International financial watchdogs are launching a comprehensive review of private credit rating methodologies, focusing on transparency, consistency, and potential conflicts of interest. The scrutiny follows growing concerns about the sector’s opacity and its impact on systemic risk.
- Over $2.1 trillion in private credit instruments rely on non-public rating agency assessments.
- Three major firms—S&P Global Ratings, Moody's, and Fitch—dominate private credit ratings with ~85% market share.
- Private credit default rates reached 40% within two years post-issuance during 2022–2023, nearly double that of public corporate debt.
- Regulators are pushing for standardized disclosures, independent audits, and clearer rationales behind ratings.
- Asset managers overseeing $1.7 trillion in private credit assets face potential compliance adjustments.
- New rules could raise costs but aim to reduce systemic risks linked to opaque credit evaluations.
A coordinated initiative by global regulatory bodies has prompted a deep dive into the practices used by private credit rating agencies, which now influence over $2.1 trillion in leveraged loans and structured debt instruments. Authorities are examining how these ratings are assigned, particularly in complex corporate finance deals involving non-investment-grade borrowers. The review centers on three major rating firms—S&P Global Ratings, Moody's Investors Service, and Fitch Ratings—whose private credit assessments have become increasingly influential since 2020. Despite having no formal regulatory mandate comparable to public credit ratings, these agencies assign approximately 85% of all private credit instrument ratings globally. The lack of standardized disclosure requirements raises concerns about reliability and comparability across transactions. Recent data indicates that nearly 40% of privately rated credits defaulted within two years of issuance during the 2022–2023 period—a rate nearly double that of publicly rated corporate debt. This performance gap underscores the urgency for reforms aimed at strengthening due diligence protocols and enhancing public access to underlying assumptions and stress scenarios used in rating decisions. Market participants, including asset managers overseeing $1.7 trillion in private credit assets, are bracing for potential changes. If new guidelines are adopted, they could require more frequent independent audits, mandatory public reporting of rating rationale, and stricter conflict-of-interest rules. These measures may increase operational costs but could also improve investor confidence and reduce the likelihood of sudden market corrections triggered by unexpected downgrades.