PRIVATE CREDIT FACES STRAIN AS BORROWING COSTS EDGE HIGHER / THE FINANCIAL TIMES

Private credit faces strain as borrowing costs edge higher

Bond investors and banks are seeking greater premiums on new financing as a precaution before lending

Eric Platt, Michelle Chan and Jill R Shah in New York

Rising borrowing costs have coincided with a decline in bond sales by flagship private credit funds as the vehicles look to other funding sources © Olga Fedorova/EPA/Shutterstock

Private credit funds are getting squeezed by higher borrowing costs, with banks tightening terms on the leverage they provide and investors demanding higher payouts before they lend to the industry.

The premium debt investors demand to lend to private credit funds has risen 0.34 percentage points since the start of the year and is up 0.83 percentage points since the beginning of 2025, amid concerns over the credit quality of the industry’s investment portfolios, according to JPMorgan Chase.

The rising costs have coincided with a decline in bond sales by flagship private credit funds, as the vehicles look to other funding sources to minimise their borrowing costs. 

They are also facing higher costs when borrowing from traditional banks, as Wall Street lenders take a more conservative approach to financing the $2tn industry.

Private credit funds have faced a surge in redemption requests from wealthy investors, with the industry facing questions about the health of the loans they underwrote. 

The scrutiny has been most intense over lending provided to private equity-backed technology companies, whose businesses could be hard hit by AI.

“At the margin, the banks are tightening terms on private credit,” Benjamin Hunsaker, a portfolio manager at Beach Point Capital, said.

So-called business development companies — funds that invest in private credit — sold about $6.8bn of bonds in the first quarter of 2026, down nearly 22 per cent from the same period last year and about 36 per cent from 2024, the JPMorgan data shows.

While the interest rate premium on BDC bonds compared to Treasuries has started to fall this month, some of the funds have opted to sell bonds with shorter maturities to help alleviate their interest burdens.

In an unusual move, a Blue Owl private credit fund sold $400mn of investment-grade bonds that mature in two years in a bilateral deal with Pimco last week, instead of marketing it to a broad group of investors, according to people familiar with the matter.

The arrangement, which is more common in the junk bond market, “is done in a way to reduce risks” for execution, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.

Pimco and Blue Owl declined to comment.

Goldman Sachs Private Credit also borrowed $750mn in debt markets last week, agreeing to pay a floating rate 2.55 percentage points above US Treasuries. 

That underscored the premium investors demand to lend to private credit funds; spreads on corporate debt with similar triple-B ratings are less than half that rate, according to Ice BofA Indices.

Brian Kennedy, portfolio manager at Loomis, Sayles & Company, said the economics still do not compensate for the risks presented by the sector.

“We are staying away from BDCs,” Kennedy said.

At the same time, the banks that have provided hundreds of billions of dollars of lending commitments to the funds have started to charge more for new credit facilities, according to people briefed on the matter.

Those facilities are critical to how private credit funds finance themselves, allowing them to borrow against the loans they provide to companies and private equity groups, which in turn amplifies the fund’s returns. 

The FT earlier this year reported on JPMorgan’s decision to tighten some of its financing terms to the industry.

Hunsaker added that investor due diligence on new bond deals had intensified as asset managers looked to better understand the loans in private credit funds.

“You are not just buying a rating,” he said. 

“Now it is three weeks of investors underwriting the sectors and the names . . . and if you have a position marked at 92 cents on the dollar but someone else has it marked at 86, they want to talk to the deal team.”

Hunsaker said many firms were instead pivoting to structured credit markets, where ample demand from insurers and other investors was suppressing borrowing costs.

Private credit funds typically borrow capital from banks and insurers. 

They also tap investors for capital through the investment-grade bond market and structured vehicles — known as collateralised loan obligations (CLOs) — where they can raise dedicated capital against the loans they manage.

The funds often look to have a mix of the three types of borrowings, with major rating agencies including S&P Global and Moody’s looking for a diversity of funding sources as a metric to gauge creditworthiness.

The structured notes, which are secured by private credit loans, are a cheaper financing source than unsecured bonds, which lack security rights.

Private credit funds have raised capital through such structured notes “more frequently due to the cost dynamic”, according to Rory Callagy, a Moody’s analyst.

Blackstone raised roughly $450mn for its flagship private credit fund through a new CLO in late March, with the triple-A bonds priced with a yield 1.28 percentage points over the floating-rate benchmark. 

In a move to boost investor confidence, the deal also provided a rare static structure that prevented the manager from trading the underlying assets.

The deal attracted strong demand from lenders, with Blackstone ultimately increasing the size by $50mn and cutting its borrowing rate from levels initially marketed, a person familiar with the capital raising said.