Global Strategy "Public and Private Credit Outlook: Will private credit ..."

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Global Strategy "Public and Private Credit Outlook: Will private credit ..."

es from non-traditional investors has eased

from the peak in mid to late Q1, as market participants have become more familiar with

the asset class. More recently, geopolitical developments—particularly the Iran conflict

—have shifted risk models and investor attention to oil prices and interest rates, pushing

private credit temporarily to the sidelines, with systemic risk concerns moderating as

recent private market data and BDC earnings show only gradual deterioration alongside

the broader AI-led rally in risk assets.

Default Risk Is Expected to Rise Materially as AI Disruption Builds: Our updated We expect this respite to be short-

perspective points to a meaningful increase in private credit defaults, rising from roughly lived as AI disruption intensifies,

4.4% to 9–10%, driven in part by the implications of the AI cycle. While the AI boom with private credit defaults rising 4-

remains a source of bullishness, continued model improvements and expanding use 5% over the next several quarters

cases also introduces structural disruption risks within private credit portfolios. A

bottom-up review of the BDC universe suggests AI-related disruption could add an

incremental 3–4% to defaults with an upside skew. This risk is expected to evolve over

the next year, intensifying toward year-end and into early/mid-2027 as software

businesses experience slowing growth, waning pricing power, margin compression, and

contract cancellations amid rising competition. Across broader markets, dispersion

remains a defining theme, with default expectations diverging across asset classes—9–

10% for private credit, 3.5–4% for leveraged loans, and 1.75–2% for high yield by year-

end 2026.