Private Debt News Weekly Issue #68: Stress Signals Flash Red, Regulators Circle, and Banks Fight Back

Warning lights blink across the $1.7 trillion market as defaults rise and PIK usage hits dangerous levels

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The private credit party is showing signs of ending badly. Bank of America issued a stark warning this week about “clear signs” of rising stress across the $1.7 trillion market, with realized losses hitting $1 billion in Q2 and debt maturity walls reaching historic highs. 17% of deals come due in the next two years, requiring $170 billion in fresh capital.

Meanwhile, Australia’s securities regulator blocked two private credit funds in two days, citing concerns about retail investor suitability and “incomplete” risk measures. The crackdown signals growing regulatory scrutiny as pension funds pile into private assets without understanding the risks.

Not all the news was negative. HPS and Blue Owl secured a $1.2 billion financing for GTCR’s SimpliSafe buyout at 5% over benchmark, while Clearlake and TA Associates explore a $3.3 billion refinancing for Precisely Software. But tellingly, VFS Global is fleeing private credit entirely, seeking $2 billion in bank financing to escape its Apollo unitranche debt.

Apollo’s Jim Zelter acknowledged the market shift, declaring that “the future of investment-grade private credit is really in partnership with the banks.” The admission suggests even private credit’s biggest players recognize their limitations as markets mature and spreads compress.

The question is no longer whether private credit will face a reckoning, but when and how severe.

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Key Market Themes

1. Bank of America Sounds Systemic Alarm

Bank of America issued its starkest warning yet about private credit stress, highlighting $1 billion in realized losses across business development companies in Q2, the highest since the pandemic. According to the bank’s Thursday report, losses have increased since the Fed started raising rates in 2022, “suggesting portfolio companies continue to struggle with interest costs.”

BDCs are carrying an additional $1.3 billion in unrealized losses, mostly from loans originated in the low-rate environment of 2021. According to Bank of America, these “problem vintages are likely to trigger further credit losses” as rates aren’t expected to drop to 2021 levels.

The report highlighted “bad” payment-in-kind deals, representing 2.5% of BDC holdings in Q2. These borrowers started deferring interest payments during the loan’s life rather than at origination, indicating deteriorating credit quality rather than strategic financing.

Systemic Implications

According to the Federal Reserve’s May report, “the lack of transparency and understanding of the interconnectedness between private credit and the rest of the financial system makes it difficult to assess the implications for systemic vulnerabilities.” With $170 billion in maturities over two years, the refinancing challenge could stress the entire ecosystem.

2. Australian Regulator Launches Retail Crackdown

Australia’s securities regulator issued 21-day stop orders against two private credit funds in consecutive days, blocking RELI Capital’s A$50.9 million mortgage fund and La Trobe Financial’s A$216 million US private credit fund. According to ASIC statements, both products may not be suitable for retail investors despite being marketed to them.

ASIC cited concerns that RELI’s fund targeted investors planning to commit 25-75% of their portfolios, while its “low-to-medium risk” classification was deemed an “incomplete measure” of true risk. La Trobe, owned by Brookfield Corp, faces similar suitability questions.

The stop orders are part of ASIC’s broader probe into private markets, examining transparency, governance, valuation practices, conflicts of interest and fair treatment of investors, according to the regulator. The scrutiny comes as pension funds and large investors ramp up private asset allocations.

Regulatory Momentum

The Australian crackdown signals growing global regulatory concern about private credit’s retail expansion. According to ASIC’s investigation focus, opacity and valuation challenges make these products unsuitable for non-institutional investors who lack sophisticated risk management capabilities.

3. Bank Refinancing Trend Accelerates

VFS Global is seeking $2 billion in bank financing to escape its private credit debt, joining a growing list of companies fleeing direct lenders for cheaper bank alternatives. According to market sources, the seven-year facility will price at 300 basis points over SOFR for dollars and 325 basis points over Euribor for euros.

The refinancing replaces a 1.1 billion Swiss franc loan from Apollo that Blackstone arranged for its 2022 VFS buyout. According to Bloomberg reporting, VFS joins other borrowers including KnowBe4 and Trescal in switching from private credit to broadly syndicated debt markets.

According to Barclays and Deutsche Bank, the joint bookrunners, the loans will be rated B1 by Moody’s and B+ by S&P. The public ratings contrast sharply with private credit’s move away from rating agencies and disclosure requirements.

Market Reversal

The bank refinancing trend indicates private credit’s pricing advantage is eroding as spreads compress and bank appetite returns. According to industry observers, private credit still offers speed and certainty but at increasingly unjustifiable cost premiums.

4. Investment-Grade Strategy Requires Bank Partnership

Apollo President Jim Zelter acknowledged that “the future of IG private credit is really in partnership with the banks” during a Bloomberg TV interview. According to Zelter, Apollo has 12 origination partnerships with banks including BNP Paribas, Citigroup, and Standard Chartered to provide investment-grade financing.

According to Apollo’s strategy, partnerships allow banks to earn fees while offloading funding burden to private credit firms. Banks might prefer senior positions or shorter-term lending while private credit takes subordinated or longer-dated exposure.

Zelter highlighted opportunities in Germany, where “capital expenditure spending has been delayed” making debt and long-term capital “particularly appropriate.” According to Apollo’s assessment, European governments have limited budgets and can’t fulfill investment-grade companies’ capital needs in energy transition and data centers.

