</li>
<li>Valuation Correlation: Private credit valuations are highly correlated with global leveraged loan valuations. European leveraged loan portfolios have about 50% overlap (debt-weighted) with U.S. leveraged loan names;</li>
<li>Issuance Pattern Correlation: The issuance patterns of U.S. and European leveraged loans, as well as U.S. high-yield bonds, have historically shown high correlation.</li>
</ul>
</blockquote>
Question 3: How Will Valuations Evolve for Private BDCs Facing Redemption Pressure?
BDCs represent one-third of private credit investment assets (approximately $500 billion, accounting for about 1.5% of the total market size of $1.5 trillion). Two-thirds of these BDCs are private, non-traded vehicles, which bear the primary redemption risk.
UBS Group AG believes that once redemption pressure begins to impact BDC liquidity, private credit valuations will shift from a &#34;mark-to-model&#34; framework to a more traditional &#34;mark-to-market&#34; approach. Historically, B3/B- rated loans traded at $90 during the Fed's tightening cycle in 2022-23, briefly fell to $80 during the COVID-19 pandemic, traded in the mid-$80s during the high-yield shale oil crisis, and fell to the mid-$50s during the financial crisis.
UBS Group AG believes these historical data points can serve as a reference range for the evolution of mark-to-market pricing in private credit portfolios.
<h2>CLOs are the Next Domino in the Private Credit Crisis</h2>
Synthesizing the analyses from Barclays and UBS Group AG, the logical chain is clear:
<blockquote>
Layer 1: The AI disruption risk for software/SaaS companies continues to erode BDC asset quality, leading to significant widening of BDC unsecured bond spreads and a surge in redemption pressure;
Layer 2: There is a deep structural linkage between BDCs and CLOs, but current private credit CLO pricing reflects almost no stress. This valuation gap will eventually narrow;
Layer 3: Once CLO pricing converges with reality, it will trigger a chain reaction including CCC rating downgrades, overcollateralization (OC) test pressure, and a contraction in CLO issuance. This will then transmit to the broader public credit market through channels such as investor overlap and valuation correlation.
</blockquote>
As Barclays pointed out, when investors search for the next credit market weakness, their gaze will inevitably turn to CLOs—a market that has, thus far, been largely spared from the BDC collapse.
UBS Group AG further warns that if AI's disruption of the software industry continues to deepen, coupled with a broader economic slowdown, the private credit crisis will not only worsen but will also use CLOs as a springboard to spread throughout the entire public credit market.

DABS

FNCL

BARC

JABS

Barclays notes that spreads on BDC unsecured bonds have widened significantly, while private credit CLO pricing severely lags behind reality; the valuation gap between the two will eventually narrow, potentially making CLOs the next risk trigger point. UBS Group AG warns that rising defaults in private credit will cause CLO issuance to plummet and spread to the public credit market through channels such as investor overlap and valuation correlation, emphasizing that systemic risks cannot be ignored

- The turbulence in the private credit market has spread from BDCs to the broader credit ecosystem, raising concerns about its deep ties to the CLO market.  
- Recent sell-offs in private credit assets, driven by significant BDC redemptions, compel a valuation shift from "model-based" to "market-based," heightening liquidity risks.  
- Analysts warn that increasing private credit defaults could trigger a ripple effect, reducing leveraged loan issuances and CLO volumes, thereby impacting the wider public credit market.

Private Credit Crisis Spreads, CLO Market Becomes the Next Risk Trigger Point