Morgan Stanley: What's Behind The Recent Explosion In Private Credit

By Vishwanath Tirupattur, Morgan Stanley global head of Quantitative Research

The evolution of private credit is reshaping the landscape of leveraged finance. Investors of all stripes and around the globe are taking notice. The rapid expansion of the private credit market in the last few years has come against a much different backdrop in public credit markets – a contraction in high yield (HY) bonds and lackluster growth in broadly syndicated loans (BSL). What the emergence of private credit means for public credit markets is a topic of active debate.

While private credit is an umbrella term encompassing a wide variety of strategies, direct lending is the relevant strategy for an apples-to-apples comparison with the public markets in leveraged finance. In this context, we define private credit as debt extended to corporate borrowers on a bilateral basis or involving a small number of lenders, typically non-banks. Lenders originate and negotiate terms directly with borrowers without the syndication process that is the norm in public markets for both bonds and loans. Typically, private credit loans are not publicly rated, not traded in secondary markets, have stronger lender protections and offer a spread premium to public markets.