finance

Despite investor fears, private credit is far from a meltdown because not all risks are the same.

The cracks in the private credit market appear to be widening.

Private credit is a significant alternative to syndicated bank loans as a source of corporate capital provided predominantly by private equity (PE) firms. The market is heavily involved in financing data center capacity, which is burgeoning along with the demand for artificial intelligence. Investors fear that the artificial intelligence capital spending boom poses a threat to the software industry and may be creating a market bubble that leaves private credit funds overly exposed.

Yet there are reasons to believe the potential damage to the private credit market remains manageable and contained.

This article appears in the May 2026 issue of Global Finance Magazine. .

To be sure, when auto parts seller First Brands announced its bankruptcy late last year, which was financed by a credit fund sponsored by investment bank Jefferies Group, it raised alarms in some quarters. Underscoring the opacity of private credit, which is largely unregulated, were allegations that First Brands had borrowed against the same receivables more than once. Meanwhile, defaults elsewhere in the credit sector hit a record high in 2025, according to Fitch Ratings, reaching a 9.2% rate, more than double the 3.6% recorded in 2023. Default rates this January continued upward, reaching 9.4% before slightly easing in February to 5.4%.

As the First Brands financing reveals, banks as well as PE firms are involved in private credit, either by financing investment funds sponsored by Ares Capital, Antares, Apollo, Blackstone, Blue Owl, and the like, or via funds of their own. With pension funds, insurance companies, and increasingly, individuals investing in private credit, law firm Quinn Emanuel warned in a March client memo that the trend may pose systemic risk, even though private credit is still a relatively small part of the overall loan market.

“The result is a transmission chain that runs from the technology companies, through private credit originators, to the regulated banks that lend to them, to the insurers and pension funds that invest alongside them, and potentially to the retirement accounts of ordinary Americans,” the memo’s authors warned.

Only a minority of small corporate borrowers are in trouble, and companies with EBITDA of $25 million or less experienced significantly higher default rates—15.8%—than larger companies in 2025. Healthcare and consumer companies have higher default rates. Fitch also notes that realized losses for first-lien lenders have been limited, with most cases resulting in full or high-percentage recoveries.

Notably, private credit default rates historically tend to run higher than those on broadly syndicated loans, a trend some observers attribute to more customized, and sometimes distressed, lending terms. The January uptick was largely driven by “distressed” exchanges and payment-in-kind (PIK) interest, according to Fitch.

AI Anxieties

Concerns are growing about PE funds exposed to software. Investors worry that AI will disrupt the software industry, leading to defaults within portfolios of private-credit loans to the sector. But most such funds are diversified, and even those that aren’t may not be as vulnerable to disruption by AI as investors fear. That’s because the large language models underpinning AI require application program interfaces to operate, so software may still be needed to facilitate the technology’s use.

“Implementing AI still requires significant effort to get it to work in a particular environment,” Alen Lin, senior director of North America corporates, technology, at Fitch Ratings, told audiences at a recent webinar held by the firm.

Of course, much depends on the type of application involved. As Fitch notes, companies producing software that is either deeply embedded in enterprise technology systems, leverages proprietary data, or operates in more regulated industries like health care and financial services could benefit from the development of AI. By contrast, those producing software for applications that aren’t so embedded, such as digital content creation or certain types of analytics and visualization tools, are more exposed to AI disruption.

Even if the AI bubble bursts, that risk is unlikely to evaporate, Lyle Margolis, senior director in Fitch’s corporates group, where he manages its private credit business, said in an interview with Global Finance. “AI is here to stay and is going to be disruptive to certain segments of the software market,” he says.

Yet the risks may be overstated. Whether measured by leverage, interest coverage, or EBITDA, “the trends in the software sector have actually been somewhat positive,” he noted. Refinancing risk for the sector is relatively benign. And data-center build-out provides one of several “significant tailwinds” for private credit in the software sector, added Dafina Dunmore, Fitch’s senior director of North American non-bank financial institutions.

