Financial watchdog warns of gaps in USD 2 tn private credit sector

Fears of a private credit crisis are reaching a boiling point now, with financial watchdog the Financial Stability Board (FSB) warning in its latest report (pdf) of widening gaps, high levels of defaults, and liquidity mismatches in the sector.

The key issues: The sector’s opaqueness is leading to risks being mispriced, and a web of interconnectedness is complicating things. With asset managers, banks, ins. funds, PE firms, institutional and retail investors, and private credit players all involved, “this layering effect may amplify losses during market stress,” the report said.

Large data gaps are making it harder to get a clear picture of the scale of the risk, FSB warns, but there are indications of a high level of defaults. When counting selective defaults from restructuring agreements, the rate of defaults in the sector reaches 5%, the report said.

How big is the problem? Total lending in the private credit market stood at USD 1.5-2 tn as of the end of 2024, as more private credit buyers pile into the market, with borrowing reaching as much as 6x their EBITDA, the Financial Times reports.

Tech, healthcare, and services were identified as the biggest borrowing sectors, FSB said, with analysts fearing that exposure to the tech sector in particular would make private credit especially vulnerable to the AI bubble, given that AI accounted for 35% of PC agreements in 2025, up from 17% on average over the last five years.

ICYMI- The worries link back to earlier fears of an AI bubble, with massive investments in data centers and infrastructure relying on private credit to secure the necessary funds. FSB said estimates pointed to AI-linked capex reaching as much as USD 2.9 tn by 2028, with USD 800 bn of this set to come from private credit.

The lender link: The watchdog flagged that up to USD 500 bn had been provided by banks in drawn and undrawn loans, while Bloomberg data points to 11 US banks having issued a total of USD 185 bn in outstanding loans. The picture isn’t much different in Europe, where 13 lenders have lent USD 135 bn this year alone.

The strain is starting to show, with HSBC recently disclosing that its lending to a private credit fund resulted in it taking a USD 400 mn hit, the Financial Times reports.

The prognosis: FSB is suggesting setting up supervisory discussions on monitoring problem areas, analyzing risks and key metrics from data it provided, and establishing uniform definitions for certain opaque areas within private credit.

For now, the scale of “leverage and interconnectedness could amplify stress in adverse scenarios, posing broader risks to financial stability,” according to the watchdog’s Secretary General, John Schindler, with the report adding that the sector has been “untested at its current size, scope, and concentration” so far under stress conditions.

MARKETS THIS MORNING-

Japan’s stock market rose to a new record as Asian markets rallied this morning, tracking Wall Street, with the Nikkei rising 5%, and Topix up more than 2%. Chinese equities were also in the green, though South Korea’s Kospi reversed earlier gains and was trading in the red. Meanwhile, Wall Street futures were mostly flat after what was also a record day for markets, on hopes of a US-Iran agreement being close.

THE CLOSING BELL: TADAWUL-

The TASI fell 0.5% yesterday on turnover of SAR 6.7 bn. The index is up 4.4% YTD.

In the green: Gulf Ins. (+9.1%), The Power and Water Utility Company for Jubail and Yanbu (+8.5%), and Arabian Mills (+8.1%).

In the red: Wataniya Ins. (-10%), Allied Cooperative Ins. (-8.2%), and Riyadh Cables Group (-7.9%).

THE CLOSING BELL: NOMU-

The NomuC rose 0.4% yesterday on turnover of SAR 19.3 mn. The index is down 2.1% YTD.

In the green: Albattal Factory (+15%), Al Modawat Specialized Medical (+9.3%), and Digital Research (+7.2%).

In the red: Shmoh Almadi (-7.5%), Horizon Food (-6.4%), and Mohammed Hadi Al Rasheed (-5.7%).

Corporate actions

The Saudi Investment Bank’s (SAIB) board recommended a 20% capital boost to SAR 15 bn, it said in a disclosure to Tadawul. The SAR 2.5 bn increase will be funded by capitalizing SAR 1.5 bn from the statutory reserve and SAR 1 bn from retained earnings, with shareholders receiving one bonus share for every five shares held. The raised capital is earmarked for strengthening the bank’s capital base and supporting growth.

Dividends: The board also proposed an SAR 374.5 mn dividend payout for 2H 2025 at SAR 0.30 per share, it said in a separate disclosure. The distribution, whose date has not been determined, would bring total 2025 dividends to about SAR 874 mn.