By Niket Nishant
Dec 9 (Reuters) - Private credit defaults are set to edge lower next year as interest rates drop, strategists at BofA Global Research said, but warned that the red-hot sector remains among
the most fragile parts of the U.S. credit market.
The brokerage expects default rates to ease to 4.5% in 2026 from 5% this year as the U.S. Federal Reserve cuts rates, offering a reprieve to an industry that has come under scrutiny following the bankruptcies of First Brands and Tricolor.
Private credit loans are typically tied to a floating rate, meaning their interest payments move in line with changes in the benchmark rate.
Still, opaque lending structures and a heavy tilt toward technology and services, areas most vulnerable to AI-driven disruption, amplify the risks, the analysts said on Monday.
"Private credit is the lowest quality asset class across our leveraged finance universe," said Neha Khoda, head of U.S. credit strategy at BofA.
Partnerships between banks and private credit firms have expanded in recent years. U.S. banks have lent nearly $300 billion to private credit providers as of June this year, data from Moody's showed.
The rapid growth of the market, which Morgan Stanley estimated at roughly $3 trillion as of early 2025 from $2 trillion in 2020, has attracted a broad swathe of investors in recent months, including retail buyers and retirement funds.
The expansion has been fueled by the flexible financing it offers to companies and the higher yields it delivers to investors, but any contagion could ripple across markets if stress intensifies.
Meanwhile, private credit firms and banks have been sparring over who is responsible for the recent stress.
Blackstone CEO Stephen Schwarzman said on Tuesday that he did not share market concerns over private credit relating to recent bankruptcies, pointing out that deals with the companies in question were done by traditional banks.
(Reporting by Niket Nishant in Bengaluru; Editing by Sriraj Kalluvila)
