U.S. banks are asking for higher interest on certain loans to private credit funds as questions mount over the valuations attached to some of the loans in those funds' portfolios, sources familiar with the situation said. The step-up in pricing affects key credit lines such as back-leverage facilities arranged for business development companies (BDCs) and similar structures, and may begin to weigh on funds' net returns.
According to people with direct knowledge of the deals, interest charges on some of those facilities have moved higher since late last year, a period when scrutiny intensified around underwriting and the performance of software firms that feature in many private credit portfolios. One source said the margin demanded on certain special purpose vehicle facilities - structures set up by BDCs that hold a pool of the funds' loans and serve as collateral for bank borrowing - has risen to as much as 2 percentage points over the Secured Overnight Financing Rate benchmark, up from roughly 1.8 percentage points since November.
Another person with knowledge of the market said pricing for comparable credit facilities climbed from about 1.75 percentage points around November to a range of 1.85-1.90 percentage points. These credit lines, known as back leverage, let private credit managers borrow against their existing portfolios and are a common source of liquidity for private credit funds.
The move represents a reversal from the prior trend. Before November, rates on these facilities had generally been compressing for about eighteen months, according to one person familiar with the market. The recent widening in bank pricing signals a shift in lender appetite at a time when private credit is already under pressure.
Higher funding costs can translate quickly into weaker investment returns. Borrowing expenses feed directly into a private credit fund's net interest income and its internal rate of return (IRR), reducing the spread managers earn after funding their loans. "Any interest cost directly affects a private credit fund’s net interest income and IRR," said Sean Dunlop, a banking analyst at Morningstar. He added that private credit is facing several near-term headwinds, including higher-than-normal redemption requests for semi-liquid vehicles such as BDCs and growing doubts about the credit quality of the loans those funds hold.
The developments come amid broader concern about private credit, an asset class estimated at roughly $2 trillion. In recent months investors have redeemed positions from some vehicles and share prices of certain public funds have plunged. One large bank, JPMorgan Chase, marked down the value of collateral securing some of its loans to private credit players earlier this month, a source familiar with the situation said. The bank extends financing under back leverage arrangements to these funds.
"People have questions about valuations now that they didn’t necessarily have six months ago," said Seth Kleinman, chair of the special situations practice at law firm Benesch. He added that these valuation doubts are pressuring banks as they decide how much to lend.
Rising borrowing costs are not limited to banks' pricing. One source told Reuters that private credit firms themselves have increased the rates they charge on loans, enabling them to absorb higher funding expenses. Still, when leverage becomes more expensive, managers have less room to enhance returns by borrowing to invest.
Market unease accelerated after a string of stress events, including the bankruptcies of a sub-prime lender and an auto parts company, and a proposed transaction from asset manager Blue Owl to combine two funds in a way that might have imposed losses on shareholders. These developments amplified concerns about lending standards and portfolio resilience, prompting banks to reassess the terms on which they will provide credit to private credit managers.
Contractual changes to the margins funds pay banks for such facilities are ultimately disclosed in regulatory filings, and pricing varies across different funds and managers. The particulars of each agreement mean that the effect on individual funds will differ by manager, structure and portfolio composition.
Size and exposure figures underline why the market shift matters. BDCs, which raise equity and then add leverage to lend to mid-sized companies, held roughly $513 billion in assets as of late 2025, according to Houlihan Lokey. A Moody’s report indicated U.S. banks had extended nearly $300 billion in loans to private credit providers as of June 2025. In addition, banks had lent about $285 billion to private equity funds and reported $340 billion in unused bank lending commitments available to these borrowers, based on Federal Reserve data and Moody’s analysis.
Legal and market advisers say the long era of cheap borrowing may be drawing to a close. "The era of low rates for a sustained period of time seems like it is over," Kleinman said, framing the pricing move as part of a broader reset in funding conditions.
For managers, the implications are straightforward. As the cost of back leverage and other credit lines rises, the arithmetic that underlies private credit returns becomes less favorable. Funds that rely heavily on leverage to amplify returns face a compression of expected yields, and managers may need to adjust underwriting, portfolio construction or pricing to preserve target returns. How individual funds respond will depend on the exact terms of their financing and the composition and credit quality of their loan books.
At the market level, the repricing of bank funding for private credit adds another variable for investors and managers already sensitive to redemption flows, valuation uncertainty and concentrated exposures to sectors such as software that some have flagged for disruption.
With lenders tightening terms and market participants reassessing valuations, private credit faces a period of heightened scrutiny and constrained funding flexibility that could shape returns and activity in the sector going forward.