美国企业信用风险：已转移而非消除

Ludovicsubran

chiefInvestmentofficerandchiefEconomist

ludovic.subran@allianz.com

ziqiye

Investmentstrategistziqi.ye@allianz.com

AmericaHernandezortiz

seniorInvestmentstrategist

america.hernandez@

pierpaoloFiore

Researchassistant

pierpaolo.fiore@allianz.com

Insummary

•uscreditlookscalmonthesurface-spreadstight,headlinegrowthcheerful-buttheriskhassimplymigrated·Investmentgrade(IG),highyield(HY)andprivatecreditareonecontinuousrisk-transferchainandateverylinkpricehasdecoupledfromfundamentalsthroughadifferentmechanism:spreadcompressioninIG,weakestlinksbypassingpublicHyandnetassetvalue(NAV)smoothinginprivatecredit.

•softenedfundamentalsandfallen-angelriskexposeupto1/3ofspread·UsIGspreadssitat~75bpstighterthantheirpre-Iran-warlevelevenascreditqualityhassoftened(interestcoverage~6.3x,netleverage~2.7x),heldtightbyprice-insensitiveall-in-yielddemandratherthanbyfundamentals.ThespecificdangersitsatthebottomofIG:afallen-angeldowngradeforcesindex-constrainedholderstosellintoasmaller,lessliquidHymarket,producingspreadmovesthatfarexceedthechangeincreditquality.Instresscaselike2020,downgradeseroded25bpsofexcessreturn,whichwouldbeequivalentto~1/3ofcurrentspread·Thenetupgraderatehasrunbelowzeroforroughlythreeyearsandactualfallenangelsaretickingup,withhistoricallytightspreadsleavingnocushiontoabsorbtheloss.

•HYOffersamoredefensiverisk/rewardprofilethanBBB-butlargelyduetoacompositioneffectsastheweakestnameshavemigratedouttoprivatecredit.Hyleverage(~3.8x)andcoverage(2.8x)haveheldfirmerthanadeterioratingBBB,helpedbyshorterduration(3yrvs7yrforIG)andacleanerindex(BBnow>50%,cccneara20-yearlow).Butmuchofthatstrengthisacompositioneffect:theweakestborrowershavemigratedouttoleveragedloansandprivatecredit.Theriskwasnotremoveditwasrelocated.

•Thesamedecouplingrunsquietlyunderneathprivatecredit,viaNAvsmoothing.Themigratedborrowersarestructurallyweaker(leverage57x,coverage12x),andbecausepositionsareappraisal-valued,NAvsstaysmoothwhilecoverageerodes.stressthereforesurfacesnotinpricebutintheplumbing:paymnent-In-kindhasroughlydoubledto8.9%ofinterestincomefroma4.3%troughinearly2023,andlendertakeoversreachedusD39.4bnacross2025-26-aboutthreetimesthepriorthreeyearscombined,thoughstilllowsingledigitsagainsta~USD1.75trnbook.Thefallen-angelanaloghereisagateorrestructuring,notadowngradelumpyanddeferredconcentratedinsoftware/Al-exposednames(~25%ofportfolios)andthe2021-23vintage.

•Forinvestors,carryrewardsholdingbutrequiresselectivityasvulnerabilitiesconcentrateinthelower-ratedbucketsBBBinIG,cccinHY,andthe2021-23private-creditvintage.All-inusDIGyieldsnear5.2%canlargelyoffseta3050bpsspreadwidening,whilethepureexcessreturnoffersonlyathincushionfor10bpswideningbasicallyatthemercyofnormalvolatility·

•Aboveall,inastresseventtheriskthatleftpublicHycanreturntoit.crowdedprivate-creditpositionsarehardtoexitquickly,sowheninvestorsneedtode-risktheysellthemostliquidinstrumentfirstpublicHYregardlessofitsownfundamentals.publicHythereforebecomestheinvoluntaryshockabsorber,anditsspreadswidenasaliquidityandbasiseffectratherthanacredit-qualityone.

