Private Credit at $2.1 Trillion Surpasses High-Yield Bonds at $1.4 Trillion
Banks Increase Lending to Non-Bank Financial Institutions Like PE to Bypass Regulations
Data Center Project Financing Sees Spread Surge
"Warning Lights Are Flashing
The U.S. private credit market reached $2.1 trillion in assets under management (AUM) this year, surpassing the $1.4 trillion size of the traditional high-yield bond market. It has now become the most important pillar in the "credit market"-the market for lending money.
On November 6, Hana Securities warned in its report, "The Canary in Credit: The First Warning Has Already Sounded," that the surge in private credit, which has grown outside the reach of regulation, has increased the risk of a crisis in the credit market.
Banks' Indirect Lending Structures to Avoid Regulation
The rapid growth in the size of private credit is a result of banks finding it increasingly difficult to make risky corporate loans directly, leading them to outsource this function. After the financial crisis, as regulations tightened and capital requirements increased, banks began to outsource credit risk by lending to non-deposit financial institutions (NDFIs), such as private credit funds, instead of taking on the risk themselves. These funds, in turn, lend to corporations, creating an indirect lending structure of "bank → NDFI → corporation." As of mid-year, the amount banks lent to such non-bank institutions reached about $1.2 trillion, exceeding 10% of all bank lending. This figure has more than tripled compared to a decade ago.
Recently, private credit has expanded beyond simple corporate operating funds to become a major source of financing for long-term infrastructure projects in areas such as artificial intelligence (AI), energy, semiconductors, and data centers. U.S. government industrial policies, including reshoring and the expansion of AI infrastructure, have fueled this demand for loans. Large-scale, long-term projects are areas where banks, constrained by regulation, cannot easily provide financing. In contrast, private credit funds can make decisions quickly and structure deals flexibly, filling the financial gap left by banks. This is why large corporations such as Brookfield, Meta, and Oracle are actively utilizing private credit and structured bonds (ABS, CLOs).
A Crisis Lurks Amid Rapid Expansion
However, warning signs are emerging amid this rapid expansion. For example, in the financing of Oracle's artificial intelligence (AI) data center project, the credit default swap (CDS) spread surged. When banks, private credit funds, and collateralized loan obligations (CLOs) all become involved in a single project, overlapping leverage structures can form, creating instability. The CDS spread rose by 50 basis points (1bp = 0.01 percentage point) in just one month, exceeding 80 basis points.
Another issue is that excessive competition in the private credit market is leading to increasingly loose "loan covenant" terms. Traditionally, banks impose various financial covenants to protect themselves in case borrowers become distressed. However, "covenant-lite" loans, which relax these requirements, have become widespread in recent years. This year, such loans accounted for 90% of all loans, a significant increase from a decade ago. In particular, private equity funds (PEFs) prefer covenant-lite loans to achieve higher internal rates of return (IRR), and as a result, banks, broadly syndicated loans (BSLs), and private credit funds have all adopted similar risky practices.
The Likelihood of an Immediate Severe Credit Crisis Is Low, But...
Lee Youngjoo, an analyst at Hana Securities, commented, "Next year, the U.S. credit market is likely to slow down and seek balance, rather than continue the rapid growth seen so far." He added, "Thanks to policy buffers such as deregulation under the Trump administration, potential interest rate cuts by the Federal Reserve, and the end of quantitative tightening (QT), a severe credit crisis or sudden liquidity crunch is unlikely in the near term."
However, there are concerns that if the policy effects that have supported market growth so far weaken, the underlying fragility of the credit structure could reemerge as a problem. Examples include covenant-lite loans and net asset value (NAV) loans, where PEFs take out additional loans using assets as collateral.
In addition, the "credit recursion" structure-where banks lend to non-deposit financial institutions, and that money ultimately returns to the banks' own assets-has become a new channel of risk. In particular, small and regional banks often serve as the "final link" in this structure, meaning that shocks at these banks could spread to other parts of the system.
The analyst noted, "For now, policy support is helping the market hold up, but the canary's song (a warning sign) has already begun." He advised, "Next year, the credit market should focus not on 'rapid growth' but on 'maintaining soundness,' moving away from the liquidity of speed and emphasizing 'credit quality.'"
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