Broadly Syndicated Loans vs. Private Credit: Risky Business?

Investors can choose between broadly syndicated loans via funds like Invesco Senior Loan ETF or SPDR Blackstone Senior Loan ETF, or private credit via Cliffwater Corporate Lending. The latter offers higher yields but has reduced liquidity and higher credit risk due to lending to smaller companies. Private lenders demand higher credit spreads, lower debt/EBITDA ratios, more collateral, and stronger covenants to compensate for the greater risk.

The private credit (PC) market has experienced remarkable growth in recent years, approaching the lending volume of traditional business credit sources such as commercial and industrial (C&I) loans from banks, broadly syndicated loans (BSLs), and high-yield bonds. According to the Federal Reserve Bank of Boston, the PC market grew from $46 billion in 2000 to approximately $1 trillion in 2023, with a significant acceleration after 2019 [1].

Private credit encompasses a diverse range of lending practices by nonbanks, including business development companies (BDCs) and other investment vehicles. This market segment is typically indirectly funded by bank credit, with banks not directly involved in underwriting or issuing PC loans. While PC loans can range from direct lending to purchasing distressed debt, they often target midsize and large businesses, similar to BSLs and high-yield bonds [1].

The growth of PC lending raises important questions about its potential to replace banks as a key source of business credit and the implications for financial system stability. The analysis suggests that PC funds may capture credit market share from banks rather than expanding the market through riskier loans. If this is the case, the overall financial stability risk could be reduced, as PC funds tend to employ lower leverage and pose less run risk than banks [1].

One notable trend is the convergence of PC loans with bank-issued credit in terms of size, terms, and borrower characteristics. PC loans have become larger and more similar to BSLs, with narrower spreads in recent years. However, PC loan spreads remain wider than those of BSLs or C&I loans, indicating higher credit risk exposure for PC lenders [1].

Investors now have a choice between broadly syndicated loans via funds like Invesco Senior Loan ETF or SPDR Blackstone Senior Loan ETF, and private credit via Cliffwater Corporate Lending. Private credit offers higher yields but comes with reduced liquidity and higher credit risk due to lending to smaller companies. Private lenders demand higher credit spreads, lower debt/EBITDA ratios, more collateral, and stronger covenants to compensate for the greater risk [1].

The Federal Reserve's data indicate that banks have become a key source of liquidity for PC lenders, with banks' extensive links to the PC market potentially exposing them to higher risks associated with PC loans [1]. This indirect exposure raises concerns about the stability of the financial system, as banks' secured credit lines represent the seniormost debt instruments issued by PC lenders [1].

In conclusion, the growth of private credit presents both opportunities and challenges for investors and the financial system. While PC lending offers higher yields and may capture market share from banks, it also carries higher credit risk and reduced liquidity. As the market continues to evolve, it is crucial to monitor the balance between credit substitution and expansion to assess the broader implications for financial stability.

References:
[1] https://www.bostonfed.org/publications/current-policy-perspectives/2025/could-the-growth-of-private-credit-pose-a-risk-to-financial-system-stability.aspx