2

Thedecouplingoffundamentalsandprice

Uscorporatecredithasshownextraordinaryresiliencein2026,butthereisanuncomfortabletruthlyingbeneaththecalmsurface,spreadsofnon-financialcorporatescurrentlysitat73bps-12bpstighterthantheirpre-warlevel.Evenattheheightofwartimefearsthewideningwasstrikinglycontained,peakingatjust92bps,only12bpsabovewheretheyearbegan(Figure1).yetstrongQ1earningshavenottranslatedintostrongercreditquality.Revenuegrowthinthecredituniverseisnotasstrongasinequitybecauseofsectorcompositionslowertechexposurebuthigherutilityexposureincreditthanequity(Figure2).Andatthebalance-sheetlevel,EBITDAgrowthhasnotdeliveredthelowerleverageorhigherinterestcoveragethatultimatelydetermineanissuer'scapacitytoserviceitsdebtcoveragegaugeshoweasilyearningscoverinterestpayments(higherissafer),andleveragemeasuresdebtrelativetoearnings(lowerissafer)·

Theoperativetransmissionmechanismbetweenrevenuegrowthanddebt-servicecapacityrunsthroughinterestcoverage(EBITDA/netinterestexpense),notEBITDAinisolation.sincetheusFederalReservestarteditstighteningcycleinearly2022,thecostofrefinancinglegacyfixed-ratedebthasrisensharply,andtheprogressive

Asaconsequence,medianEBITDAinterestcoverageforusinvestment-9radecorporatesfelltoroughly6.3xbyQ22024andhashoveredaroundthatleveleversince(Figure3).Takeninisolationthedeclinelooksbenigncoverdgestoodat6.6xinQ42019,thepre-covidbenchmark-butthecomparisonispreciselythepoint:nlate2019,withtheFedfundstargetat1.75%andcoverageessentiallywhereitsitstoday,IGspreadstradedaround110bps,fully40bpswiderthanthecurrent73bps,Investorsarethereforeacceptinglesscompensationforabroadlycomparableleveloffundamentalcreditquality·Meanwhile,netleveragenetdebt/EBITDAhasrisenmodestlybutsteadilyacrosstheIGUniversefromroughly2.5xnetdebt/EBITDAin2022toabout2.7xtodayreflectingacautiousre-leveragingthatEBITDAgrowthhasonlypartlyoffset·

Figure1:uscreditspreadsatahistoricallow

400

350

300

250

200

150

100

50

USCorporateIGspreadUSHYspread(RHS)

1617171819202021222323242526

1000

900

800

700

600

500

400

300

200

sources:LSEGDatastream,AllianzResearch

3

Figure2:credithaslowertechexposurebuthigherenergyandutilitiesexposu「ecompAredtoequity

Utilities

FinancialsIndustrials

HealthCare

CommunicationServicesConsumerStaples

InformationTechnologyEnergy

ConsumerDiscretionary100

80

%ofindex

60

40

20

0

Credit(CF0Xnon-fin)Equity(MSCIUSA)

sources:Bloomberg,AllianzResearch

Figure3:USIGinterestcoverdgeratiosFigure4:USIGCreditnetleverogeratios

Trimmedmean(bottom/top10%),EBIT/Interestexpense,xTrimmedmean(bottom/top10%),Netdebt/EBITDA,x

10

9

8

7

6

5

201120142017202020232026

3,0

2,5

2,0

1,5

201120142017202020232026

sources:Bloomberg,AllianzResearch·

Theexplanationforthisdivergenceliesinthestructureofdemandforinvestment-gradecreditratherthaninanyfundamentalreappraisalofissuercreditworthiness.positivetechnicals-strongdemandandlimitednetsupplyhavedominatedspreadcompressionsince2023·Theresettohigherall-inyieldshasdrawnasteady,price-insensitivebidintoIGcreditfromyieldbuyerssuchasinsurers,pensionfundsandsovereignwealthvehicles·Atthesametime,heavygrossissuancehasbeenabsorbedbyalargematurityandredemptioncalendar,leavingnetsupplycontained.Together,thisdemand-supplyimbalancehasprovidedaconsistentbidthathascompressedtheriskpremiumwellbelowwhatfundamentalsalonewouldjustify.

