US private credit default rate hits a record 6.3%

The default rate for US private credit over the trailing 12 months rose to 6.3% in August, a historic high, according to a Fitch Ratings report¹. The same record was reported alongside news that KKR’s private high-grade debt deals have surged to $80 billion this year².

Supervisors are responding. The European Securities and Markets Authority warned that risks in the US private credit market could increasingly affect European investors³. In the United States, Senator Elizabeth Warren asked the National Association of Insurance Commissioners how it oversees insurers’ private assets, saying Congress needs to know how it can mitigate the risks private credit poses to insurance markets and policyholders⁷.

Why it matters to investors

The asset class has grown fastest inside vehicles that are not covered by bank capital rules, and those rules are not relevant to private credit, which sits outside the prudential regulator’s perimeter in Australia⁸. That is the structural point underneath the default number: the losses land with end investors rather than with supervised lenders^7,8.

Managers themselves are flagging complacency. A review by Longwave, which manages approximately $4 billion, found a surprisingly sanguine industry underestimating risks to property developers^4,5. Property development exposure is the specific concern that review raised, and it sits in the same portfolios that have been marketed on steady income⁴.

What to watch

The first thing to track is whether the default rate keeps climbing from its record, because a trailing measure turns slowly and reflects deals struck when financing was cheaper¹. A commentary described the sector as prone to boom and bust and the current damage as a case of poor risk management, drama waiting for a crisis rather than a crisis yet⁶.

Two readings of the same record sit side by side. One is that this is a normal turn in a cycle the asset class has never been through, an industry prone to boom and bust now showing poor risk management⁶. The other is that the risk has been distributed to holders who sit outside bank capital rules, which is the concern supervisors have taken up in Europe and in the US insurance system^3,7,8.

The second is where the exposure sits. Insurance balance sheets are the specific concern raised with the state regulators’ body⁷, while European allocators have been told the American market is the source of the risk³. Against that, the largest managers report the business is still growing, with high-grade private deals reaching $80 billion this year at one firm alone².