UBS Warns of Rising Default Risk in Private Credit
From the desk of Jim Eccleston at ÍøÆسԹÏ
A UBS report signals that credit stress likely will intensify next year as borrowers confront inflation, elevated interest costs, and softening consumer conditions. Strategists expect private credit to absorb the sharpest impact, according to Financial Advisor News.
Financial Advisor News adds that private credit now represents 11 percent of U.S. gross domestic product and is increasingly intertwined with the banking and insurance sectors. According to the report, banks with more than $10 billion in assets hold over $2.2 trillion in loans to nonbank financial institutions. As a result, private credit’s trajectory will play a critical role in shaping the broader credit market outlook.
UBS projects that private credit defaults could rise by as much as three percentage points in 2026. This is significantly higher than the anticipated one-point increase for everaged loans and high-yield bonds.
The report points to the growth of payment-in-kind, or PIK, features as a warning sign. These structures allow borrowers to defer cash interest payments, indicating increased pressure to conserve liquidity in a high-rate, slower-growth environment.
The UBS report also highlights the concentration of private credit in vulnerable sectors, including areas connected to artificial intelligence. UBS describes AI exposure as a double-edged sword: a downturn could impair up to 30 percent of newer AI-linked borrowers, while a surge in AI-driven disruption could affect as much as 40 percent of private credit assets.
Despite the near-term concerns, UBS expects defaults to stabilize by late 2026.
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Tags: eccleston, eccleston law, ubs