Lookingahead,EBITDAgrowthisthekeytocreditmetrics.TheFedshowslittlesignofeasingsoonsointerest-expensepressureisunlikelytofade.Higherrateshavenotyetfullyfedthroughandaslegacydebtrefinancesattoday'scoupons,grossinterestexpensecanhardlydrop.weexpectleveragetodriftmodestlyhigherevenCsspreadstradeattheirmostcompressedlevels,drivenbyAl-relatedcapitalexpenditure,theM&Acycleboomand

climbfurther·providedEBITDAgrowthcontinuestooffsettherisinginterestburdenourbasecasethese

4

pressureswillremainmanageable.However,slowergrowthandgrowingdebtloadscoincidingwouldmeangradualdeteriorationincreditmetrics·

Figure5:Expectedhyperscalercopex

897

1000GoogleAmazonMeta971

MicrosoftOracle

693

800

600

400379

200

0

20252026E2027E2028E

themismatchbetweenpricingandfundamentalsandthatgaprestsontechnicalsupportratherthanonanygenuinestrengtheningofcreditquality.ThosetechnicalsarelessdurablenetsupplylookssettoriseasAl-

relatedcapitalexpenditureandhyperscalerissuanceaccelerate,whiletheyield-driveninflowsareprice-sensitiveatthemarginandcouldreversequicklyiftherateoutlookshifts.Beyondvaluationrisk,thedowngraderisk

triggeredbyfundamentaldeteriorationshouldalsonotbeoverlookedbycreditinvestors.

Thefallenangelrisk

individual-issuerlevel-anditisconcentratedatthebottomoftheinvestment-gradeladder,intheBBBsegment,whereso-called'fallenangels'areborn.Afallenangelisanissuerdowngradedfrominvestmentgradeintohighyieldanditsmarketimpactisdeterminednotsolelybythechangeincreditqualitybutbythemechanical

sequenceistriggered:

1)lnvestment-grade-constrainedmandatesesp.ETFsandindex-orientedmandatesarerequiredoratleaststronglyincentivizedbytrackingerrortoreduceexposuretothedowngradedsecurities,oftenwithinacontractuallyspecifiedwindow·Thiscreatesasupplyofforcedsellerswithnopricesensitivityonthedownside.

2)Thehigh-yieldmarket,whichoperateswithasmallerassetbaseandlowermarginalliquiditythantheIGmarket,isrequiredtoabsorbanissuerwhosenotionalsizetypicallyexceedsthecapacityofthenaturalHYbuyerbasetodigestinanorderlymanner.Thesupplyshockproducesspread-wideninginthereceivingmarketthatexceedsfundamentalrepricing.

3)oncefallenangelsbegintooutpacerisingstars,thecumulativeforcedsellingerodesthecQrrythatanchorsinvestment-gradeportfoliosandinterruptsthehold-to-maturitylogicunderpinningmuchoftheIGbid-ashiftcapableofturningthebroaderspreadcycle.

Thismechanismmakesthespreadadjustmentfarexceedtheunderlyingchangeincreditqualitywhichispreciselywhyfallen-angelriskhasbecomealeadingsourceofidiosyncraticlossandapersistentalphachallengeforinvestment-grade-mandatedassetmanagers.Theeffectismaterialinseveredowngradeperiodslikein2020:Lossesfromdowngradeseroded25bpsfromtheexpectedexcessreturn·BBB-rateddebtconstitutesapproximately45%oftheinvestment-gradeuniversebynotionalvalue.ThisconcentrationmagnifiesthesystemicimpactofanyBBBdeterioration,makingthesegmentworthwatchingnow.

5

Figure6:usfallen-angeldebt:actualvspotential(USDbn,quarterly)

$250

$200

$150

$100

$50

$0

ActualPotential

20212022202320242025

sources:Bloomberg,AllianzResearch

Thefallen-angelwavepeakedinthefirstandsecondquartersof2025sothepoolofpotentialcandidatesanddebthasbeenshrinking(Figure6Thedowngradetrendhasslowedbutnotturnedyet:ThenetupgraderateforUSIGnon-financialissuershasrunbelowzeroforroughlythreeyears(Figure7)andasthatpressurepersistsactualfallenangelshavebeentickinguprecently·Moody'scountedsixinthefirstquarterof2026,upfromthreelastquarter·Investorsshouldthereforenotoverlookfallen-angelriskparticularlywhenhistoricallytightspreadsleavenocushiontoabsorbthelossesadowngradebrings·onceslowerEBITDAgrowthmeetsahigherinterestburdenthepoolofissuerssittingclosetothecut-offwillgrowsharply.

