A new International Monetary Fund (IMF) report spotlights trouble in the private lending sector.
More than 40% of the companies who borrowed from private lenders had, at the end of 2024, negative cash flow from their operations, the IMF’s Global Financial Stability report said.
The report pointed to concern in the market that the decline in borrowers’ credit quality has yet to appear in accounting valuations. And as private equity funds are being pressured to sell investments to provide returns to investors, PE “funds are increasingly levering up their acquired companies to fund special dividends to be distributed to LPs, thereby further straining borrowers’ debt sustainability,” per the report.
“The risk of earnings erosion and cash flow problems has increased, with idiosyncratic pockets of risk in some industries or borrowers” such as health care and software, the IMF wrote in reference to direct lenders (DL).
“Even before the tariffs, nearly half of DL borrowers had negative free operating cash flows, prolonging their reliance on payment-in-kind provisions and amend-and-extend restructurings.”
As a report by Bloomberg News on the findings noted, the IMF’s warning is among a series of calls to action from watchdogs who worry that contagion in the private credit sector could infect the banking industry, as banks now have more than $500 billion of exposure to private credit.
Private credit groups are part of a larger industry known as the “shadow banking” sector, which also encompasses nonbank lenders and products spanning hedge funds, money market and private equity vehicles.
Estimates of the shadow banking sector’s size vary widely. But, as determined by the Financial Stability Board, the nonbank financial intermediation world was tied to $239 trillion of assets. More narrowly defined, “other financial intermediaries,” which include the funds that are largely unregulated, hold assets of $68 trillion.
As reported by PYMNTS earlier this year, private credit made up about $2 trillion in investments worldwide, and represented roughly 12% of bank loans to nonfinancial corporations, according to estimates by the Organisation for Economic Co-operation and Development.
“As for the banks’ moves into the private credit space, the push comes as a way to offset the share of lending they are losing to the alternative channels,” PYMNTS wrote.
“JPMorgan Chase, for example, has over the last four years deployed over $10 billion across more than 100 private credit transactions, while also working with lending partners to allocate an additional $15 billion in private credit.”
