Thoughts on the Market: “Credit Market’s Three Big Debates”
Morgan Stanley Podcast
Hosts: Andrew Sheets & Vishy Tirupattur
Date: October 16, 2025

Overview

In this episode, Andrew Sheets (Head of Corporate Credit Research) and Vishy Tirupattur (Chief Fixed Income Strategist) discuss the three hottest debates currently shaping global credit markets, live from the Morgan Stanley European Leverage Finance Conference. The discussion centers on:

1. The rise and impact of private credit
2. Shifts in the merger & acquisition (M&A) and leveraged buyout (LBO) cycle
3. The looming funding needs of artificial intelligence (AI) infrastructure

1. Private Credit: Definition, Risks & Opportunities

Timestamps: [00:10]–[03:34]

What is Private Credit?

• Vishy defines private credit as lending by non-banks to small and medium-sized companies.
  • “The most common understanding of private credit is lending by known banks to small and medium sized companies. And...this definition is actually expanding much beyond this narrow definition.” — Vishy [01:13]
• On a leveraged basis, the credit quality is comparable to “triple C to B minus” in public markets, meaning the companies are often weaker, cyclical, and more leveraged.
• However, “the quality of covenants in these deals is significantly better compared to the public credit markets.” — Vishy [01:34]

Risks & Opportunities

• The main concern: opaqueness and limited public information. Many private credit borrowers aren’t public filers, leading to information asymmetry.
  • “There is information asymmetry in those markets as well. So the issue is not the opaqueness of private markets, but opaqueness in credit in general.” — Vishy [02:18]
• Despite these risks, Vishy states: “We don’t get to the conclusion that we are at a precipice of some systemic risk exposure in credit.”
• Default rates are “sticky around these levels, which are slightly above the long-term average...We expect that to remain so.” — Vishy [03:15]
• Andrew summarizes: “These are weaker, more cyclical, more levered companies. But overall, this is not something that we think at the moment is going to interrupt the credit cycle or the broader markets dynamic.” [03:21]

2. M&A and LBO Cycle: Are We Repeating History?

Timestamps: [03:34]–[06:34]

Current State of M&A and LBOs

• Andrew notes investor concerns about whether rising M&A and LBO activity is approaching the peaks seen in 2000 or 2007.
• But: “If we look at the actual volumes that we're seeing, we're actually a little bit below average in terms of corporate activity.” [04:55]
• After COVID, corporate activity has lagged and many current big transactions have “more conservatively structured” financing—a sign markets are not yet overheating.

Structuring & Regulations

• Vishy points out: “These LBOs that are happening today are a substantially higher amount of equity contribution compared to the LBOs we saw pre financial crisis.” [05:33]
• Andrew adds with humor: “I used to be tall and good looking and they were just very different. We're still not there...you're looking at transactions still that are far more conservative than what we saw then.” [05:54]
• Regulatory changes since the financial crisis have led to more conservative lending; a rollback could shift dynamics, but “we haven't quite seen that yet.” — Andrew [06:18]

3. Funding the AI Infrastructure Boom: Who Pays?

Timestamps: [06:34]–[10:36]

Scale of the Capex Need

• Andrew: AI spending is making headlines daily, and “the question is, okay, where’s all that money going to come from?” [06:34]
• Vishy estimates: “Our estimate of simply data center related CAPEX requirements are close to 3 trillion. You add the power required...add another three, $400 billion.” [07:16]

Who Will Fund It?

• About half of AI capex will come from cash flows of highly profitable “Hyperscalers” (big tech firms).
• “The rest—so one and a half trillion plus—has to come through various channels of credit.”
  • Only a small slice (maybe $200 billion) will be unsecured credit.
  • Asset-based finance (ABF) and private credit could supply $800+ billion.
  • Securitized markets (ABS, CMBS) will play a moderate role.

Comparing Capex Cycles: Now vs. the Past

• Andrew: “So much of the spending is still ahead of us. It hasn’t even really started.” [08:33]
• Vishy draws a contrast with the telecom boom of the late ’90s/early 2000s:
  • Then: Capex funded by “already very leveraged” firms with little cash.
  • Now: “Much of this is being done by highly rated companies...with a lot of cash on their balance sheets and with very little outstanding debt.” [09:35]
  • Modern funding has “widely distributed risk” via new channels like datacenter ABS, ABF, and joint ventures.
  • “That makes me feel a lot better about the evolution of this capex cycle compared to the most recent one.” — Vishy [10:14]

Notable Quotes & Memorable Moments

• “Default rates are sticky around these levels, which are slightly above the long-term average levels. And we expect that to remain so.” — Vishy [03:15]
• “These [LBO] transactions are still far more conservative than what we saw then.” — Andrew [05:54]
• “Our estimate of simply data center related CAPEX requirements are close to 3 trillion.” — Vishy [07:16]
• “So much of the spending is still ahead of us. It hasn’t even really started.” — Andrew [08:33]
• Regarding risk in the AI capex cycle: “Much of this is being done by highly rated companies...and with very little outstanding debt...that makes me feel a lot better.” — Vishy [09:35–10:14]

Episode Highlights by Timestamps

• [00:10] Introduction to the three big credit debates.
• [01:13] Private credit defined and differentiated.
• [02:09] Discussion of opaqueness and risks in private vs public credit.
• [03:21] Assessment of default risk in private credit portfolios.
• [04:55] How current M&A/LBO cycles compare to market peaks.
• [05:33] Structuring LBOs today vs pre-2008 crisis.
• [06:34] The “AI infrastructure” credit challenge introduced.
• [07:16] Breakdown of estimated AI/data center capex needs and credit’s potential share.
• [09:35] Why this capex cycle is different and likely less risky than previous booms.

Conclusion

Sheets and Tirupattur agree: while private credit is expanding and has its idiosyncratic risks, there is no sign of a systemic threat. The M&A/LBO cycle is not showing signs of late-cycle excesses, and the impending AI capex boom is likely to be funded through a mix of new channels, with much less risk concentration than previous investment booms. The tone is analytical but optimistic, balancing caution with a sense of long-term opportunity.