Emerging Credit Risk Trends

The Bloomberg piece circulating today highlights a trend many of us have been watching closely: developed‑market private credit is losing the very protections that once defined the asset class. Covenant‑lite terms, higher leverage, longer maturities — all negotiated in a race to win allocations. But here’s the irony: the part of the world investors have long viewed as “riskier” — emerging markets — is now where traditional private credit discipline is actually being preserved. In developed markets, popularity has come at a cost. Competition has driven DM lenders toward structures that look increasingly like broadly syndicated loans: • 5x+ leverage • 6–7 year maturities • Thinner covenants • Asset‑light underwriting • Fund‑level leverage stacks that amplify liquidity risk This is not the private credit ecosystem investors think they’re buying. Emerging markets, by contrast, still look like private credit was originally designed to look. • Lower leverage — often 2–3 turns less • Enforceable covenants • Real collateral • Amortization and reporting requirements • Borrowers accustomed to operating in volatile, high‑rate environments When global rates spiked from 2023–2025, DM portfolios strained. In EM, it was business as usual. Coverage ratios held. Structures held. Behavior held. The biggest misconception in the market today is where the real risk lies. Private credit is supposed to deliver contractual protection, negotiated control, and lender‑friendly terms. Those qualities increasingly do not describe much of the DM universe. But they do describe EM private credit — which remains underpenetrated not because of fundamentals, but because of outdated perception. If we’re honest about where discipline, structure, and recovery certainty truly reside, we may need to flip an old assumption on its head: 👉 Emerging markets may now be the more conservative corner of private credit — and developed markets the more speculative one. https://lnkd.in/e3evxyMT #markets #privatecredit #emergingmarkets #investing

🚨 Emerging Trends Alert: Key Insights from the June 30th CECL Trenches 🚨 After two intense weeks of diving deep into clients' CECL calculations for June 30th, I've surfaced with some critical observations that every finance professional should be aware of: 1️⃣ Rising Problem Loans: While we're not anywhere near 2008 crisis levels, there's a noticeable uptick in criticized and classified loans. This is the highest I've seen post-2008, pandemic included. 2️⃣ Real Estate Appraisal Concerns: Collateral-dependent loans are in the early innings of feeling the strain. Recent appraisals are starting to come in lower, leading to larger specific allowances. If this trend continues, expect significant allowance increases across the industry since many of these loans had a specific allowance of $0 when appraisals were higher. 3️⃣ Economic Indicators Show Weakness: GDP projections are dipping, unemployment is rising slightly, and CRE valuations are declining. These factors are pushing ACL rates up by 3 to 5 basis points, potentially leading to higher-than-budgeted provision expenses. 📈 The upward pressure on ACL is real, and it's time to prepare. Future Fed rate cuts might help, but for now, I advise clients to forecast higher CECL allowances. Most banks have not had their CECL models tested by scenarios like this. Right now, we are kind of at an inflection point. The economy is overall fine and loan losses are still on the lower end historically, but the trend is more negative than positive. Some CECL models are undereacting and others are overreacting. Are you sure your model is up to the task? #CECL #Finance #Banking #EconomicTrends #LoanLosses #RealEstate #RiskManagement #BusinessStrategy

Consumer financial health is showing clear signs of strain. According to the July 2025 VantageScore® CreditGauge™ report: - Late-stage credit delinquencies (90+ days past due) jumped 109% year-over-year for Superprime consumers and rose 47% for Prime borrowers. - Subprime and Near-Prime segments also recorded significant increases, underscoring widespread payment challenges across the credit spectrum. - Mortgage and auto loans led the uptick in delinquencies, with mortgage delinquencies increasing the most year-over-year and month-over-month. - As a result, the average VantageScore 4.0 dipped to 701, while total average household consumer credit balances climbed to $106,100—a five-year high. These trends reveal stress points even among traditionally resilient borrowers—and signal that what was once “early warning” is now hard data on missed payments.  As lenders or financial educators, this is our cue to:   • Sharpen early-intervention strategies.   • Offer empathetic, tailored support before accounts slip deeper.   • Reassess underwriting frameworks in light of evolving consumer behavior.  How is your organization adapting to help consumers navigate these pressures? #ConsumerFinance #CreditHealth #Delinquencies #VantageScore #RiskManagement #Credit #FinancialHealth #CreditScore https://lnkd.in/gJtaH-ux