Another mitigating factor: Redemption risk, which can see large outflows of capital. However, it is limited largely to business development companies (BDCs), a more liquid, retail-oriented variety of private-credit investment vehicle. Blue Owl, for example, recently blocked redemptions at one of its BDCs and liquidated some others. And the $33 billion Cliffwater Corporate Lending Fund, the largest US private-credit interval received redemption requests on 14%.

Although defaults are rising for these portfolios, redemption risk isn’t a problem for most credit funds, because investors are locked in until maturity. In addition, stress is concentrated in direct lending: corporate loans that fund working capital and growth.

Hidden Risks

To be sure, many such risks may be hidden, given private credit’s opacity. Blue Owl’s exposure to software loans, among the highest in the industry, is roughly twice as extensive as its public filings indicate, according to a recent analysis by the Wall Street Journal. The paper also found other PE firms whose credit funds exhibit software exposure exceeding what’s publicly disclosed include Blackstone, Ares, and Apollo.

Investor worries may exacerbate Blue Owl’s redemption woes since its data center financing deals involve accounting practices that obscure the risk involved. The main source of concern is likely Blue Owl’s $27.3 billion financing of Meta’s Hyperion data center in Louisiana.

Yet, S&P rates the bond backing the deal, called Beignet, as Meta’s obligation, reflecting that it bears the risk of default. Indeed, investors seem to like that cash-rich Meta stands behind Beignet. The bond was recently spread over a bond financing the CoreWeave data center, which isn’t backed by the hyperscaler.

Still, some wonder if the risks are adequately priced into these issues.

Quinn Emanuel warns that the vagaries of Meta’s accounting treatment may lead to litigation between the parties over who bears the loss if AI fails to meet expectations and Meta chooses not to renew the lease. Blue Owl finances an Oracle data center in similar fashion, but that bond is trading at a discount to Meta’s, partly because Oracle doesn’t back it and partly because the ultimate tenant is less financially stable OpenAI.

“When we rate data centers, to some extent we look at the credit quality of the ultimate tenant,” says Victor Leung, vice president for project finance at ratings firm DBRS Morningstar.

This type of complexity led Quinn Emanuel to warn in its March 13 memo that, “the AI data center buildout—projected to require $5.2 trillion in infrastructure investment by decade’s end—has spawned complex financing structures that are generating significant litigation risk.”

Mark Koziel, CEO of the International Association of International Certified Professional Accountants and president-CEO of the American Institute of CPAs, says he would raise the issue of current accounting rules for such financing arrangements at an upcoming meeting with the Financial Accounting Standards Board. Also last month, the US Department of the Treasury said it would meet with industry and investor representatives to discuss private credit’s potential risk to the financial system.

Thus far, warnings of a private credit meltdown seem overstated.

Credit funds focused on asset-backed finance (ABF), which is based on the value of a borrower’s assets and is the fastest-growing sector in the market, are relatively immune to stress, thanks to their self-liquidating feature. In contrast to direct loans, principal on asset-backed financings is paid back during the life of the loan. As a result, ABF funds don’t face the same refinancing risk as direct lenders.

Sponsors of direct lending funds “don’t have the benefit of those cash flows directed to pay down the loans,” notes Fitch’s Margolies.

Apart from First Brands’ receivables deal with Jefferies, the ABF segment has yet to be fully tested. But a test may soon be underway: Beignet is also asset-backed. Or sort of.

Debt principal remains outstanding at each renewal point, so it isn’t completely self-amortizing. As a result, DBRS Morningstar’s Leung notes, “you face a risk that your facility will lose its source of revenue.” Hence, Meta’s guarantee that it will make up any loss facing investors if it fails to renew the lease and the facility’s residual value falls below a certain threshold.

That scenario is not far-fetched, Quinn Emanuel warns, noting that it’s expensive to convert an AI data center to general-purpose cloud computing or other uses: “If demand for AI computing contracts, these facilities may function as stranded assets with limited alternative use and depressed liquidation value.”   

France pushes euro stablecoins and tokenized deposits as EU banks race to close the gap with dollar-led digital payments.

