Inside Credit Market’s Issuance Boom and Private Lending Risks

Global credit markets face scrutiny regarding high issuance levels and the complexities of private credit. Issuance in investment grade and high yield markets are up 21% and 25% respectively, driven by AI-related capital expenditure from hyperscalers and increased M&A activity, which appears indifferent to macroeconomic volatility. This new wave of issuance comes with high new issue concessions, potentially repricing downstream companies. Simultaneously, concerns around private credit, particularly direct lending, are rising due to flat AUM, reduced fee income, and narrowed spreads versus the public market. The software sector, a significant portion of private credit, faces challenges from AI disruption and refinancing risks, potentially leading to subpar returns and sluggish AUM growth. Despite these risks, systemic issues are not expected, though owning hedges is advised given tight valuations and limited upside in credit markets.