Private Credit News Weekly Issue #75: Extend-and-Pretend, Earnings Misses, and the Covenant Race to the Bottom

BDCs miss estimates as lenders kick maturities down the road to avoid "messy restructurings" while top funds warn market has gotten "very nervous"

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Private credit has officially entered extend-and-pretend mode. Lenders are easing loan terms on existing deals to avoid costly restructurings, according to practitioners, creating what Bloomberg Law calls “an extend-and-pretend dynamic that masks deeper economic strains.”

“Of the debt coming due soon or in the near to medium term, there’s a lot of reluctance in the marketplace from lenders to enter a real messy restructuring unless they absolutely have to,” said Seth Kleinman of Benesch Friedlander. The practice refers to creditors extending loan maturities despite doubts about repayment likelihood, giving borrowers time to hope conditions improve.

The strategy is showing up in earnings. Blue Owl Capital brought in $190.1 million of net investment income in Q3, missing analyst estimates. Ares Capital also missed with $338 million versus estimates of $354.9 million. Sixth Street beat estimates but its shares dropped approximately 5% after reporting.

Fitch Ratings declared its outlook for the BDC sector “deteriorating” given expected rate cuts and elevated payment-in-kind levels. Blue Owl’s non-accrual portfolio nearly doubled to 1.3% in Q3 from the prior period after adding GoHealth and Beauty Industry Group. Carlyle placed Roomba maker iRobot on non-accrual after the company amended its credit agreement for the sixth time.

Meanwhile, top funds are sounding alarms. TCW CEO Katie Koch told a Hong Kong forum she’s “very nervous” about parts of private credit, with her firm 15% underweight credit currently. Davidson Kempner CIO Tony Yoseloff warned there’s been a “race to the bottom” in terms of covenants.

DoubleLine’s Robert Cohen added fuel to the fire, cautioning fixed-income investors about the AI debt funding frenzy. “At some point, it’s going to have to be proven that these projects are profitable,” Cohen said. “If we find that most of them are not, then there’s going to be a severe reaction.”

The SEC is investigating Egan-Jones Ratings over whether the firm exerted improper commercial influence on its ratings procedures. The probe targets a company that rated over 3,000 private credit investments last year with approximately 20 analysts.

Yet deal activity continues. Banks are considering bringing private credit into a $12.25 billion Hologic financing, with $2 billion of second-lien debt potentially sold to direct lenders. Bain Capital lined up $3.1 billion in private credit financing for Service Logic acquisition. And private credit is muscling into Premier League football, with recent loans including £500 million to Chelsea and £80 million to Nottingham Forest.

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Key Market Themes

1. Extend-and-Pretend Becomes Standard Practice

Private credit lenders are easing loan terms on existing deals in hopes of staving off costly restructurings, creating what practitioners call an extend-and-pretend dynamic. According to Seth Kleinman of Benesch Friedlander, “there’s a lot of reluctance in the marketplace from lenders to enter a real messy restructuring unless they absolutely have to.”

The practice refers to creditors extending loan maturities despite doubts about repayment likelihood, avoiding restructuring and giving borrowers time for conditions to improve. According to Daniel Alpert of Westwood Capital, “the extension of maturities and playing the game of ‘pretend’ is based on the idea that, at some point, the business will improve and enable repayment.”

Companies are rushing to address private credit loans maturing between 2025 and 2027 ahead of potential credit market tightening. According to practitioners, rising defaults and bankruptcy risks driven by tariffs, higher operating costs, and declining revenues are forcing the issue.

Risk Assessment

According to Mark Roe of Harvard Law School, the concept is also known as “pray and delay” where companies “pray for some celestial intervention” that turns business around. The recent First Brands bankruptcy, which filed in September with liabilities exceeding $10 billion, demonstrates risks of loosening terms too aggressively.

2. BDC Earnings Point to Softening Market

Blue Owl Capital brought in $190.1 million of net investment income in Q3, missing average analyst estimates according to Bloomberg data. Ares Capital also missed estimates with $338 million versus expectations of $354.9 million. Sixth Street beat estimates with approximately $50.7 million of adjusted profit but shares dropped about 5% since Tuesday morning before earnings.

BDC shares have taken hits in recent months as investors become increasingly concerned private credit will produce lower returns following rate cuts and spread compression. According to Dave Donahoo of Franklin Templeton, “the global wealth community has spent the past four years allocating tens of billions of dollars annually into the upper-middle market in direct lending” but “now, that same community is saying it’s gotten a little crowded.”

Fitch Ratings declared its outlook for the BDC sector “deteriorating” given expected rate cuts and elevated payment-in-kind income levels. Most deals added to non-accrual lists in Q3 were tied to consumer-facing businesses.

Portfolio Stress

Blue Owl’s non-accrual portfolio reached 1.3% in Q3, nearly double the prior period after adding GoHealth and Beauty Industry Group. Carlyle placed iRobot on non-accrual after the company amended its credit agreement for the sixth time in August. FS KKR took control of Production Resource Group following October restructuring.