Figure7:UsIGnon-financialissuersratingdrift(netupgraderate)

80%

50%

20%

-10%

-40%

-70%

-100%

20192020202120222023202420252026

sources:Bloomberg,AllianzResearch."Netupgraderate=(upgrade#Downgrade#)/Totalratingactions

Highyield:Thecounterintuitivebrightspot

whentheeconomyslows,Highyield(HY)isusuallythefirstcauseforconcern,withlowerratingsandhigherdefaultprobability.Butthatinstinctismisleadinginthiscycle.USHyactuallyoffersamoredefensiverisk/rewardprofile,especiallywhencomparedwiththeBBBsegment.AsshowninFigure8&9below,thetrajectoryofHYfundamentalshasheldmorefirmlythanBBB'soverthelastdecade·Figure8capturesthedivergenceinleverage:

Afterspikingthroughthe2020pandemicpeak,Hynetleveragefellsharplyfrom4.2xto3.6xandhassincere-leveragedonlymodestlyto3.8xasoflastquarter.Meanwhile,BBBleveragehasgroundsteadilyhigher,increasingfrom2.75xin2021to3.1xina12026.Theinterestcoveragetrajectorytellsasimilarstorybothpeakedin2022asratesclimbed,butHycoveragehasbroadlystabilizedat2.8xsince2024whileBBBcoveragehascontinuedtoslide.

Thereasonmightbestructural.HYissuersaresmallerfirmswithweakerfundamentals,sotheydeleveragedheavilythroughthepandemicandcautiouslyre-leveragedthereafterduetohighinterestrateenvironment.ThecautiouscapitalexpenseandlimitedfinancingaccesshasthereforeleftHycreditmetricsinarelativelygoodshape.

shortermaturitiesreinforcethecase,ThedurationoftheHyuniverseis3years,muchshorterthanIGpaper(sevenyears).shorterdurationmeanslesspricesensitivitysoforanygivenmoveinspreads,theirpricesfallbyless.shorter

refinanceorrepay,leavinglesstimeforfundamentalstodeterioratebeforethebondcomesdue.Together,thesefeaturescushionHyagainstthesharperspreadswingsthattoday'srateenvironmentcanproduce·

Figure8:ushighyieldnetleverQgevsBBB

TrimmedMean(Bottom/TOP10%)NetDebttoEBITDA

HighYieldBBB(rhs)

5,0

4,4

3,8

3,2

20172019202120232025

Figure9:highyieldinterestcoverogevsBBB

TrimmedMean(Bottom/TOP10%),EBITDA/Interestexpense

3,3

3,1

2,9

2,7

2,5

2,3

4,5

4,0

3,5

3,0

2,5

2,0

1,5

HighYieldBBB(rhs)

8

7

6

5

4

20172019202120232025

sources:Bloomberg,AllianzResearch

partoftheimprovementisalsoacompositioneffect:ThepublicHyindexhasbecomeacleaner,higher-qualityuniversebecausetheweakestmarginalborrowersareincreasinglymigratingtootheralternatives.BB-ratedissuersareover50%oftheusHymarketversusasingle-Bmajorityin2000,andtheccc-and-belowcohorthasshrunktoroughly10%,neara20-yearlow.Thismixisaresultofatwo-directionmigration·withtheratesshockin2022,netHyissuanceturnednegativeandclearlyskewedtowardhigher-ratedBBnames·Atthelowerend,weaker,moreleveredborrowershavelimitedmarketaccess,especiallyunderthehigher-interest-rateenvironment.Andtheyhavelargelymigratedintoleveragedloansandprivatecredit·withbothendsremoved,whatremainsisanarrowermiddlestructurallylessrepresentativeofbelowIGrisk.publicHyseesthebenefitofahigher-qualityindexmix,whileotherleveragedlendingareasinheritthecounterpartsmaller,morelevered,lessliquidborrowersdependentonsponsorsupport.Thatsaid,investshouldalsoremainrisk-aware:Highyieldisstillhighlysensitivetomacroshocksandindustrydisruption,whichhavehistoricallytriggeredmostcreditlosses.Threethingsareworthwatching:whethereconomicgrowthandinterestratesstayresilienthowAIdisruptionaffectsindividualbusinessesandwhetherinvestordemandforhighyieldholdsupaboveall,appetitefornewlyissuedbondsgiventhattoday'stightspreadsarehelddownbystrongdemandratherthanbygenuinelystrongerfundamentals.

