Ghosts of the 2008 financial crisis are haunting Wall Street as private equity firms are pooling and repackaging troubled corporate debt in a bid to raise liquidity. Redemptions from private credit funds have been spiking on fears of potentially bad loans in application software and other sectors, driven by the ascent of artificial intelligence and hurt by a higher-for-longer short-term interest rate regime. Private equity firms are securitizing those loans, and combining them with higher quality debt into larger investment vehicles in order to extend their shelf lives ahead of maturities. They're also selling off portions of larger funds to manage exposures. "This obviously is an attempt to take the proverbial sow's ear and turn it into a silk purse," Westwood Capital cofounder Dan Alpert told CNBC. "That follows the same pattern that we saw during the 2008 crisis: Let's see if we can take the remainder of the unleveraged portion of the private credit loan and package it in securitizations." Panelists at a private credit conference in Nashville earlier this month described the private credit environment as "one of 'peak anxiety,'" according to analysts at KBRA, a credit rating agency. While loan defaults haven't occurred en masse, default rates are elevated, multiple ratings agencies say. In the first quarter, a record number of companies were downgraded two or more levels in KBRA's default monitor range, the agency said Thursday. KBRA chief ratings officer William Cox told CNBC that securitizations and other efforts to extend debt maturities are acting to soften any blows in the sector. "What we're seeing is that those different vehicles in the spreading around of the loans, and therefore the risk, [have] actually been a shock absorber for these relatively elevated – but still manageable – rates of default," Cox said. Amend-and-extend Private equity firm Carlyle Group is building out a new structured finance vehicle to help repay investors in the company's older private equity funds, Bloomberg reported in March. The securitizations can provide liquidity to existing fund loan portfolios, but they also create opaque leverage on top of investments that are already leveraged inside the fund. One day in February, shares of business development company (BDC) Blue Owl Capital fell nearly 6% after it sold $1.4 billion of loan assets held in three private debt funds. That followed an aborted attempt last November to merge two of its funds, including one that had restricted withdrawals. Software is the biggest sector in the broadly syndicated loan market, at a 15% exposure, as well as for middle-market collateralized loan obligations (CLOs), at 19%, according to ratings agency Standard & Poor's. "We expect CLOs rated 'AAA' are likely to remain resilient – but CLO refinancings could become more costly, most notably for middle-market CLOs due to their software exposures," the agency said in February. Ratings agency Fitch conducted a test in February that simulated a "severe deterioration" in software loan credit quality held in syndicated CLOs. Portfolio exposure to loans assessed as 'CCC+' or below increased to 15% from 6%, though the agency said it doesn't expect negative rating actions on those CLOs. BDCs – another type of private lending designation – were downgraded earlier this month by Moody's to "negative" from "stable" on increased redemption pressures, higher leverage ratios and macroeconomic factors. Ratings agency Fitch said Monday that it's "monitoring leverage trends across BDCs." Insurance Insurance is another area where financiers are getting creative in private credit, and drawing scrutiny from ratings agencies, especially with commercial real estate debt, like software, growing increasingly precarious in recent years. Last week, private equity firm Apollo Global Management closed on the sale of a $9 billion loan portfolio from its indirectly managed REIT to an insurance company it also owns, Athene Holding. Nearly a third of the life insurance industry's $6 trillion in assets has been allocated to private credit, a Moody's analysis found last year. Ratings agency Fitch warned Thursday about downgrades to the insurance sector stemming from a new challenge process from the National Association of Insurance Commissioners (NAIC). The new mechanism is expected to boost scrutiny of opaque private assets. "U.S. insurers with larger concentrations in complex, illiquid or subordinated holdings aggressively underwritten could be subject to negative ratings," Fitch said. The Bank for International Settlements, the central bank for central banks, based in Basel, Switzerland, warned in 2025 that liquidity risks stemming from the life insurance sector's growing involvement in private equity have become more pronounced and that the sector's systemic importance has increased, due to "heightened interconnectedness with the broader financial system." —Justin Zacks contributed reporting.