India’s Special Situation Credit: The 2026 Alpha Frontier The narrative of "distressed debt" in India has officially evolved. We are no longer just cleaning up legacy NPAs; we are witnessing the rise of a sophisticated Special Situation Credit ecosystem. For the discerning Indian investor, this sector currently offers perhaps the most compelling risk-reward symmetry in the emerging market landscape. The Trend: From Distress to Complexity In 2026, the opportunity set is driven by complexity rather than just insolvency. Key emerging trends include: The Refinancing Wave: A significant volume of corporate paper issued during the 2021-22 liquidity surge is hitting a "maturity wall." With banks facing stricter capital adequacy norms, bespoke private credit is filling the gap for mid-market leaders. Acquisition Financing & "Hybrid" Capital: As M&A activity hits new highs, we see a surge in demand for structured credit that bridges the gap between pure equity and traditional bank debt—often featuring equity kickers or PIK (Payment-in-Kind) toggles. Rescue & Bridge Funding: Fundamentally robust businesses often face temporary cash flow mismatches. Special situation funds are stepping in as the "liquidity of last resort," pricing in a significant complexity premium. Why the Risk-Reward is Attractive NOW Structural Protection via IBC 2.0: The IBC (Amendment) Bill 2025/26 has been a game-changer. By mandating admission timelines and introducing Creditor-Initiated Insolvency, the "legal drag" that once deterred investors has been replaced by a more predictable, time-bound resolution framework. The Yield Advantage: While global credit spreads remain tight, Indian special situation deals are consistently pricing in the 18%+ IRR range. This isn't just "risk" pay; it's a scarcity premium for flexible capital. Superior Security Packages: Unlike the "covenant-lite" trends in Western markets, Indian deals remain anchored by hard collateral, personal guarantees, and robust share pledges. We are seeing equity-like returns with the security of a first-priority creditor. The Bottom Line Special situation credit has matured into a mainstream institutional asset class. With the Indian private credit market projected to surpass $70 billion by 2027, the "alpha" is no longer just in picking stocks—it’s in the creative structuring of the balance sheet. For those with the "sharp-pencil" discipline to underwrite complexity, India’s credit market is the place to be. #PrivateCredit #SpecialSituations #AlternativeInvestments InCred Asset Management & Alternative Investments

Kicking off the year with the release of our new Departmental Paper on corporate sector vulnerabilities and high levels of interest rates! I had the pleasure of leading this project over the past two years, collaborating with a great team: Nassira A., José Garrido, Deepali Gautam, Benjamin Mosk, PhD, CFA, Thomas Piontek, CFA, Anjum Rosha, Thierry Tressel, and Aki Yokoyama. Our paper provides a detailed analysis of the vulnerabilities that have surfaced in the corporate sector post-pandemic, emphasizing the financial stability risks in a world of persistently high interest rates. While some central banks have begun cutting policy rates, the expectation is that rates will remain elevated compared to pre-pandemic levels. This underscores the urgency of designing and implementing policies to prevent and mitigate risks from the corporate sector. The paper highlights several key findings: ➡️ Firms with substantial refinancing needs—the so-called "maturity wall"—face heightened challenges in rolling over debt as interest rates remain elevated, potentially straining their financial performance. ➡️ Should interest rates remain higher than current projections, corporate defaults could surge significantly, posing critical financial stability risks, particularly in emerging markets and countries with less developed banking systems. ➡️ The growing role of nonbanks in corporate credit intermediation, especially in advanced economies, heightens financial stability risks. The shift of credit to unregulated sectors raises concerns about how risks from a potential corporate default cycle could propagate throughout the financial system. ➡️ Despite progress in insolvency and restructuring frameworks since the pandemic, significant gaps remain. These shortcomings could hinder countries’ ability to swiftly resolve firms in scenarios of intensified corporate distress. Full paper: https://lnkd.in/eUynEVMz

As a 20+ year commercial banker, I’ve seen firsthand how strong credit cycles can mask underlying risk. Right now, U.S. corporate debt markets are red hot—record issuance, tight spreads, and investor demand that’s outpacing fundamentals. But beneath the surface, signs of stress are emerging: surprise bankruptcies, rising defaults in private credit, and questionable underwriting practices. Howard Marks from Oaktree Capital said it best: “The worst loans are made at the best of times.” This environment calls for vigilance. When capital is abundant and optimism is high, it’s tempting to loosen standards. But long-term relationships, sound underwriting, and risk-adjusted returns are what sustain healthy portfolios—especially when the cycle turns. 📎 Read the full WSJ article for a deeper look into what’s driving the current credit boom—and why caution is warranted.

The $3,500,000,000,000 ($3.5 trillion) private credit market is entering a pivotal phase over the next 12–18 months. Here are 5 trends LPs should be watching: 1. Maturity walls and refinancing pressure ∙ ~$580B in leveraged loans and ~$625B in high-yield bonds mature between 2027 and 2029; a roughly $1.2 trillion debt wall that will need to find a home in the next few years ∙ Many borrowers will need capital in a higher-rate environment Investor takeaway: ∙ Expect more deals, but also more credit risk. ∙ Use this window to review how exposed your portfolio is to borrowers refinancing out of necessity rather than strength. 2. Bank retreat and the rise of non-bank lenders ∙ Regional and mid-market banks are pulling back ∙ Banks are partnering with investment managers; banks focusing on origination, while investment managers provide the balance sheet Investor takeaway: ∙ This shift expands the private credit universe. ∙ Investors should revisit their mandate. ∙ There may be room to allocate to newer strategies that did not exist even five years ago. 3. Yield compression and spread discipline ∙ Competition is driving yields down from peak levels ∙ Borrowers have pushed for increasingly aggressive terms amid the competitive backdrop Investor takeaway: ∙ Do not chase the highest yield. ∙ Focus on risk-adjusted returns, and assess whether the premium justifies the liquidity and credit exposure you are taking on. 4. Liquidity and fund alignment are under scrutiny ∙ Semi-liquid & evergreen vehicles are becoming more common ∙ Redemption risk is rising if portfolios do not match their terms Investor takeaway: ∙ Scrutinize how your private credit fund handles liquidity. ∙ Ensure redemption policies, lockups, and deployment timelines fit your broader portfolio needs. 5. Sector selection and macro resilience ∙ Some sectors are feeling pressure from inflation, tariffs, and cost shocks ∙ Healthcare and recurring-revenue services are holding strong; tech deal value in North America was up 56% year-over-year through mid-2025 ∙ Software is a growing exception: AI is eroding the seat-based pricing and ARR predictability that made it a reliable credit underwrite; lenders need to distinguish AI-native businesses from legacy SaaS platforms now competing against their own customers’ tools Investor takeaway: ∙ Do not treat “software” as a monolithic safe haven. ∙ Focus on credit strategies targeting essential, durable industries that can weather macro shifts without sacrificing cash flow. P.S. What trend are you paying closest attention to as we head deeper into 2026?

