Inside Credit Market’s Issuance Boom and Private Lending Risks

Summary

Thoughts on the Market – March 27, 2026

Inside Credit Market’s Issuance Boom and Private Lending Risks

Hosts: Andrew Sheats (A), Global Head of Fixed Income Research, and Vishwas Bhakkar (B), Head of US Credit Strategy, both at Morgan Stanley

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Episode Overview

This episode zeroes in on two critical questions facing global credit markets in early 2026:

1. The current issuance boom in credit markets, especially investment grade and high yield sectors.
2. Growing risks and anxieties in the private credit market, with a particular focus on direct lending and concerns related to AI disruption.

The hosts combine data, high-level observations, and strategic insights to help investors make sense of recent trends, emerging risks, and practical considerations for navigating this complex terrain.

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Key Discussion Points and Insights

1. Credit Market Issuance Boom

Expectations and Data (00:10 – 02:08):

• Vishwas Bhakkar reviews his team’s aggressive forecasts for 2026:
  • Investment Grade (IG): Predicted record $2.25 trillion in gross issuance—25% higher than last year.
  • High Yield: Projected $400 billion—up 30% year over year.
  • Current Reality: "IG issuance is up about 21%. High yield issuance is up about 25%. So so far at least it’s along the lines of what we’d called for." (B, 01:19)
  • Key drivers:
    • Major AI-related investment by hyperscalers ($80 billion+ year-to-date)
    • Increase in M&A activity
  • Observation: AI CapEx and related issuance are proving "somewhat agnostic to macro" volatility. (B, 01:53)

Nature of the Boom (02:08 – 03:29):

• New Regime: Issuance levels are high and appearing largely insensitive to broader economic or geopolitical volatility.
• Issuer Motivations:
  • "This issuance is being driven by investments that are not opportunistic. Right? They are competitive in nature." (B, 02:36)
  • Issuers, especially those involved in AI infrastructure, display urgency that seems relatively indifferent to market spreads.
  • "New issue concessions are well above average...that has knock-on effects repricing other companies that are downstream."

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2. Private Credit: Structure, Risks, and Investor Anxiety

Understanding Private Credit (03:29 – 05:02):

• Vishwas delineates "private credit" as non-bank, non-syndicated capital provision—encompassing direct lending, infrastructure finance, private placements, and asset-based finance.
• Direct lending accounts for much of recent concern, having ballooned from ~$500 billion to ~$1.3 trillion in a decade.
• "Leverage typically tends to be higher than what you see in the public market." (B, 05:04)
• Risk management is challenged by limited transparency: “When you get a bunch of negative headlines, there isn’t necessarily readily available information to either disprove or validate it.” (B, 05:14)

Rising Investor Worries (05:32 – 07:18):

• A cascade of factors contributed to investor anxiety:
  • Initial macro drivers: as Fed policy eased, yield on private credit compressed, making it less attractive.
  • Asset manager stocks corrected due to "more yield, compression, less yield for investors." (A, 06:38)
  • Isolated scandals: "double pledging of collateral, some accounting malpractices," seen as largely idiosyncratic one-offs. (B, 06:54)
  • In 2026, focus has shifted to the software sector, now under AI disruption pressure.

Software Sector as a Flashpoint (07:15 – 08:39):

• Software comprises about a third of all LBOs (2018–2022); many such loans originated during loose policy are highly leveraged.
• AI-related disruption threatens software lenders' margins precisely as a wall of maturities approaches: "$65 billion of software loans maturing, largely in that lower quality cohort...in the next few years." (B, 08:24)
• Central questions: “Will all these software loans over the next 12 to 18 months...have the capital to term out their maturities?” (B, 08:37)

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3. Strategic Takeaways for Credit Investors

Three Key Takeaways (08:39 – 10:38):

1. Private Credit Returns Under Pressure
   • Potential for subpar returns and sluggish or negative AUM growth in 2026.
   • Crucially: “We would not conflate that with something that’s systemic…some of the linkages to the banking system are through leverage that is significantly lower in this cycle.” (B, 09:00)
2. Issuance Resilience – But Valuations May Be Too Tight
   • High levels of primary issuance persist, “somewhat agnostic to macro conditions.”
   • “We think valuations are still too tight...the convexity of credit is very weak…very limited upside and [more] downside.” (B, 09:55)
   • Ongoing geopolitical tensions and commodity price shocks add to concerns.
3. Importance of Hedging
   • Advocates owning hedges despite their cost: “they can also be a very efficient way to protect yourself.”
   • Recalls how quick volatility in the past “provided a very good entry point to capture the rally that played out thereafter.” (B, 10:33)

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Notable Quotes & Memorable Moments

