Private Debt News Weekly Issue #47: Cash Flow Erodes, Defaults Rise, and Private Credit Faces a Reality Check
Free cash flow collapses, valuations stay frozen, and secondaries explode as the market braces for its next phase.
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Private credit’s cracks are widening. As banks, regulators, and investors finally confront rising borrower stress, defaults are creeping higher, PIK usage is surging, and valuations are getting harder to justify. Meanwhile, retail fundraising stalls, secondary markets boom, and private lenders are increasingly stepping into "hung" bank deals amid tariff chaos.
The next phase isn’t about growth—it’s about liquidity, risk management, and survival. Here’s everything you need to know this week.
Key Market Trends
1. Borrower Weakness Deepens: 40% of Private Credit Borrowers Have Negative Free Cash Flow
The IMF just dropped a bombshell:
Over 40% of private credit borrowers had negative free cash flow at the end of 2024.
That’s up from 25% in 2021.
Rising use of payment-in-kind (PIK) interest is hiding deeper cash flow problems.
Why it matters:
Private lenders are extending and pretending. The longer the trade war and inflation persist, the harder it gets to paper over bad credits.
2. Banks Hold $500 Billion of Private Credit Exposure
Traditional banks aren't insulated.
Banks now have over $500 billion of exposure to private credit platforms.
Regulators are watching closely, worried about contagion risk if defaults spike.
The Financial Stability Board is expected to issue policy recommendations on leverage in shadow banking this summer.
3. Private Equity Firms Lean Harder on PIK Notes
More than 25% of lenders' net investment income now comes from deferred interest.
Dividend recapitalizations are adding further stress to capital structures.
Bottom line:
Deferred cash payments may keep the music playing, but the underlying deterioration is real.
4. Public Credit Spreads Widen—Private Credit Marks Haven't Moved (Yet)
High-yield bond spreads are climbing toward 500–600 bps, the widest since mid-2022.
BDC stocks (Blue Owl, FS KKR, Oaktree) are trading at discounts of 14%–23% to NAV.
Meanwhile, most private credit funds are still reporting valuations at par.
Translation:
Marks will move. It’s just a matter of when—and who flinches first.
5. Private Credit Still Flooding Into M&A Deals
Even amid stress, private lenders are winning major deals away from banks.
Apollo and Blackstone are leading a $4 billion loan for Thoma Bravo’s acquisition of Boeing’s Jeppesen navigation unit.
KKR lined up direct lenders for its Karo Healthcare acquisition, steering clear of banks.
PE firms are paying extra to lock in private financing and avoid syndication risk.
Fundraising and Secondary Market Developments
1. Retail Push Stalls as ETFs Struggle
State Street's PRIV ETF has seen no new flows since March.
Investors remain skeptical about liquidity mismatches.
Blackstone, KKR, and others pivot toward interval funds and model portfolios for more controlled retail exposure.
2. Secondaries Market Gaining Momentum
Coller Capital closed a record $1.6 billion secondary transaction in senior direct lending.
Generali and Partners Group launched a new fund to capitalize on private credit secondaries.
LPs are using secondaries for portfolio management as traditional exits slow.
Major Deals and Fundraising Highlights
Crayhill Capital raised $1.3 billion for asset-based finance.
Sculptor Capital raised $900 million for an opportunistic fund, delivering **15%+ annualized returns since 2022.
Mubadala committed $1 billion to Fortress strategies focused on private credit and asset-based lending.
Pimco secured approval for a European diversified private credit fund, focused on asset-backed strategies.
Forward Outlook
Expect Rising Defaults and Valuation Pressures
As cash flow deteriorates, watch for more borrowers triggering PIK toggles and amend-to-extend deals.
Secondaries Will Become a Core Liquidity Tool
With exits scarce, LPs will increasingly rely on secondaries and NAV financing.
Retail Growth Will Shift to Controlled Products
Daily liquidity ETFs are dead on arrival. Interval funds, feeder funds, and retirement solutions will dominate.
Banks Will Tighten Lending Standards Again
Shadow banking risks are rising. Expect regulatory pressure to mount heading into the summer.
Private Credit Managers Will Fight to Protect Marks
The gamesmanship over valuations will get ugly before it gets honest.
Final Takeaway
Private credit’s cracks were forming long before tariffs hit. Now they’re widening. Free cash flow is disappearing, PIK usage is soaring, and secondaries are booming as liquidity gets scarce.
The new cycle won’t reward size—it will reward discipline, transparency, and risk control.
Stay ahead with Private Debt News Weekly—your signal through the noise.
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