Private Debt News Weekly Issue #69: Default Denial, Investment-Grade Dreams, and the Bank Comeback
Stable default rates mask payment deferrals while private credit chases blue-chip deals and banks reclaim $20 billion in M&A financing
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Private credit is playing an elaborate shell game with defaults, and the numbers are starting to tell the real story. While Fitch reported default rates holding steady at 5.2% in August, the composition reveals a troubling truth: 59% of defaults now stem from payment deferrals and PIK elections rather than actual bankruptcies, which account for just 7% of failures.
Meanwhile, the industry gathered in Paris this week to discuss its next act: muscling into investment-grade lending to blue-chip companies. According to Apollo’s estimates, this expansion could catapult the market from $1.7 trillion to $40 trillion. Blackstone demonstrated the model with a $7 billion LNG infrastructure deal that packages equity investments as privately-rated notes for credit funds.
But traditional banks are fighting back hard. Wall Street firms are arranging over $20 billion in M&A debt, offering borrowing costs at multi-year lows thanks to 160 new CLO funds hungry for assets. Companies like VFS Global are fleeing private credit entirely, seeking $2 billion in bank financing to escape Apollo’s higher-cost unitranche debt.
Private credit CLO issuance is set to hit a record $50 billion this year, while Blue Owl agreed to purchase $7 billion of PayPal’s buy-now-pay-later loans. Apollo launched European wealth funds with €10,000 minimums, chasing retail capital as institutional demand shows signs of saturation.
The industry faces a classic growth dilemma: expand into new markets while defending existing turf against resurgent bank competition.
Key Market Themes
1. Default Statistics Hide Deteriorating Credit Quality
Fitch Ratings reported private credit default rates held steady at 5.2% in August across 1,200 tracked borrowers, but the underlying composition reveals concerning trends. According to the rating agency’s analysis, 59% of the 74 defaults over the trailing twelve months stemmed from payment deferrals and PIK elections, while traditional bankruptcies represented just 7% of failures.
Of the nine default events recorded in August, five cases involved interest deferrals, with additional out-of-court restructurings and stressed maturity extensions, according to Fitch’s monthly report. The subset of 300 privately-issued loans rated by Fitch showed default rates declining to 8.4% from 9.2% in July, suggesting some improvement in higher-quality paper.
However, the prevalence of payment deferrals over formal bankruptcy proceedings indicates widespread liquidity stress being managed through financial engineering rather than fundamental business improvement, according to market observers familiar with restructuring trends.
Credit Quality Reality
According to industry analysis, the shift from bankruptcy defaults to payment deferrals suggests borrowers and lenders are collaborating to avoid triggering formal default events while maintaining the fiction of performing assets. The 59% deferral rate indicates systemic cash flow problems across private credit portfolios.
2. Investment-Grade Expansion Dominates Industry Strategy
Private credit executives gathered at the IPEM conference in Paris focused heavily on expanding into investment-grade lending to blue-chip companies, viewing this as the next major growth frontier. According to Daniel Leiter, Blackstone’s international head of credit and insurance, “investment-grade private credit is the new topic all investors have been asking us about today.”
Apollo’s estimates suggest expanding to investment-grade firms could grow the industry to $40 trillion from the current $1.7 trillion, according to conference discussions. Major deals like Apollo’s $11 billion Intel transaction and Pimco and Blue Owl’s $29 billion Meta data center financing demonstrate the potential scale.
However, competition with traditional bank financing remains intense, as investment-grade companies have historically relied on cheaper bank credit and public bond markets, according to industry participants. According to Ares Management’s Matthew Theodorakis, competing against leveraged loan markets on pricing alone is challenging for debt funds.
Strategic Challenges
According to conference attendees, the investment-grade push faces fundamental obstacles including price competition from banks, borrower familiarity with traditional financing, and regulatory advantages that banks maintain in serving large corporate clients. The $40 trillion opportunity may prove more theoretical than practical.
3. Infrastructure Deals Blur Debt-Equity Lines
Blackstone’s $7 billion investment in a Texas LNG export facility demonstrates how private credit firms are structuring equity investments as debt instruments to fit within credit fund mandates. According to people familiar with the transaction, Blackstone plans to repackage the financing into senior and junior notes that can be privately rated and housed in credit funds.
The structure involves acquiring a 49.9% equity interest in Sempra’s Port Arthur expansion project, then creating notes backed by 30-year customer contracts with investment-grade counterparties, according to market sources. Partners including KKR, Apollo, and Goldman Sachs participate in the transaction alongside Blackstone.
According to Matthew Einbinder of Simpson Thacher & Bartlett, these deals allow “mega-sponsors to take down massive multibillion-dollar deals by allocating them to different funds” while providing borrowers with longer-term capital that doesn’t require refinancing every five years like traditional bank loans.
Structural Innovation
According to Moody’s warnings, these hybrid structures “typically do not improve credit quality for companies struggling to deleverage,” suggesting the arrangements benefit private credit firms more than borrowers. The equity-to-debt repackaging allows managers to deploy capital while maintaining the fiction of credit investing.
4. CLO Securitization Boom Reaches Record Pace
Private credit CLO issuance is set to reach an all-time high of $50 billion this year, surpassing last year’s record by more than 25%, according to Bank of America data. Firms including Blackstone, Apollo, Golub Capital, and Blue Owl are selling bonds backed by private credit loans at the fastest pace on record.
