Private Credit Writedowns Triple Since 2022 as MSCI Flags Growing Distress in Senior Loan Market

The private credit market is showing signs of growing distress as the rate of senior loan writedowns has tripled since 2022, according to MSCI. This surge is attributed to higher interest rates that have strained companies with riskier debt profiles. The roughly $3 trillion private credit market—dominated by loans from non-bank lenders—has come under increased scrutiny following a series of high-profile U.S. bankruptcies.

MSCI highlighted that writedowns of 20% on senior loans, a rough threshold for distress, have risen significantly over the past two years. More than 5% of senior loans have now seen 50% writedowns. These aggressive markdowns suggest that a growing number of loans are at risk of restructuring, with debt holders potentially losing equity value. MSCI emphasized that while income from loans still offsets losses, the rise in bankruptcies has drawn investor concern.

The situation has sparked a broader debate about the resilience of the private credit sector. Banks and asset managers are increasingly evaluating how to manage their loan portfolios under prolonged high-interest-rate environments. The pressure on borrowers is especially acute for those with leverage and minimal cash buffers, a trend that has led to calls for tighter oversight in the sector.

Why Did This Happen?

The surge in writedowns is directly linked to the sharp rise in interest rates since 2022. These higher rates have tested the ability of borrowers to service their debt, particularly for riskier credits. MSCI noted that elevated rates are compounding existing weaknesses in some borrowers' business models and balance sheets, increasing the likelihood of restructuring or insolvency.

Private credit funds, which typically offer more flexible terms than traditional banks, are now facing the same credit challenges. Investors in these funds have not yet taken widespread action to restructure distressed loans, but MSCI warns that deeper impairments are beginning to surface. The market is watching for signs of further deterioration, especially as the economic environment remains uncertain.

How Did Markets React?

The private credit market is not the only sector responding to changing interest rate dynamics. Wells Fargo, for example, expects total net interest income to reach $50 billion in 2026, driven by balance sheet expansion and lower funding costs. The bank anticipates deposit and loan growth to continue throughout the year, supporting its NII outlook.

Meanwhile, Ares Management Corp. recently upped its loan offering to a health-care software platform, leveraging a portability clause to maintain existing debt. This strategy allows firms to carry over financing when ownership changes, helping to streamline transactions and avoid additional capital costs. The loan increase underscores the competitive advantages private credit lenders can offer in complex financing scenarios.

What Are Analysts Watching Next?

Analysts are closely monitoring how private credit funds handle the growing number of distressed loans. While MSCI notes that income from these loans still compensates for losses, the increasing rate of bankruptcies suggests that more aggressive action may be required in the near term. The threshold for restructuring is becoming clearer, and investors are assessing whether current strategies are sufficient.

In the broader financial sector, the potential for a federal interest rate cap on credit cards has introduced new uncertainty. President Trump's proposal for a one-year 10% cap could significantly impact banks and consumers. Analysts caution that such a move could lead to reduced credit access and higher fees for cardholders, despite short-term savings.

The market is also watching for regulatory responses to these developments. As private credit and shadow banking entities face more scrutiny, the role of oversight bodies in stabilizing the sector will become increasingly important. For now, the drumbeat of bankruptcy news continues to grow louder, with implications for both borrowers and lenders.