The specter of the 2008 financial crisis continues to haunt Wall Street as private equity firms pool and repackage distressed corporate bonds to increase liquidity. Reimbursements from private credit funds have soared on concerns about the potential for bad loans in application software and other areas, hit by the rise of artificial intelligence and a sustained rise in short-term interest rates. Private equity firms are securitizing these loans and combining them with higher quality bonds into larger investment vehicles to extend the life of the loans prior to maturity. They are also selling some of their larger funds to manage exposure. “This is clearly an attempt to turn the proverbial sow’s ear into a silk purse,” Westwood Capital co-founder Dan Alpert told CNBC. “This is the same pattern we saw during the 2008 crisis. Let’s see if we can package the rest of the unlevered portion of private credit loans into a securitization.” Panelists at the Private Credit Conference in Nashville earlier this month described the private credit environment as “one of ‘peak anxiety’,” according to analysts at credit rating agency KBRA. According to multiple rating agencies, loan defaults are not occurring in large numbers, but default rates are rising. A record number of companies were downgraded by two or more levels in KBRA’s default monitoring range in the first quarter, the agency announced Thursday. KBRA Chief Ratings Officer William Cox told CNBC that securitization and other efforts to extend bond maturities are helping to cushion the blow to the industry. “What we’re seeing is that the various instruments spread around lending, and therefore risk, are actually becoming shock absorbers for relatively elevated (but still manageable) default rates,” Cox said. AMENDMENTS AND EXTENSIONS Private equity firm Carlyle Group is creating a new structured finance vehicle to help repay investors in its older private equity funds, Bloomberg reported in March. Securitization can provide liquidity to an existing fund loan portfolio, but it also creates opaque leverage on top of the investments already leveraged within the fund. One day in February, business development company Blue Owl Capital’s stock price fell nearly 6% after it sold $1.4 billion in loan assets held in three private debt funds. This followed an aborted attempt in November last year to merge two funds, including one that had restricted withdrawals. Software is the largest sector in the broader syndicated loan market at 15%, according to rating agency Standard & Poor’s, with exposure to middle-market collateralized loan obligations (CLOs) at 19%. “While we expect ‘AAA’-rated CLOs are likely to remain resilient, refinancing CLOs may be more costly, particularly for mid-market CLOs due to software exposure,” the agency said in February. In February, rating agency Fitch conducted a test to simulate a “severe deterioration” in the credit quality of software loans held by syndicated CLOs. The portfolio’s exposure to loans rated ‘CCC+’ or lower increased from 6% to 15%, but the agency said it does not anticipate any negative rating action on these CLOs. BDCs, another type of private lending designation, were downgraded from “stable” to “negative” by Moody’s earlier this month, citing increased redemption pressures, higher leverage ratios and macroeconomic factors. Ratings agency Fitch said on Monday it was “monitoring leverage trends across BDCs.” Insurance Insurance is another area where lenders are getting creative with private credit and drawing scrutiny from rating agencies, particularly with regard to commercial real estate debt, such as software, which has become increasingly volatile in recent years. Last week, private equity firm Apollo Global Management completed the sale of a $9 billion loan portfolio from an indirectly managed REIT to insurance company Athene Holding, which it owns. A Moody’s analysis last year found that nearly a third of the life insurance industry’s $6 trillion in assets was allocated to private credit. Ratings agency Fitch on Thursday warned of downgrades in the insurance sector due to a new appeals process from the National Association of Insurance Commissioners (NAIC). The new system is expected to strengthen the monitoring of opaque personal assets. “U.S. insurance companies that actively write complex, illiquid or subordinated holdings may be subject to negative ratings,” Fitch said. In 2025, the Basel, Switzerland-based Bank for International Settlements, a central bank among central banks, warned that liquidity risks from the life insurance sector’s growing involvement in private equity were becoming more pronounced, and that the sector’s “increasing interconnectedness with the broader financial system” was increasing the sector’s systemic importance.