3. Top Funds Warn of Covenant Race to Bottom

TCW CEO Katie Koch told Hong Kong’s Global Financial Leaders’ Investment Summit she’s “very nervous” about parts of private credit, with her Los Angeles-based firm 15% underweight credit currently. Davidson Kempner CIO Tony Yoseloff warned on a separate panel that private credit’s impact is particularly visible in the US where “there’s been a race to the bottom in terms of the covenants that are provided, the coupons that are earned.”

The warnings come as private credit ballooned to a $1.7 trillion industry, with some banks collaborating with private credit players to earn fees while others warn combinations are risky and could infect the banking sector. US life insurers ramped up private debt investments, allocating close to one-third of their $5.6 trillion in assets to the sector last year, up from 22% a decade ago per CreditSights data.

UBS Chairman Colm Kelleher highlighted risks in the US insurance industry Tuesday, citing weak and complex regulation as private financing booms. According to Kelleher, he’s beginning to “see huge rating agency arbitrage in the insurance business.”

Executive Tensions

Apollo CEO Marc Rowan shot back at Kelleher on an earnings call, saying he was “just wrong.” According to Rowan, Apollo’s Athene insurance unit mostly uses big three credit rating companies while most banks’ balance sheets don’t have ratings at all. However, Rowan agreed risks are posed by offshore jurisdictions like Cayman Islands that don’t have same regulatory standards as US.

4. DoubleLine Warns on AI Debt Funding Frenzy

DoubleLine Capital’s Robert Cohen warned fixed-income investors to tread carefully funding the AI boom, pointing to novel structures and uncertainty over profitability of huge capital projects. According to Cohen, “at some point, it’s going to have to be proven that these projects are profitable. If we find that most of them are not, then there’s going to be a severe reaction.”

The warning comes as technology companies investing in AI sweep across private and public debt markets. This week Alphabet sold $17.5 billion of US bonds plus €6.5 billion in Europe. Meta raised $30 billion last week after a $27 billion private sale for Louisiana project. Oracle tapped bond investors for $18 billion in September.

Morgan Stanley forecasts hyperscalers will spend approximately $3 trillion on infrastructure projects like data centers between now and 2028. According to the bank’s estimates, cash flow can fund about half but significant debt must be raised.

DoubleLine Skepticism

According to Cohen, DoubleLine invests in both public and private debt but isn’t convinced private offers enough additional return to compensate for worse liquidity and transparency. “I don’t think there’s any alpha in private credit,” Cohen stated, adding that some DoubleLine clients committed significant capital to private debt have been disappointed by results.

5. SEC Probes Egan-Jones Ratings Practices

The SEC has been scrutinizing Egan-Jones Ratings, looking into whether the firm and senior executives exerted improper commercial influence on its ratings procedures, according to people familiar. SEC enforcement attorneys and officials in the agency’s complex financial instruments unit are involved in the investigation that began during Biden administration and continued this year.

Egan-Jones is a Nationally Recognized Statistical Rating Organization, an accreditation allowing its grades to be used by US insurers to calculate regulatory capital charges. The firm built dominant position early in rapidly expanding private credit market, rating over 3,000 private credit investments last year with approximately 20 analysts.

Bank for International Settlements said in October report that private credit grades used by insurance companies tend to be concentrated among smaller ratings firms, raising risk of “inflated assessments of creditworthiness.” Bank of England Governor Andrew Bailey recently told lawmakers he’d had conversations with industry figures who assured him “everything was fine in their world, apart from the role of rating agencies.”

Previous Scrutiny

Egan-Jones attracted scrutiny from large industry players over upbeat ratings of various private credit loans, Bloomberg reported in June. In 2024, two former employees accused founder Sean Egan and his wife of firing them in retaliation for raising concerns to SEC, including allegations they pressured analysts to alter early indicative ratings to motivate potential clients to pay for final ones.

6. Private Credit Muscles Into Premier League

Premier League clubs are turning to debt after spending record £3 billion over summer on new signings, with transfer fees regularly topping £100 million for star talent and stadium redevelopment projects in mind. Private credit firms are rapidly increasing UK football involvement despite not yet being part of the Premier League’s approved lenders group.

Recent notable deals include Ares providing Chelsea £500 million in 2023, Apollo lending Nottingham Forest £80 million earlier this year on three-year deal at 8.75% interest rate, and Wolverhampton refinancing £100 million with PGIM in September. Bloomberg reported in August that Apollo and Blackstone explored funding player transfer deals.

The Premier League has built exclusive circle of banks and specialist lenders enjoying privileged access to clubs, including HSBC, Barclays, Banco Santander, Close Brothers, and Aldermore. Just one Wall Street name, Citibank, rounds off the list according to document seen by Bloomberg.

Lending Challenges

Unlike NFL and NBA where teams remain constant, Premier League relegates three lowest-performing clubs each season to less lucrative tier, making lending more challenging unless secured by solid collateral. Premier League rules state no clubs can grant security over entitlement to central funds like TV rights to non-financial institutions per rule D31.

7. Banks Consider Private Credit for Hologic Deal

Wall Street banks are considering bringing private credit firms into a $12.25 billion debt financing supporting Blackstone and TPG’s Hologic acquisition, according to people familiar. Lenders are debating bringing on banking rivals ahead of potentially launching deal in leveraged loan market in January.