Figure10:ushighyieldindexhasbecomeahigher-qualityuniverse,BBrepresentover50%oftheindex.

BBBCCC&lower

100%

75%

50%

25%

0%

1996200120062011201620212026

sources:Bloomberg,AllianzResearch

Theborrowersleavingpublichighyielddonotmovestraightintoprivatecredit.Leveragedloansarethe

cantransmitstressbackintoliquidmarketsandhighyieldtheliquidsleevesthat,atreducedallocations,wouldneedtogivewayfirsttokeeptheoverallportfoliowithinitsrisklimits.Forthatreason,aclosereadofprivate-creditdynamicsmattersevenforinvestorswhoholdnonedirectly.

privatecredit:wherethecreditwent

Theissuermigrationnarrativecarriesanimmediatecorollary:ifpublicHyhasbeencleansedofitsweakestborrowers,thoseborrowersdidnotdisappear,theyrelocated.Thatmarketisinpartprivatecredit;nowaUSD1.75trndirectlendingmarketwithafurtherusD315bnofinstitutionaldrypowder.TheanalyticalframeworksthatapplytopublicIGandHytranslatethereonlyimperfectly,andsometimesnotatall.

Thefirsttranslationdifficultyconcernstheassumptionofsizeseparation.privatecreditwasbuiltaroundastructuralgapofcompaniestoosmallortooidiosyncratictoaccesspublicsyndicatedmarkets,whereminimumdealsize,ratingrequirementsandinvestorbasebreadthcreateadefactofloor.Thedatastilbroadlyreflectsthisorigin.ThemedianprivatecreditborrowercarriesEBITDAofUSD30-50mn,roughlytentimessmallerthanthemedianHybondissuer(USD568mnEBITDA)orleveragedloanborrower(USD522nnEBITDA).Inthatrespect,the

theanalyticalframeworksgoverningpubliccreditmarketsapplytoitatmostbyanalogy.

Butthatcleanseparationhasbeenerodingsince2022andattheupperendofthemarket,ithasbrokendownmaterially.The2022ratesshockthatfrozethebroadlysyndicatedmarketforleveragedbuyout(LBO)financingforthebetterpartof18monthspushedlarge-capsponsorsintoprivatecreditastheonlyavailableexecutionroute

emergenceof"jumbo"directlendingbilateralorsmall-clubtransactionsprovidingdebtpackagesaboveusD1bn,aterritorypreviouslytheexclusivepreserveofsyndicatedfinance.Thatshifthasnotfullyunwound:BYQ12026,

third-partybuyoutsexceededusD1bn.

Thespreaddataconfirmshowfarthecompetitivefrontierhasmoved.uppermiddlemarketunitranchedeals(borrowerswithEBITDAaboveusD100mn)nowpriceatapproximately516bps,barelyabovewheretheystoodatyear-end2024,reflectingthearbitragecompressionthatoccurswhenprivatelendersandareopenedBSLmarketcompetedirectlyforthesametransactions.Bycontrast,sub-USD50mnEBITDAdeals,thecorehistoricalprivate

creditmarketpriceat505-511bpswithnoequivalentconvergencepressure,becausethesyndicatedmarkethasnostructuralinterestinthatsizetier.

samelabel.Thecoremiddlemarket—theusD30-100mnEBITDAborrowerforwhomdirectlendingwasdesignedremainsstructurallyseparatedfrompublicmarketsbysize.Theuppermiddlemarkettiersitsinactivecompetition

whatunifiesbothpopulations,andwhatmakesthetranslationfrompubliccreditframeworksgenuinelydifficultregardlessofborrowersizeistheabsenceofpricediscovery.Inpubliccredit,thegapbetweenmarketpricingandunderlyingfundamentalsislegibleinbasispoints.Inprivatecredit,itaccumulatesunderneathinamendmentactivity,paymentinkind,maturityextensionsandsponsorinfusions,bilateralandoutsideanymechanismthat

whatithasabsorbed.