• “This idea of AI Capex investments and by extension issuance being somewhat agnostic to macro, that seems to be playing out so far.” (B, 01:53)
• “Issuance is being driven by investments that are not opportunistic. Right. They are competitive in nature. Clearly there is an arms race to figure out who will win the AI race.” (B, 02:36)
• “Direct lending...has grown substantially over the last decade. It was about 500 billion or so 10 years ago. It’s about 1.3 trillion right now.” (B, 04:47)
• “Some of the linkages to the banking system are through leverage that is significantly lower in this cycle than...prior to the gfc.” (B, 09:03)
• “The convexity of credit is very weak...very limited upside and downside if we get both a technical and a fundamental and why it is significant.” (B, 09:58)

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Segment Timestamps

• 00:10 – 02:08: Overview of 2026 credit market issuance trends and drivers
• 02:08 – 03:29: Discussion of issuer motivations and the unprecedented nature of the current cycle
• 03:29 – 05:32: Deep dive into private credit market structure and growth
• 05:32 – 08:39: Exploration of mounting risks, with focus on AI disruption and software loans
• 08:39 – 10:38: Main takeaways for investors: outlook on private credit, valuations, and hedging strategies

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Summary

The episode provides a timely and detailed portrait of the historic issuance underway in credit markets, driven by competitive AI investments and resilient M&A activity. Alongside, it unpacks the complexity—and opacity—of private credit, especially direct lending, where concerns are growing due to both structural factors (high leverage, lack of transparency) and sector-specific risks (AI disruption in software lending). Strategic counsel is clear: expect weaker returns and sluggish growth in private credit, remain wary of tight valuations, and consider hedging as insurance against outsized downside risk—even as the overall market remains, for now, on a strong issuance footing.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Andrew Sheats, Global head of Fixed Income Research at Morgan Stanley.

[B]

And I'm Vishwas Bhakkar, Head of US Credit Strategy at Morgan Stanley.

[A]

And today on the program we're going to talk about two of the biggest questions facing global credit markets. A rush of issuance and questions around private Credit. It's Friday, March 27th at 2pm in London. Vishwas, it's great to have you in town talking over what I think are two of the biggest questions that are hanging over the global credit market. A large wave of issuance and a lot of questions around a segment of that market often known as private credit. So let's dig into those in turn. I want to start with issuance. You and your team had a pretty aggressive forecast at the start of the year for a significant level of supply. How's that going? How is it shaping out? We're now almost through the first quarter.

[B]

Yeah. So we came into the year expecting a record 2.25 trillion of gross issuance in investment grade. That's 25% higher than last year. That would mark a record one year number for investment grade. And for the high yield market we expected about 400 billion of issuance up roughly 30%. If I were to mark to market those, the forecast is roughly playing out as expected through mid March. IG issuance is up about 21%. High yield issuance is up about 25%. So so far at least it's along the lines of what we'd call for. More importantly though, I think when I think about the drivers of the issuance that I think in some ways is a little more valid because there were two big components of what was going to drive the issuance. One was AI related issuance from the large hyperscalers and the second was a decent uptick in M and A. And we've seen both of those. So year to date we've had north of 80 billion of issuance from hyperscalers alone in the dollar market. That's on top of significant non USD issuance that we've had this year. So I think this idea of AI Capex investments and by extension issuance being somewhat agnostic to macro, that seems to be playing out so far.

[A]

So let's talk a little bit more about that because this is a new development, this kind of is a new regime to have this much supply sort of somewhat independent of a very volatile macro backdrop. And maybe if you could talk just a little bit more about what we're learning about the issuers, what do they care about what is bringing them to market and then maybe what would cause them to slow down or speed up.

[B]

Yeah, I think we've learned a couple of things, right? First is I think this issuance is being driven by investments that are not opportunistic. Right. They are competitive in nature. Clearly there is an arms race to figure out who will win the AI race. I think a second leg of it is the issuance is somewhat spread agnostic. So in credit we look at this metric called new issue concessions, which is effectively how much is a company paying in terms of excess funding costs relative to their bonds outstanding? And what we've seen with some of the larger deals is that new issue concessions are well above average. And that's pretty important in the grand scheme of things because we're talking about one sector that is driving AI infrastructure. But when you have issuance that comes in size and it comes wide to where existing bonds are, we think that has knock on effects repricing other companies that are downstream of those names.

[A]

So we have a market for issuing corporate debt that's pretty wide open, as you mentioned, very high levels of issuance and supply going through despite would have been a lot of concerns. And one of those concerns is the conflict in Iran. But another concern that's been cropping up is a concern around this market often known as private credit, where you've seen a lot of focus, a lot of headlines, volatility in some of the managers of private credit. But also I think this is an area where less is known and where there's still a lot of confusion about what it is and how it's performing. So for the second set of questions, Vishwas, maybe we could just start with when you think about private credit, what is it to you and how do you break up the market?

