Rating reforms are needed for private credit

Financial Times Europe16 Jul 2026Haran Segram Haran Segram is an adjunct pro fessor of fin ance at New York Uni versity Stern School of Busi ness

Less than 20 years after the fin an cial crisis, credit rat ing agen cies are once again atthe centre of con cerns about a sys temic risk in fin ance — this time about how theyare now grad ing the private credit mar ket.

UBS chair Colm Kelle her warned late last year the insur ance industry was enga gingin “rat ings arbit rage” in private credit. That fol lowed a let ter by US sen ator Eliza -beth War ren sent to the big agen cies ask ing whether recent rat ings had beeninflated. The global Fin an cial Sta bil ity Board also warned in May that private creditremained untested in a pro longed eco nomic down turn.

The issues raised closely resemble those that sur faced in the after math of the 2008fin an cial crisis. Who pays the rat ing agency? How is the con flict of interest man -aged? Why do privately rated bonds impair twice as often as pub lic bonds car ry ingthe same grade, as a recent Columbia Busi ness School research paper sug gests?

Private credit now rivals the highy ield bond mar ket in size, and insur ance com pan -ies are sig ni fic ant end-investors. These insurers rely on credit estim ates pro ducedby agen cies that count the asset man agers that ori gin ate the under ly ing loans as bigcli ents. The con flict is the one that sur faced in the 2008 struc tured fin ance fail ures.

Soft ware-as-a-ser vice (SaaS) is the single largest sec toral con cen tra tion in privatecredit. Out stand ing dir ect loans to SaaS firms rose from about $8bn in 2015 to over$500bn by the end of 2025, accord ing to the Bank for Inter na tional Set tle ments. Andloans held by US busi ness devel op ment com pan ies — the lis ted vehicles thatprovide access to private credit — mature mostly between 2028 and 2031, accord ingto ana lyses by Reu ters and Pre qin. This win dow coin cides with the period dur ingwhich lenders will need to mark down recov ery assump tions to reflect AI’s com -pres sion of SaaS profit mar gins.

Pub lic equity mar kets have already par tially reflec ted the scale of this adjust ment.The iShares Expan ded Tech-Soft ware ETF declined roughly 30 per cent from itsSeptem ber 2025 peak to its April 2026 low, and remains more than 20 per centbelow that peak.

The struc ture of the under ly ing agree ments com pounds the risk fur ther. Law firmProskauer estim ates that the “cov en ant-lite” share of dir ect lend ing deals reachedabout 21 per cent in 2025, up from 4 per cent in 2023. Main ten ance cov en ants arethe mech an ism through which lenders are aler ted to deteri or a tion in bor rowercredit qual ity.

Under ly ing all of this is a meth od o lo gical prob lem. Stand ard credit rat ing mod elsassume the pop u la tion of rated entit ies can be described by a single set of fixedpara met ers. That assump tion is defens ible for invest ment-grade pub lic cor por atebonds, where issuers are com par able and dis clos ure is stand ard ised. In privatecredit, however, each loan is bilat er ally nego ti ated and exhib its idio syn cratic fea -tures in its cov en ants, secur ity, and inform a tion avail ab il ity.

Four reforms are needed now to address the struc tural vul ner ab il it ies.

Firstly, the Secur it ies and Exchange Com mis sion should study and imple ment, ifappro pri ate, an altern at ive to the issuer-pays model, most plaus ibly a ran dom-assign ment scheme admin istered by a pub lic util ity. In 2020, the SEC’s own FixedIncome Mar ket Struc ture Advis ory Com mit tee also recom men ded bond hold ersshould rat ify the rat ing agency selec ted by an issuer. The SEC should now put this toa formal rule.

Secondly, pro vi sions under the Dodd Frank Act that credit rat ing agen cies have“expert liab il ity” for their rat ings — like account ants do for pub lic fil ings — requireact ive enforce ment.

Thirdly, private credit requires a dis clos ure regime appro pri ate to its share of thefin an cial sys tem: loan-level report ing for mater ial insur ance com pany pos i tions,inde pend ent third party valu ation for large pooled vehicles, and stand ard ised cross-jur is dic tional defin i tions. Rat ing com mit tees should pub lish model assump tionsand back-test per form ance,

Finally, cap ital require ments in the insur ance sec tor should not be tied solely to asingle agency rat ing when the rated entity is also a primary pay ing cli ent of that rat -ing firm. Reg u lat ors pos sess the author ity to require inde pend ent cor rob or a tion orinternal model val id a tion for private place ment hold ings. This author ity should beexer cised now.

If the vul ner ab il it ies in private credit are not tackled, the con sequences will fall onthe insurers, pen sion funds, and other insti tu tions hold ing the rated oblig a tions