Thecreditqualityunderneath

migrationnarrativeimplicitlyinvitescomparisonwith.Borrowersindirectlendingportfolioscarryleverageintherangeof57xandinterestcoverageof12x,placingthembroadlyinlinewithlowsingle-BtoCccpublicequivalents,notwiththeBB-heavyHyindexthatpublicmarketcompositiondatanowreflects.ThecomparisonthattheHysectiondrawsbetweenpublicHY's3.8xleverageandstable2.8xcoverageversusadeterioratingBBBuniversedoesnotcarryacrosstoprivatecredit,whosefundamentalstartingpointisconsiderablymorestretched.

Table1:Leverageandinterestcoverageacrossprivatecredit,leveragedloans,andhighyield(Q12026)

Debt/EBITDAEBITDA/InterestExpense

privatecredit

(asofQ12026)

FitchS&P

KBRA

Lincoln

International

5.9x

4.7x

5.2x

5.7x

7.3x

4.7x

5.2x

4.5x

4.3x

4.8x

5.2x

5.8x

2.0x

2.3x

2.1x

1.5x-2.7x

1.4x-2.3x

MSFundamentalDataset(publicFilers)Q12026

BSLBB

3.3x

3.4x

2.6x

5.2x

5.1x

4.2x-5.6x

BSLsingleB

4.2x

2.5x

1.4x-4.1x

BSLCCC

HYBB

1.4x

4.9x

5.6x

3.6x-9.9x

HysingleB

2.2x

5.4x

1.2x

3.6x

2.6x-5.4x

HYCCC

sppubliclyRated

universe(public+privateReporters)Q42025

B+

BFlatB-

CCC+

3.2x

2.3x

1.5x

source:Fitch,s&p,KBRA,LincolnInternationalvoG,Bloomberg,Factset,Morganstanley,AllianzResearch.

Note:FundamentaldataasofQ12026,exceptthedataonpubliccredit;theassetuniverseisnMorganstanleyFundamentoalDataset",thusthelevelsarenotdirectlycomparabletothecreditmetricswetalkedabove;"average(range)acrosssectors"refers

quorter.

Thetrajectorymattersasmuchasthelevel,outsidethesoftwaresector,privatecreditleveragehasbeenbroadly

2026agenuineimprovementfromthe1.52xrecordedatend-2023.TheaggregatepicturethereforeechoestheHYstoryinonerespect:cautiousre-leveragingaftertherateshock,withborrowersthatcouldnotrefinancehaving

largelyworkedthroughorexitedthesystem.Thepoolthatremainsis,onaverage,moreresilientthan2021-vintageunderwritingsuggesteditwouldbeatthispointintheratecycle.

Theconcentratedvulnerabilityissector-specificratherthanbroad,butwithwideningdispersionbearswatching·softwareandAl-exposedborrowersconstituteroughly25%ofaggregatedirectlendingportfoliosandtheircreditprofileismateriallyweakerthanthebroaderuniverse:medianleverageinthesoftwarecohortsitsatapproximately8.3xagainst7.0xforallprivatecreditsectors,withcashinterestcoverageofjust1.4x-thelowestofanymajorsectorinthes&pprivatecredituniverse.Thesenumberswereunderwritteninaworldofnear-zerorates

threatensboththeirrevenuevisibilityandtheirenterprisevalue,thelatterbeingtheprimaryleverthroughwhichsponsorsupportdecisionsaremade.

structuralmitigants:genuinebutlimited

relationshipsandfirst-liensecurity.Allthreegenuinelydifferentiatedirectlendingfrombroadlysyndicatedalternatives.Thedifferentiationhasprovenrealinthecurrentcyclebutitislessuniformthantheassetclass'spromotionalnarrativesuggests.