[B]

Yeah, so I think at a very high level you can think about private credit as capital that is provided by non bank lenders and in some ways that is not broadly syndicated. So it's different from investment grade bonds or high yield bonds or leveraged loans in that respect. The second factor I laid out, you know, private credit overarchingly is a big umbrella term. It includes direct lending to businesses, it includes infrastructure finance, project finance, the private placement market, asset based finance. So there are a lot of subcomponents. Now to your point where the market's a little worried and there is growing anxiety is around the direct lending portion of private credit. That segment of the market has grown substantially over the last decade. It was about 500 billion or so 10 years ago. It's about 1.3 trillion right now.

[A]

And this is lending directly to companies?

[B]

Yeah, this is lending directly to companies. Leverage typically tends to be higher than what you see in the public market. So one of the challenges around navigating the risks are when you get a bunch of negative headlines that isn't necessarily the readily available information to either disprove or validate it. So I think that's some of the anxiety which is building among the investor base. Our view is these risks are significant and investors should be cognizant of what's happening.

[A]

Maybe just to take a step back a little bit there. Why have investors been more worried about the private credit space? Have we seen particular events or is it more other factors that you think have driven this increased focus?

[B]

Yeah, I think it's been a rolling set of factors this year. The whole story has really been about software and concerns about AI disruption. But before I get into that, I think it was a process that really began, I would say, second half of last year. So private credit really had its moment in the, in the sun a few years ago where inflows were massive, the public market was choppy while the Fed was hiking rates and a lot of stressed issuers were choosing to raise capital via direct lenders. And at that time, spreads in the private credit market were also very attractive. What you've seen last year is private credit AUM was effectively flat. The fee income being generated on the loans has come down as the Fed has eased policy, and the spread on private credit versus the public market has also narrowed. So what started off, I think was more macro. It was driven more by what was happening on the policy front.

[A]

More yield, compression, less yield for investors, which caused them to be just a little bit less attracted to the space.

[B]

Absolutely, yeah. And I think that was largely the driver of the correction in some of these asset manager stocks to begin with. Then you had some of the headlines around, specific single name headlines, double pledging of collateral, some accounting malpractices, which I think we can say with the benefit of hindsight, those were idiosyncratic, those were one off. But again, you know, doesn't make for a positive headline when you get news flow to that effect. And then this year, as I said, it's really been about concerns around the

[A]

software sector, which is a very big part of the private credit market.

[B]

It is a very big part of the private credit market. It made up for almost a third of all LBOs that were originated between 2018 through 2022. And in fact, really, if you look at 2021, when interest rates were very low, a lot of the outstanding software loans were originated in those really weak market. And so I think AI disruption has maybe been the catalyst to drive some of this price action. But that's on top of software, where a lot of loans were originated with high leverage. But now that you have a very disruptive force around margins potentially looming, the concern has now shifted towards what do balance sheets look like? And the software sector is very levered. In the bank loan market, for example, more than 50% of software loans outstanding are rated B minus or lower. And one extension of that is that you have a non trivial amount of debt that is maturing in the next few years. So through 2028 we see about 65 billion of software loans maturing largely in that lower quality cohort. So even before we get clarity around how AI will diffuse and disrupt or not disrupt these names, the issue is really refinancing in this period of uncertainty, will all these software loans over the next 12 to 18 months, will they have the capital to term out their maturities?

[A]

So, Vishwas, maybe just in closing, as you're going around and talking to credit investors at the moment, what do you think are the two or three biggest high level takeaways and views that you're trying to get across?

[B]

A few things, I would say. So specifically on private credit, we are saying that I think we are in for a period where returns might be subpar. It is possible that private credit sees AUM growth that is sluggish, maybe even down year over year this year. But we would not conflate that with something that's systemic. And I think it's very important to lay that out. But importantly, some of the linkages to the banking system are through leverage that is significantly lower in this cycle than what we've seen in the past, say prior to the gfc. So that's one second. I continue to think that the aspect of issuance being very high and somewhat agnostic to macro conditions that's been validated so far. And when I look at what credit markets are priced for in aggregate, we think valuations are still too tight and that's notwithstanding everything that's going on in the Middle East. We clearly have a commodity price shock to navigate and that can have a feedback loop via what central banks will do and the US consumer. But I would say just the convexity of credit is very weak if, let's

[A]

say we get limited upside relative to

[B]

more downside very limited upside and downside if we get both a technical and a fundamental and why it is significant. And the third thing I would say is it makes sense to own hedges here. Again, hedges can be expensive, can lead to loss of carry, but they can also be a very efficient way to protect yourself. And if you look at this time last year in the lead up to Liberation Day, credit had held up really well for the first, say five or six weeks of that sell off. But then when it moved, it moved very quickly. And in some ways, if investors were able to protect themselves through that last leg of volatility, that effectively provided a very good entry point to capture the rally that played out thereafter.

[A]

Vishwas, I think that's a great thing to keep in mind. Thanks for taking the time to talk.

[B]

All right, thank you for having me,

[A]

Andrew, and thank you as always for your time. If you find thoughts of the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today.

[C]

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