Higher-for-longer interest rates are starting to expose “weaknesses” in private credit, with risks increasingly hiding in the structure of loans rather than default rates, according to new analysis by Moody’s Asset Management Research.
It revealed that the shift to a higher-for-longer rate environment “has altered the transmission of credit risk” within private markets, with implications in particular for family offices, which are being urged to rethink private credit.
Weaker structures are being exposed earlier “as floating-rate debt compresses borrower cash flows and narrows the margin for operational underperformance”, said Hanna Sundqvist, head of private credit, Europe and David Hamilton, managing director, research and analytics at Moody’s Asset Management Research in London.
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They warned that distress is showing up via restructurings and amendments, rather than headline defaults, thereby masking real downside risk.
Recognition of problems is being further delayed by valuation opacity and limited secondary markets, “increasing loss severity when stress finally surfaces”, Sundqvist and Hamilton wrote.
They pointed out that family offices typically approach private credit from a different “starting point” to institutional allocators, “particularly in how downside risk is absorbed”.
Family offices are more exposed to “idiosyncratic deal risk”, where upside is capped by contractual yield, while downside is driven by recovery outcomes and timing.
As such, for family offices, private credit risk is no longer about chasing yield, it is about “structure, control, and heeding early warnings before losses crystallise”, or “prudent governance”.
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“Credit investing is always a game of avoiding losers rather than picking winners, but this is especially true for private credit,” said Sundqvist.
They suggested that rising restructurings are “an early warning” rather than a solution and warned that deals relying on refinancing optionality, or earnings add‑backs, are most exposed in the current rate environment.
Manager selectivity is now a key differentiator, Moody’s Asset Management Research said.
“The path to successful outcomes depends less on the macro backdrop and more on disciplined underwriting, strong investor protections, robust sponsor alignment, and rigorous monitoring,” said Sundqvist and Hamilton.
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