Amid the recent controversy over artificial intelligence (AI) investment returns, default risk in the private credit market is growing. iM Securities analyzed on the 24th that while the private credit market's default risk will not trigger major problems immediately, concerns over defaults could widen if the debate over AI investment profitability expands.
Although AI investment has been active lately, controversy over profitability is expanding at the same time. Unlike before, big tech corporations have sharply increased corporate bond issuance to raise large-scale investment funds. Although the U.S. Federal Reserve (Fed) is increasingly likely to keep rates on hold, concerns about a credit crunch are surfacing even amid ample liquidity.
Park Sang-hyun, a researcher at iM Securities, said, "A signal that represents this mood is concern over private credit defaults," adding, "In January, default risks emerged for some loans at major private credit managers such as BlackRock, and in February came news that a fund at private credit investor Blue Owl had suspended redemptions."
Park said the mood is not one of credit concerns spreading across the board. Park explained, "Credit spreads have rebounded, but only to a limited degree, and the absolute level of credit spreads is also low," adding, "With the possibility of additional U.S. rate cuts still open, liquidity flows are also favorable."
In the U.S. private credit market, health care and technology are the main sectors. By sector, among newly originated private direct loans last year, health care and technology each accounted for 17%, services 16%, and manufacturing and machinery 8%.
Park said, "Along with the enthusiasm for AI investment, fundraising through private credit has also increased, and off-balance-sheet debt using private credit is also rising."
iM Securities pointed to three potential risk factors in the private credit market: ▲ underestimation of default rates ▲ subjective valuations ▲ deepening interconnectedness with banks and insurers.
Park said, "There are also more cases where debt raised through the private credit market is treated as off-balance-sheet, so the debate over AI investment profitability could translate into a potential trigger for concerns about private credit market defaults."
Park continued, "The AI industry could enter a breather or a phase of sorting the wheat from the chaff, and in that case, the default risk in the private credit market, which carries structural vulnerabilities, could materialize, so caution is needed."