Strategic Evolution

According to Apollo’s $690 billion credit business, investment-grade opportunities could expand the total private credit market to $40 trillion. But the bank partnership requirement suggests private credit cannot access this market independently.

5. BDC Structure Creates Dangerous Incentives

According to Financial Times analysis, BDCs employ $478 billion in assets with approximately half debt-financed, creating leveraged exposure to middle-market lending. The structure allows managers to charge fees on both investor capital and borrowed funds, creating incentives for maximum leverage.

According to BIS research, BDC leverage is “highly procyclical” and “reliance on bank credit lines could transmit stress in private markets to bank balance sheets through simultaneous credit line drawdowns.” While BDCs have drawn $32 billion of $56 billion in committed facilities, rapid drawdowns could stress banking relationships.

According to academic research, BDCs look well-capitalized with median risk-based capital ratios of 36%, far exceeding bank requirements. However, the analysis assumes credit losses remain at historically low levels that may not persist.

Fee Structure Problems

According to the FT analysis, BDC managers earn fees on investment income rather than total returns, directly incentivizing short-term income maximization regardless of credit outcomes. This structure makes manager compensation “remarkable quite how insensitive” to heavy credit losses.

6. PIK Usage Creates Cash Flow Mismatches

According to Lincoln International data, “bad PIK” deals now represent 53% of PIK arrangements across the industry, indicating borrowers deferring payments due to stress rather than strategic considerations. BDCs must distribute 90% of profits to maintain tax advantages, creating cash flow problems when PIK income exceeds 10% of total returns.

According to the Loans Syndication and Trading Association, almost one-fifth of BDCs had more than 10% of investment income from PIK accruals in Q1 2025. This forces managers to raise debt, use prepayments, or tap new subscriptions to fund distributions.

According to S&P Global Intelligence analysis, private credit default rates “roughly quintuple” when including payment deferrals, covenant amendments, and maturity extensions that aren’t counted in traditional default statistics.

Liquidity Pressure

According to Blue Owl Technology Finance Corp’s Erik Bissonnette, PIK lending can be “accretive to returns and perfectly safe” when done strategically. However, the proliferation of stress-driven PIK arrangements suggests widespread liquidity problems rather than strategic financing.

7. New Deals Show Persistent Demand

Despite stress signals, new private credit deals continue closing at significant scale. HPS Investment Partners and Blue Owl are providing $1.2 billion for GTCR’s SimpliSafe acquisition at 5 percentage points over benchmark with seven-year maturity, according to people familiar with the transaction.

According to Bloomberg reporting, Clearlake Capital and TA Associates are in preliminary talks for a $3.3 billion debt refinancing for Precisely Software, though conversations may not lead to a deal. The discussions demonstrate continued appetite for large-scale private credit transactions.

According to market participants, private credit firms continue winning deals against banks, with direct lenders recently securing financing for Warburg Pincus’s $3.6 billion Park Place Technologies acquisition and multiple refinancing transactions.

Competitive Dynamics

According to industry observations, direct lenders maintain advantages in speed and execution certainty despite pricing pressures. However, the bank refinancing trend suggests these advantages may not justify cost premiums indefinitely.

Deals of Note

• SimpliSafe - $1.2B unitranche from HPS and Blue Owl for GTCR buyout at 5% over benchmark

• VFS Global - $2B bank refinancing to escape Apollo private credit debt

• Precisely Software - $3.3B potential private credit refinancing under discussion

• Australian Funds - A$267M combined stop orders by ASIC for retail unsuitability

• BDC Losses - $1B+ realized losses in Q2, highest since pandemic

Forward Outlook

• Maturity wall of $170 billion over two years tests refinancing capacity

• Regulatory scrutiny intensifies globally as retail exposure grows

• Bank refinancing trend accelerates as private credit pricing advantages erode

• PIK usage creates cash flow mismatches and liquidity pressure

• Investment-grade expansion requires bank partnerships rather than direct competition

• BDC structure faces fee alignment criticism and leverage concerns

• Credit losses likely to rise from historically suppressed levels

Final Takeaway

Private credit’s moment of reckoning has arrived. Bank of America’s warning about $1 billion in realized losses and $170 billion in upcoming maturities isn’t theoretical anymore, it’s mathematical. With 17% of deals maturing in two years and bad PIK arrangements representing 53% of payment deferrals, the industry faces its first real stress test since inception.

BDC structural problems identified by the Financial Times analysis reveal dangerous incentive misalignments. According to the investigation, managers earn fees regardless of credit outcomes while tax requirements force cash distributions even when income comes from unpaid PIK accruals. The structure works until it doesn’t.

According to Lincoln International data, the shadow default rate including payment deferrals and amendments reached 6% in Q2, quintupling traditional default metrics. PIK usage proliferation indicates widespread borrower stress rather than strategic financing, creating liquidity time bombs across the industry.

Private credit’s $1.7 trillion scale means systemic implications extend beyond individual funds or managers. According to Federal Reserve analysis, interconnectedness with banking systems through credit facilities and origination partnerships could transmit stress across financial markets. The $56 billion in BDC bank commitments may seem manageable, but rapid drawdowns during stress could overwhelm capacity.

Market leadership now requires acknowledging limitations, managing stress proactively, and preparing for normalized credit cycles rather than perpetual growth assumptions. The industry’s next phase depends on surviving the maturity wall, regulatory scrutiny, and competitive pressure from banks offering superior pricing without sacrificing relationship advantages that originally defined private credit’s value proposition.