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

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.

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."

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)

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)

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)

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

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.