By Isla Binnie and Saeed Azhar
NEW YORK, March 31 (Reuters) – Banks in the United States are charging more for some loans to private credit funds as doubts grow about the valuations given to some of their investments, three people familiar with the matter said, in a development that could start to hurt funds’ returns.
The interest rates banks are seeking on some of the key sources of debt for these funds, which include business development companies (BDCs), has gone up since late last year, when doubts were intensifying about lending standards and the performance of software companies they have lent to, two sources familiar with the matter said.
The interest rate being offered for credit facilities extended to some special purpose vehicles that are set up by BDCs and hold a pool of the funds’ loans – a type of back leverage – has climbed to as much as 2 percentage points over the Secured Overnight Financing Rate benchmark, from around 1.8 percentage points since November last year, one of the people familiar with the matter said.
Another source said the rate for such credit facilities had gone from 1.75 percentage points around November last year to 1.85-1.90 percentage points. Back leverage is a type of financing in which private credit or other debt managers borrow money from banks, using their existing portfolio of loans as collateral, and is widely used to provide credit lines to private credit funds, the sources said.
This is a reversal from levels seen before November last year when rates were largely compressing, they said.
‘A ROUGH SPELL’
A tightening of lending conditions could impact the ability of funds to make investments and finance day-to-day operations.
“Any interest cost directly affects a private credit fund’s net interest income and IRR,” said Sean Dunlop, a banking analyst at Morningstar. IRR, or internal rate of return, shows the yearly profit rate an investment is expected to earn.
“It’s definitely a rough spell for private credit in general, between elevated redemption requests for semi-liquid funds like BDCs, (and) concerns regarding the creditworthiness of the underlying portfolio,” Dunlop said.
It is the latest sign of concern around private credit, a roughly $2 trillion asset class which has attracted scrutiny in recent months due to its exposure to the potentially disruptive effect of artificial intelligence on the software industry. Some investors have redeemed their positions in vehicles, while the stock prices of some publicly-traded funds have been crushed.
JPMorgan Chase marked down the value of collateral to secure some of its loans to private credit players, a source familiar with the matter told Reuters in early March. It lends to these funds under its so-called back leverage financing, the source said.
“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. “Those underlying questions about valuations are really stressing the banks in terms of how much they’re willing to lend.”
One of the sources told Reuters borrowing costs have firmed up across the market, with private credit firms also charging more, allowing them to absorb higher funding costs. Private credit funds use leverage to increase the amount they can invest in other assets, so when that leverage gets more expensive they have less space to turn a profit.
The rise came after broad concerns about credit snowballed after the bankruptcies of a sub-prime lender and an auto parts firm, and a proposal from Blue Owl to merge two funds in a way that could have imposed losses on shareholders.
Prior to that, the cost of borrowing through those facilities had been getting cheaper for around eighteen months, one of the people familiar with the matter said.
Changes to the rates funds agree to pay banks for these loans are eventually disclosed in regulatory filings. The rates differ between funds and fund managers.
BDCs, which raise equity and then pair it with leverage to lend out to mid-sized companies, held around $513 billion in assets as of late 2025 according to Houlihan Lokey. A recent Moody’s report showed U.S. banks had lent nearly $300 billion to private credit providers as of June 2025. Banks loaned a further $285 billion to private equity funds and had $340 billion in unutilized bank lending commitments available to these borrowers, according to data from the Federal Reserve and Moody’s analysis.
“The era of low rates for a sustained period of time seems like it is over,” said Kleinman.
(Reporting by Isla Binnie and Saeed Azhar; editing by Megan Davies)
Comments