France is pressing European banks to accelerate the development of euro-denominated stablecoins, as policymakers grow concerned that the region might fall further behind the U.S. in the shift toward digital payments and tokenized finance.

Recently, French Finance Minister Roland Lescure publicly called for more euro-based stablecoins and urged banks to explore tokenized deposits, saying the limited circulation of euro-pegged tokens compared with dollar-backed alternatives was “not satisfactory,” during a pre-recorded address to a crypto industry conference.

Meanwhile, a consortium of European banks, called Qivalis, plans to launch a more competitive alternative to dollar-pegged stablecoins in the second half of this year, subject to approval from the Dutch central bank.

Qivalis, which includes banks like ING, UniCredit, and BNP Paribas, was formally unveiled in December and has received continued praise from European authorities. Referring to the initiative, Lescure said, “That is what we need, and that is what we want.” At the same time, he strongly encouraged banks to further explore launching tokenized deposits.

Enter Fireblocks

Late in April, the consortium selected Fireblocks as the technology provider for its planned MiCA-compliant euro stablecoin, a step that provides it with the tokenization, wallet, and settlement infrastructure needed to move the project from planning to a planned launch in the second half of 2026.

Around the same time, Societe Generale’s digital assets unit, SG-Forge, said it was expanding its crypto client base to 15 firms, including exchanges, brokers, and wallet providers, showing that bank-linked activity is growing but remains small.

Stablecoins are already widely used in crypto trading and are increasingly being explored for settlement, cross-border payments, and liquidity management, but the market remains overwhelmingly dollar-based as industry participants debate whether euro-pegged coins face demand or regulatory constraints.

Recent research from RBC Capital Markets found that two-thirds of European banks surveyed still view demand for euro-pegged stablecoins as limited. Conversely, Jean-Marc Stenger, CEO of SG-Forge, has argued that a better-regulated infrastructure remains a key condition for broader adoption.

“[There is] a very, very strong need for well-regulated, robust offering in the crypto and stablecoin space,” he said in an interview with Reuters.

The IMF resumed Venezuela ties after a six-year freeze, focusing on data rather than debt relief.

After announcing its resumption of its dealings with Venezuela under acting president Delcy Rodriguez on April 14, the International Monetary Fund plans to take a wait-and-see approach to the Latin American country’s plans to restructure its reported $170 billion in external debt.

The IMF and World Bank halted deals with Venezuela in 2019, citing the government’s failure to provide mandatory economic data and disputing the legitimacy of President Nicolás Maduro’s administration. Venezuela’s reintegration into the global financial system is now underway. The U.S. is helping to facilitate the change following the removal of Maduro in January by U.S. forces, with Vice President Rodriguez as interim leader.

“Restoring fiscal and debt sustainability is obviously a very important priority for Venezuela, and we do stand ready to support the authorities in this very important step that they’re taking,” said Julie Kozack, an IMF spokesperson, during a press briefing. “Typically, when a country chooses to restructure its debt, the discussions are between the country’s authorities and their creditors. The Fund does not participate in those discussions.”

Resuming Business as Usual

The IMF has started regular discussions with the Ministry of Finance and the Banco Central de Venezuela.

“These discussions have focused mostly on the production and provision of economic data,” Kozack said. “Providing and producing this economic data is a requirement under our articles of agreement so that we can assess the macroeconomic developments and provide policy advice ultimately to Venezuela.”

Since the Latin American country resumed work with the IMF, it regained access to its special drawing rights, but the nation has not requested financing from the IMF, said Kozak. “Any financing would require a formal request from the authorities.”

Reaching Debt Sustainability

In the meantime, the Venezuelan government expects to release a macroeconomic framework and debt analysis to the international financial community in June, said the office of the Vice Presidency for Economy in a prepared statement.

“The current debt overhang constrains external financing, limits public investment capacity, and prevents full re-engagement with the international financial system,” wrote the statement’s authors. “It needs to be substantially reduced for Venezuela to engage in a virtuous circle.”

The government plans to normalize the government’s and state oil company PDVSA’s outstanding commercial debt to restore public debt sustainability.

Nic Wirtz contributed to this story