HSBC surprised investors this week by booking a $400 million loss connected to a fraud involving a British mortgage lender, underscoring how closely banks are intertwined with private credit despite the sector often operating outside conventional lending channels. The bank's loss arose from its loan to an Apollo-backed vehicle, Atlas SP, and related financing of Market Financial Solutions (MFS), but HSBC characterised the hit as stemming from fraudulent activity rather than the industry-wide liquidity or profitability dynamics that have concerned market participants in recent months.
That distinction matters for gauging systemic risk, yet the episode amplified pre-existing regulatory unease. The Financial Stability Board (FSB), the global financial watchdog, issued a warning about mounting risks tied to banks' expanding relationships with the private credit industry. The FSB singled out the prospect of rising defaults, a high concentration of exposures, and a general opacity in the private credit market as particular sources of concern.
Alongside regulatory alarms, market participants are showing signs of re-evaluating where they seek financing. Reuters' analysis points to a measurable rebalancing: some US borrowers are favouring bank-led syndicated loans over private credit as terms in the private market have become less attractive and, in certain cases, traditional bank financing is materially cheaper.
Publicly traded vehicles tied to private credit are reflecting those stresses. Earnings and disclosures from listed business development companies (BDCs) and similar funds indicate that strains felt in sectors such as software are influencing valuations and lending behaviour across private credit strategies. Asset managers with large private credit operations have adjusted fund values in response: BlackRock reduced the valuation of one private credit fund by 5%, while Blackstone's Secured Lending Fund recorded a 2.4% decline in net asset value per share during the first quarter.
Blue Owl, which runs one of the largest publicly traded private credit funds, plans to trim its exposure to the software sector, a move that illustrates how lenders and investors are reassessing both valuations and growth assumptions within portfolios that had previously leaned into technology lending.
Despite these signs of repricing and repositioning, a sweeping wave of immediate refinancing needs for private credit borrowers does not appear to be imminent. Reuters examined SEC filings from 74 private credit funds and found that the most substantial debt maturity concentrations for those borrowers generally lie further out, largely in 2027 and 2028. That timing suggests that while vulnerabilities exist and must be monitored, the sector is not currently facing a widespread cliff of maturities demanding immediate action.
The HSBC loss, though described by the bank as fraud-driven, nonetheless illustrates why regulators are scrutinising the web of exposures linking banks and private funds. The $3.5 trillion private credit market is sizeable and, in many instances, the loans involved are originated, financed or otherwise held through structures that can obscure concentration and counterparty risk.
For banks, asset managers and corporate borrowers, the recent developments have practical implications. Borrowers evaluating cost of capital are weighing bank-led syndicated loans against private credit offers; asset managers are adjusting valuations and sector weightings inside private credit funds; and regulators are sharpening their focus on transparency and potential concentration risks.
Sectors affected
- Banking - direct exposures and reputational sensitivity following high-profile losses.
- Private credit funds and BDCs - valuation adjustments and portfolio de-risking.
- Software and technology lending - re-assessment of growth and creditworthiness by lenders.