Private Credit Market Strains Signal Need for “Healthy Cleanup,” Says Bank of America Executive
By [Your Name], International Finance Correspondent
LONDON – The $1.7 trillion private credit market, once hailed as the darling of alternative finance, is showing early signs of stress—and that might be exactly what it needs, according to a top Bank of America executive. Bernard Mensah, president of international operations at the Wall Street giant, argues that mounting pressures in certain segments could catalyze a long-overdue market correction, forcing lenders and borrowers alike to reassess risk in an era of tighter capital conditions.
Speaking exclusively to Bloomberg Television, Mensah described the current environment as an opportunity for “a very good, healthy cleanup,” one that will “shine a light” on weaker underwriting standards and overleveraged deals. His comments come as rising default rates and slowing deal flow spark concerns about the sustainability of breakneck growth in private credit, which has doubled in size since 2020.
The Cracks Beneath the Surface
Private credit—where non-bank lenders provide loans directly to corporations, often with fewer regulatory constraints than traditional banks—has flourished in the post-2008 financial landscape. With institutional investors chasing higher yields and mid-market companies seeking flexible financing, the sector ballooned to rival the leveraged loan market. But cracks are emerging.
Data from Fitch Ratings shows private credit defaults climbed to 3.5% in 2023, up from 1.9% the previous year, with sectors like commercial real estate and cyclical retail particularly exposed. Meanwhile, the Federal Reserve’s aggressive rate hikes have left some borrowers struggling to service debt structured during the ultra-low-rate era.
“The market got ahead of itself,” says Christopher Smart, a former Obama administration economic advisor now at the Carnegie Endowment for International Peace. “When money was virtually free, underwriting discipline went out the window. Now we’re seeing the hangover.”
A Wake-Up Call for Lenders
Mensah’s call for a “cleanup” reflects a growing consensus that private credit must evolve. Unlike syndicated bank loans, private credit deals are typically held to maturity, meaning lenders can’t easily offload risk when conditions sour. This opacity has masked vulnerabilities, critics argue, as funds often mark their own assets without the price discovery of public markets.
“Investors are realizing that ‘private’ doesn’t always mean ‘safe,’” notes Seema Shah, chief global strategist at Principal Asset Management. “The lack of transparency is becoming a liability.”
Regulators are taking notice. The Bank for International Settlements (BIS) warned in December that private credit could amplify systemic risks if left unchecked, while the U.S. Securities and Exchange Commission (SEC) has stepped up scrutiny of fund valuations.
Opportunity Amid the Pain
Yet for deep-pocketed players like Bank of America, dislocation creates openings. Mensah hinted that the bank’s global reach and balance sheet strength position it to absorb quality assets if distressed sales accelerate. Private equity firms, too, are circling: Apollo Global Management and Blackstone have earmarked billions to snap up discounted private credit portfolios.
“The best vintages often come after a shakeout,” says Michael Arougheti, CEO of Ares Management, which manages $419 billion in credit assets. “This is when disciplined lenders separate from the herd.”
The Road Ahead
The sector’s resilience will soon face a critical test. Over $250 billion in private credit loans mature in 2024–25, per Preqin data, with many tied to floating rates that have skyrocketed. Refinancing won’t be easy, warns Moody’s Analytics, as insurers and pension funds grow wary of covenant-lite structures.
Still, optimists point to structural tailwinds. Banks continue retreating from riskier lending due to Basel III rules, leaving private credit to fill the void. And while defaults are rising, they remain below historical peaks in leveraged finance.
“The market isn’t broken—it’s maturing,” says Lisa Quest, head of financial services research at Oliver Wyman. “The next phase will favor lenders with robust risk frameworks, not just deep pockets.”
As the private credit reckoning unfolds, one thing is clear: The era of easy money is over. Whether the sector emerges stronger or staggers under its own weight may depend on how swiftly it heeds Mensah’s call for a cleanup. For now, the world’s largest financial institutions are watching—and waiting—to pick up the pieces.
