The cracks in the $3 trillion private credit market are officially widening.
According to a new report from MSCI, the era of “higher for longer” rates is finally taking its toll on borrower resilience, leading to a sharp spike in portfolio distress.
📉 THE DATA OF DISTRESS:
- The Trend: The rate of senior loan writedowns has tripled since interest rates began surging in 2022.
- The Threshold: Writedowns of >20% (MSCI’s proxy for distress) are becoming common.
- The Severity: Crucially, more than 5% of senior loans have now experienced massive 50% writedowns, indicating deep impairment.
⚠️ “CIRCLING THE DRAIN”: MSCI’s report uses stark language to describe the shift from “mark-to-model” stability to “restructuring” reality.
“These more aggressive markdowns suggest an increasing number of loans are circling the drain, sliding toward restructuring — the point where debt holders risk becoming equity holders.”
🛡️ THE CUSHION (FOR NOW): Despite the rising impairments, the asset class remains net-positive. The high current income generated by floating-rate structures is presently sufficient to compensate for these credit losses. However, the “drumbeat of bankruptcy news” is getting louder, suggesting the margin for error is thinning.
💡 ANALYST TAKEAWAY: This is the stress test the market has been waiting for. For the last decade, private credit defaults were remarkably low. The tripling of writedowns signals that the “Vintage Risk” is real: deals underwritten in 2021/2022 are struggling to service 2025/2026 debt costs. Expect the next 12 months to be defined by Liability Management Exercises (LMEs) as lenders are forced to swap debt for equity to salvage value.
👇 Credit PMs: Are you seeing these 20%+ marks in your own books, or is this distress concentrated in specific vintage years?