US Senator Elizabeth Warren has written to Treasury Secretary Scott Bessent and several ratings agencies about the $1.7tn (£1.3tn) private credit market, amid concerns that “some companies may be inflating the credit ratings of private credit products” following recent reports.
In her letters to agencies including Moody’s Ratings, S&P Global Ratings, and Fitch Ratings, Senator Warren requested further details about each company’s business practices “especially as it relates to managing potential conflicts of interest in the development of credit ratings”, and their methodologies for determining product ratings.
Read more: Moody’s tips private credit market for $3tn growth
She wrote that “recent reporting suggests that some companies may be inflating the credit ratings of private credit products, posing potential systemic risks to the financial system”, adding that credit ratings “should offer independent, objective, and accurate assessments of credit risk”.
In June, Bloomberg reported that Egan-Jones Ratings Co, which it said “has billed itself as the biggest ratings company in private credit”, came under scrutiny for its “top-tier ratings” of private debt instruments.
Egan-Jones Ratings also received a letter from the senator, as did Morningstar DBRS, AM Best, Demotech, and KBRA.
Warren reminded Rob Fauber, president and chief executive of Moody’s Investors Service, in her letter to him that inaccurate credit ratings “notoriously contributed” to the 2008 financial crisis, when ratings agencies provided “overly optimistic ratings” of mortgage-backed securities and collateralized debt obligations.
She acknowledged the practice whereby some companies are reportedly being “swayed by financial incentives”, and said that if companies can “shop around” for higher ratings, “the likelihood of inflated or inaccurate credit ratings in the private lending market grows”.
Read more: Fitch warns of new headwinds for BDCs and private credit
Separately, Warren, who is ranking member of the Senate Banking, Housing, and Urban Affairs Committee, wrote to Bessent, chair of the Financial Stability Oversight Council (FSOC), setting out her concerns about the financial stability risks posed by the rapidly growing private credit market.
She pointed to a 145 per cent increase in the volume of bank loans to private debt funds.
Senator Warren has called for the FSOC to design and conduct a stress test focused on non-bank financial institutions’ private credit exposures.
“In its 2024 annual report, FSOC also acknowledged the ‘potential financial stability risks’ inherent in the private credit market, including ‘opacity, credit risk, liquidity risk, and increasing interconnectedness with banks, insurance companies, and other institutions,’” wrote Warren in her letter to Bessent.
Read more: Moody’s: Insurance companies increasing exposure to private credit