Recoveryratesillustratethepoint·structurally,directlending'ssmallerlendergroups,tighterdocumentationandout-of-courtresolutionpathwaysoughttosupportmeaningfullyhigherrecoveriesthanbroadlysyndicatedloans,

10ppsrecoverydifferentialbetweencovenantedandcovenant-litetermloansindefault.yetimpliedrecoveryfromBDcmarksatdefaultfor2025placeddirectlendingrecoveriesataround45centsonthedollar(KBRA)-8pointsbelowthecomparableBSLfigure-draggedlowerprincipallybythepIK-heavy,software-concentratedportfolioswheretheweakestunderlyingcreditscluster.Theforward-lookingprojectionfromMorganstanley-thatrecoveriesshouldriseto7080%ondirectlendingdefaultsoverthenext12-18months,drivenbyout-of-courtresolutionandstructuralprotectionsisplausible,butrestsontheassumptionthattheremainingstressisconcentratedinassetswherelendercontrolremainsmeaningful.IfAl-disruptiondefaultsinvolveimpairedenterprisevaluesratherthancash-flowshortfalls,thatstructuralleverageshrinksconsiderably.

covenantquality,too,hasbeenerodedintheupper-middlemarketsegmentspecifically.Ananalysisofover

headroomexceeding40%notbecausetheyhavedeleveraged,butbecausecovenantsweresetwideat

looseningstructuralprotectionsinpublicleveragedloans,concentratedintheusD500mn-plusdealsegmentwheredirectlenderscompetedmostaggressivelywiththeBSLmarket.Thecoremiddlemarketbroadly,borrowerswithEBITDAbelowusD50mnhasretainedtightercovenanttermsandgenuinelendercontrolanditisthissegmentthatinstitutionalinvestorsarenowrefocusingonasaconsequence.

Figure11:Loosemaintenancecovenantshavepermeatedtheprivatecreditmarket

60

50

(%)

40

30

20

10

0

56

52

44

40

35

29

19

2220

CoreMM(EBITDA$30mil.-$50mil.)

LowerMM(EBITDA

<$30mil.)

UpperMM(EBITDA

>$50mil.)

Borrowerswithmaintenance

covenantheadroomatorabove40%

Borrowerswithmultiplemaintenancecovenants

Borrowerswithmaximumleveragethresholdatorabove8x

source:"LooseMaintenancecovenantspermeateprivatecredit,"2025s&PGlobalRatings.

Thedecouplinganalog

Justaspublicspreadsarecompressingevenasinterest-coverageratiosfall,privatecreditrunsthesamedecouplingthroughaquieterchannel.Becausepositionsareappraisalvaluedratherthanmarkedtomarket,the

deteriorationsignalthereforedoesnotappearinprice,itappearsintheplumbing,andtheplumbingnowshowsitclearly.

Theabsenceofdailymarksandindex-drivenforcedsellingsthefeaturesthatmadeprivatecredit'SQ12025experiencesomuchcalmerthanpublicmarketequivalentssalsodefinetheprincipalriskthattheassetclassnowcarries.stressinprivatecreditaccumulatesandisresolvedbilaterally,whichmeansitremainsinvisibletoaggregatemarketindicatorsuntilitcannotbemanagedthatway.payment-In-kind(PIK)interestasapercentage

andatroughof4.3%inQ12023(Lincoln.seeFigure12),androughly20%ofpIkloansarenowmarkedbelow9ocents,atorabovepost-covidhighsdependingonthemeasurementbasis.Lendertake-overs,wherelendershavemovedtoforecloseonequityandtakeoperationalcontrolofborrowers,reachedUSD39.4bnocross2025and2026combined,againstjustUSD13.6bnovertheprecedingthreeyearsintotal.Almostthree-quartersofthosetransactionsinvolved2021and2022vintagedealspreciselythecohortunderwrittenatpeakleverage,peakvaluationmultiplesandnear-zerorotes.

Figure12:privatecreditstressissurfacingintheplumbingrisingpIkuseincreasesleverage

8,5%

7,9%7,6%7,9%7,7%

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

9,3%

PIKInterestasa%ofTotalInterestIncome

8,9%

8,2%8,1%8,3%

7,5%7,6%

6,7%

6,3%

5,4%5,1%5,6%5,5%5,3%

Q1'20

Q2'20

Q3'20

Q4'20

Q1'21

Q2'21

Q3'21

Q4'21

Q1'22

Q2'22

Q3'22

Q4'22

Q1'23

Q2'23

Q3'23

Q4'23