Hologic’s financing package is expected to include $2 billion second-lien loan, some of which may be sold to private credit firms. The other $9.5 billion of first-lien loans in dollars and euros could be offered to investors at 275 bps over respective benchmarks.

This wouldn’t be first time banks sold riskier second-lien debt to direct lenders. JPMorgan led $1.9 billion first-lien loan for Trucordia in June while Blue Owl was major holder of $548 million second-lien portion.

Competitive Pricing

According to Bloomberg data, pricing for Hologic’s first-lien loan at 275 bps sits just above average cost of debt for companies with BB ratings this year. However, first-lien debt for Electronic Arts buyout is being offered at 350 bps while $1.5 billion loan backing Thoma Bravo’s Verint acquisition finalized at 400 bps and discount of 95 cents on dollar last month.

8. Japan Expansion Faces Long Timeline

Global firms are racing to carve out space in Japan’s lending market, betting demand for private credit will surge, but cracking the world’s third-largest economy remains a long game. According to people familiar, one new hire has clocked over 50 meetings in past few months to build pipeline, but it will likely take nearly two years before deal volumes begin resembling other parts of Asia.

Firms including Apollo, Blackstone, and KKR have begun laying groundwork, staffing up in Tokyo to originate loans locally. Apollo hired MBK Partners’ Kazuo Yamataka last year, KKR brought on Goldman’s Ken Murata as managing director, and Blackstone hired Goldman’s Mao Ito as principal for credit origination.

Japan remains heavily overbanked from perspective of non-bank lenders. Domestic banks, flush with liquidity, continue offering loans with low yields and flexible terms. Even after three rate hikes since last March, borrowing costs from banks remain among lowest in developed world.

Growth Projections

Private credit AUM in Japan will likely grow by approximately 34% over next three years, hitting $10.2 billion according to Broadridge Financial Solutions. According to Matthew Michelini, head of Apollo’s Asia Pacific business, “I wouldn’t expect a wave of activity over the next three to six months. Direct lending is a two- to five-year timeline.”

Deals of Note

• Service Logic - Bain Capital lines up $3.1B in private credit financing to acquire from Leonard Green & Partners

• QTS Data Centers - Blackstone’s QTS seeks approximately $2.1B through privately placed high-grade bonds for US data center projects, following similar $1.65B placement earlier this year

• Tobacco Rag Processors - Stifel launches and leads $675M private credit financing package for tobacco products supplier

• Shutterfly - General Atlantic-led group in talks to provide approximately $2B to refinance debt

• Alteryx - Analytics software company sounding out investors for $2.4B loan to refinance $1.8B private debt and fund dividend to Clearlake and Insight Partners. Original financing led by Sixth Street, Blackstone, Blue Owl, and Apollo at SOFR plus 650 bps, now at SOFR plus 600 bps.

• Premier League Football - Apollo lent Nottingham Forest £80M at 8.75% on three-year deal, PGIM refinanced Wolverhampton’s £100M loan in September

What It Means

Extend-and-pretend is what lenders do when they’re out of options. When Kleinman says there’s “a lot of reluctance to enter a real messy restructuring unless they absolutely have to,” that’s not prudent lending. That’s hoping conditions improve before someone has to recognize losses. First Brands filed with over $10 billion in liabilities after playing that game.

BDCs missing earnings while Fitch calls the sector outlook “deteriorating” confirms what the extend-and-pretend strategy attempts to hide. Blue Owl’s non-accruals nearly doubling to 1.3%, Carlyle putting iRobot on non-accrual after six credit agreement amendments, these aren’t one-offs. When TCW is 15% underweight credit and Davidson Kempner warns of a “race to the bottom” on covenants, sophisticated allocators are repositioning.

DoubleLine’s Cohen saying “I don’t think there’s any alpha in private credit” while warning AI infrastructure projects may not be profitable represents rare honesty. Morgan Stanley forecasts $3 trillion in hyperscaler spending through 2028 with half funded by debt. If Cohen’s right that most projects won’t prove profitable, “there’s going to be a severe reaction.”

The SEC investigating Egan-Jones for potentially exerting commercial influence on ratings procedures matters because the firm rated over 3,000 deals last year with 20 analysts. When BIS warns ratings used by insurers are concentrated among smaller firms raising risk of “inflated assessments” and BOE’s Bailey hears industry figures say “everything was fine apart from rating agencies,” the credibility infrastructure supporting $1.7 trillion in private credit faces serious questions.

Private credit moving into Premier League with £500M to Chelsea and £80M to Nottingham Forest at 8.75% demonstrates capital seeking deployment anywhere. Apollo CEO Rowan shooting back at UBS Chairman Kelleher shows tensions rising as scrutiny intensifies. Sixth Street beating estimates but dropping 5% post-earnings suggests markets price deteriorating outlook despite current performance.

The maturity wall between 2025-2027, extend-and-pretend becoming standard practice, BDCs missing estimates, and top funds warning of covenant deterioration all point one direction. The question isn’t whether stress exists. It’s whether extending maturities and praying for improvement works before someone has to recognize what the loans are actually worth.