Moody’s: Rising complexity in private credit could amplify risks
Private debt structures are becoming increasingly complex, which can present new risks around transparency and refinancing, Moody’s Ratings has warned.
The ratings agency said the rapid expansion of the $3tn (£2.3tn) private credit market has driven the use of strategic partnerships, hybrid funds and different structures. While these innovations support private credit growth, they also introduce more complexity and interconnections that “transfer or amplify risk in novel ways,” Moody’s said.
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One area of concern is the rise of hybrid funds combining illiquid private credit assets with liquid securities such as government bonds. These vehicles often include withdrawal limits to manage outflows, with payment-in-kind (PIK) debt also becoming more common. While PIK toggles can support borrower flexibility, they may also increase refinancing risk, Moody’s said.
Interlinkages between private credit funds, banks and insurers are also deepening, the ratings agency noted. These structures can spread losses across the system: a borrower default could hit subordinated tranches held by private credit funds while also forcing write-downs on senior bank exposures. The risk is magnified when funds rely on bank-provided credit lines such as net asset value facilities.
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Moody’s also noted an increase in covenant-lite structures, particularly in refinancings and sponsor-backed deals. The “erosion” of covenant protection is credit-negative for lenders, and the overall opacity of the market means weaker early-warning indicators and potentially lower recoveries in distress scenarios.
Recent events have underscored these concerns, said Moody’s. The bankruptcy of US auto-parts supplier First Brands Group revealed more than $10bn in liabilities, including $2.3bn in opaque short-term financing, highlighting the dangers of growing structural complexity in the sector.
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