According to Bank of America’s research, private credit CLOs now represent 18% of the overall private credit market, with expectations to reach 25% over the next two to three years. The $30 billion sold year-to-date already exceeds previous annual volumes, driven by investor demand for higher-yielding structured products.
However, spreads between private credit CLOs and traditional broadly syndicated loan CLOs have compressed to historic lows of 20-25 basis points, according to Bank of America analysis. According to Victoria Chant of Blackstone Credit & Insurance, the market has become “intelligent faster than expected” with broader understanding of structural differences.
Market Maturation
According to Seth Painter of Antares Capital, which reset a $1.5 billion middle-market CLO last Friday, “private credit CLOs are surging because private credit is surging,” but the spread compression suggests diminishing risk premiums for complexity and illiquidity relative to traditional CLOs.
5. European Wealth Expansion Accelerates
Apollo launched three new European funds targeting wealthy individual investors with €10,000 minimum investments and monthly subscription opportunities, according to Véronique Fournier, Apollo’s head of EMEA wealth distribution. The funds offer exposure to European private credit, global diversified credit, and private markets secondaries with quarterly redemption limits of 5%.
The launch follows regulatory changes under ELTIF 2.0 that removed minimum investment requirements while offering more liquidity than traditional closed-end structures, according to European securities authorities. According to ESMA data, ELTIF fund approvals jumped significantly after the 2023 regulatory reforms.
Competitors including Blackstone’s ECRED with €2.7 billion in assets and Ares’ European Strategic Income Fund with €4.6 billion are also pursuing European wealth capital, according to firms’ latest disclosures. According to Apollo’s estimates, there’s a $15 trillion opportunity across Europe and the Middle East for household assets.
Distribution Race
According to market observers, the European wealth expansion represents both opportunity and desperation as institutional appetite shows signs of saturation. The €10,000 minimums and 5% quarterly redemption caps create structural liquidity risks if retail investors become dissatisfied with returns or transparency.
6. Banks Reclaim M&A Financing Market Share
Wall Street banks are arranging over $20 billion in M&A debt as deal activity revives and competitive advantages over private credit reemerge, according to Bloomberg calculations. JPMorgan, Goldman Sachs, and Citigroup secured mandates from KKR, Advent International, and other major private equity firms in recent weeks.
According to Daniel Rudnicki Schlumberger, JPMorgan’s head of leveraged finance for EMEA, the bank is eyeing a $25 billion pipeline of debt deals currently. The creation of approximately 160 new CLO funds has driven borrowing costs to multi-year lows, allowing banks to offer cheaper rates than private credit firms.
Single B term loans are currently priced at spreads in the low-to-mid 300 basis points, compared with 400 basis points in April following Trump’s tariff announcements, according to Bloomberg data. According to Jeremy Burton of Pinebridge Investments, “the main advantage is that it’s cheaper than private credit” in the broadly syndicated market.
Competitive Reversal
According to Michael Craig of Invesco, “you have seen companies actively pivot between the direct lending market and the syndicated loan market, particularly among larger borrowers.” The VFS Global example of seeking $2 billion in bank financing to replace Apollo debt demonstrates the trend’s acceleration.
Deals of Note
Blackstone LNG - $7B Texas infrastructure investment structured as privately-rated notes
Blue Owl/PayPal - $7B buy-now-pay-later loan purchase over two years
Wall Street M&A - $20B+ bank financing pipeline including Zentiva, Spectris, and Dayforce deals
Private Credit CLOs - $50B projected issuance for 2025, up 25% from record 2024
Apollo European Funds - Three new wealth vehicles with €10,000 minimums
Forward Outlook
Default composition shift toward payment deferrals rather than bankruptcies continues
Investment-grade expansion faces pricing competition from traditional bank markets
Infrastructure deals proliferate using equity-to-debt repackaging structures
CLO securitization growth accelerates despite spread compression warnings
European wealth capital becomes increasingly competitive battleground
Bank financing resurgence threatens private credit’s large-deal market share
Consumer credit expansion provides new deployment opportunities beyond commercial lending
Final Takeaway
Private credit’s 5.2% default rate stability masks a fundamental shift in how defaults manifest, with 59% now involving payment deferrals rather than traditional bankruptcies. This evolution suggests the industry has become adept at managing optics while underlying credit quality deteriorates through financial engineering rather than business improvement.
The Paris conference’s focus on $40 trillion investment-grade opportunities reveals both ambition and desperation as traditional middle-market lending faces saturation and competition. According to Apollo’s own estimates, the expansion represents a 23x market increase, but requires competing directly with banks that maintain structural advantages in serving blue-chip clients.
Private credit CLO issuance reaching $50 billion indicates the industry’s securitization dependence, but spread compression to 20-25 basis points over traditional CLOs suggests diminishing risk premiums for complexity and illiquidity. According to Bank of America projections, CLOs will finance 25% of private credit within three years.
Wall Street’s $20 billion M&A financing pipeline and 160 new CLO funds demonstrate traditional banking’s resurgence. The VFS Global defection from Apollo debt to seek $2 billion in bank financing exemplifies how quickly borrowers abandon private credit when alternatives offer superior pricing.
The fundamental tension remains between growth imperatives and competitive realities. Private credit must expand into new markets to justify continued capital raising, but each expansion brings direct competition with established players offering superior economics. The industry’s next phase depends on successfully executing these market expansions while defending existing franchise value against resurgent bank competition and evolving borrower preferences.