Private credit strains as $100 oil meets climbing Treasury yields

Bloomberg described the private credit structure as a Jenga tower teetering as Treasuries climb, with a sweeping selloff raising questions about the risk and reward on offer in direct lending¹. Oil’s return above $100 is raising input-cost and inflation risks for leveraged private credit borrowers, and refinancing risk has been rising with it².

Stress is concentrated at the bottom of the market. It has risen sharply among the smallest borrowers, although across the wider private credit market defaults represented just 0.8 per cent of outstanding loan principal and 2.5 per cent of borrowers⁴.

Listed vehicles are showing it first. Credit stress is building among business development companies as non-accruals climb, in vehicles that carry credit, valuation and leverage risks alongside their private credit exposure⁵. Receiverships jumped 71 per cent as private credit tightened its grip on distressed projects⁷.

Why it matters to investors

The two pressures compound. Borrowers that took floating-rate loans face a higher benchmark as Treasury yields climb¹, while the same companies absorb higher energy input costs². Refinancing into that combination is materially more expensive than the terms originally underwritten.

The redemption data is not pointing the same way everywhere, and that disagreement is worth noting. Reuters reported that withdrawal requests at BlackRock’s flagship private credit fund fell in the third quarter³. Fitch, cited by Connect Money, reported that second-quarter withdrawal requests increased at a number of vehicles⁵.

Headline default rates remain low⁴, which is the argument for calm. The counter-argument is that non-accruals are a leading indicator and are rising⁵, and that reported defaults lag the refinancing dates at which stress is actually realised².

What to watch

The maturity wall is the contested point. PGIM’s credit co-chief investment officer called the coming maturity wall a fake flag, arguing the concern is overstated⁶. The test of that view is whether refinancing risk, already described as rising, converts into defaults as deals come due².

Second, watch the gap between the smallest borrowers, where stress has risen sharply, and the market-wide default rate that remains below one per cent of principal⁴. A widening gap would indicate the problem is being contained; a converging one would not.

Third, watch quarterly redemption disclosures, given the conflicting readings already on the record^3,5, and the non-accrual trend at listed lenders as the cleanest public window into private books⁵.