Is private credit becoming a crowded trade? As spreads tighten, many investors are asking whether the private credit market has reached a tipping point. But the answer depends less on the asset class as a whole, and more on where within it you allocate, in our view. Some key distinctions: • Risk premia live in inefficient markets: Niche and transitional opportunities, where capital is scarce and complexity is high, continue to offer attractive return premiums (300-600 bps over SOFR), particularly in the “middle market” CRE credit segment. • Bespoke or transitional deals, such as CRE value-add or development financing, require deeper structuring and underwriting, which tends to preserve yield even as broader spreads compress. • Short Duration: With base rate cuts expected in 2026, we anticipate spread widening. Short-duration, floating-rate loans with high contractual floors mitigate duration risk and could present a compelling yield enhancement opportunity. • Capital preservation: Asset-backed lending backed by real collateral, stable cashflows (rent with annual lease escalations) and strong covenants provides downside protection in tighter environments. • Supply/demand imbalance: We still see a structural undersupply as banks retrenched from development, refinancing, workouts and recapitalizations in CRE “middle market” credit unlike commoditized, large cap and sponsor-driven credit. We also see sustained demand with $1 trillion maturing in CRE debt in the next 12 months as the market resets basis. The chart below from PWC’s excellent “Emerging Trends in Real Estate 2025” survey depicts that structural undersupply of CRE debt for refinancing (left) and development/redevelopment (right).

The Future of Credit Ratings: How Sustainable Finance is Redefining Risk 💼 The intersection of sustainability and finance is no longer a niche concept—it’s a transformative force reshaping credit ratings and investment strategies. Environmental, Social, and Governance (ESG) factors are now critical financial stability and risk management indicators. 🔑 Why Sustainable Finance is Reshaping Credit Ratings: 1️⃣ Reduced Default Risk for ESG Leaders Companies excelling in ESG practices are proving to be more resilient. According to Moody’s (2023), firms with strong ESG performance have a 30% lower likelihood of credit downgrades compared to their peers with weaker ESG profiles. 2️⃣ Cost-Effective Capital Access Issuers of green bonds or sustainability-linked loans often benefit from lower borrowing costs. S&P Global highlights that green bond issuers in emerging markets enjoy 10-20 basis point reductions in interest rates compared to traditional bonds. 3️⃣ Regulatory and Reputational Pressures With frameworks like the EU’s Green Taxonomy, companies failing to meet sustainability benchmarks face higher regulatory risks and potential credit downgrades. Ignoring ESG factors can lead to increased capital costs and reputational damage. 💡 Implications for Investors and Businesses Enhanced Risk-Adjusted Returns: ESG-integrated portfolios consistently outperform traditional ones over the long term. Evolving Credit Assessments: Leading rating agencies like Fitch and Moody’s now embed ESG metrics into their evaluations, making it imperative for investors to prioritize sustainability. Climate Risk as a Key Driver: Moody’s estimates that $2.2 trillion of rated debt globally is exposed to climate-related risks, underscoring the urgency for ESG integration. 📊 The Numbers Don’t Lie 40% of corporate credit rating changes in 2022 were influenced by ESG factors, with climate risk being the primary driver (S&P Global). Firms with high ESG scores benefit from 25-100 basis point reductions in borrowing costs, as per the Bank for International Settlements (BIS). 🌱 Why ESG is a Financial Imperative Sustainable finance isn’t just about ethical investing—it’s about managing risk and unlocking opportunities. Companies that fail to address ESG challenges risk higher capital costs and limited access to funding. For investors, integrating ESG into decision-making is no longer optional—it’s essential for long-term success. 🚀 What’s your perspective on the growing link between ESG and credit ratings? Have you observed real-world examples of this trend? Let’s discuss how sustainable finance is shaping the future of risk assessment. #SustainableFinance #ESGInvesting #CreditRisk #ClimateAction #GreenBonds #FinancialInnovation #RiskManagement #CorporateSustainability #ClimateFinance #FutureOfFinance Let’s connect and explore how sustainable finance is driving change in the financial world! 🌟