LONDON, Dec 16 (Reuters) - Weakening profit margins at private credit borrowers globally will likely lead to further loan defaults in 2026, credit rating agency Morningstar DBRS said on Tuesday, as it reaffirmed its negative outlook for the fast-growing sector.
The roughly $3 trillion private credit market - mostly made up of loans to companies by non-banks like asset managers - has attracted scrutiny after a few high-profile U.S. bankruptcies earlier this year raised investor concerns about broader
credit quality.
In its latest outlook report on private credit, Morningstar DBRS analysts said uncertain economic conditions - particularly in the U.S. - meant margin compression was intensifying and leverage increasing, with the weakest companies at risk of default.
"We're seeing margin compression. Instead of it going away, it's actually getting worse," said Michael Dimler, senior vice president at Morningstar DBRS.
The report found private credit borrowers in the U.S. year-on-year on average had reported both weaker cash flows and interest coverage ratios.
"It's just really a matter of when does the credit cycle turn," Dimler said, adding that point had not yet been reached. The full impact of U.S. trade tariffs on business borrowers was still unclear and could add further pressure, he added, although he said the sector overall remained resilient for now.
Improved sales and lower borrowing costs were working in borrowers' favour, the report said, while credit quality in Europe appeared healthier.
The growth of private credit has drawn sharper regulatory scrutiny, with the Bank of England last week announcing it would launch stress tests into how the sector and private equity would fare in a major financial shock.
Credit ratings agencies Fitch and Moody's have previously highlighted the growing interconnectivity of private credit with the traditional financial system, which could amplify risks in the event of financial stress.
(Reporting by Iain WithersEditing by Nick Zieminski)
