Morgan Stanley: Rising Default Risks in Private Credit
Written by Emily J. Thompson, Senior Investment Analyst
Updated: Mar 17 2026
0mins
Source: CNBC
- Rising Default Expectations: Morgan Stanley forecasts that direct lending default rates will reach 8%, nearing pandemic peak levels, reflecting concerns over AI's impact on software service demand, which could lead to increased defaults and instability in the credit market.
- Investor Redemption Surge: Fears surrounding AI's potential disruption of software businesses have prompted investors to withdraw from private credit funds, resulting in a spike in redemptions by private market and alternative asset managers, further exacerbating market uncertainty.
- Increased Software Loan Risks: Morgan Stanley highlights that the credit fundamentals of software loans are challenged, with the highest leverage and lowest coverage ratios, particularly as 11% of software loans are set to mature by the end of 2027 and another 20% in 2028, raising default risks.
- Limited Market Impact: Despite rising default risks, Morgan Stanley believes these risks are not systemic, as corporate balance sheets remain largely healthy, and the leverage levels in private credit funds and BDCs are lower compared to historical crisis periods, indicating some market resilience.
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Analyst Views on BX
Wall Street analysts forecast BX stock price to rise
12 Analyst Rating
5 Buy
7 Hold
0 Sell
Moderate Buy
Current: 128.990
Low
166.00
Averages
176.60
High
205.00
Current: 128.990
Low
166.00
Averages
176.60
High
205.00
About BX
Blackstone Inc. is an alternative asset manager. Its asset management includes global investment strategies focused on real estate, private equity, infrastructure, life sciences, growth equity, credit, real assets, secondaries, and hedge funds. Its Real Estate segment comprises its management of opportunistic real estate funds, Core+ real estate funds, and real estate debt strategies. Its Private Equity segment includes its management of flagship Corporate Private Equity funds, sector and geographically focused Corporate Private Equity funds, core private equity funds, an investment platform, and others. Its Credit & Insurance segment consists of Blackstone Credit & Insurance, which is organized into three overarching strategies: private corporate credit, liquid corporate credit and infrastructure and asset-based credit. Its Multi-Asset Investing segment is organized into four investment platforms: Absolute Return, Multi-Strategy, Total Portfolio Management, and Public Real Assets.
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
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- Key Contributors Identified: The increase in non-accruals was primarily driven by Medallia, a software platform, and Affordable Care Holding, a consumer healthcare company focused on tooth replacement solutions, suggesting challenges in these sectors may impact Blackstone's overall investment returns.
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- Increase in Non-Accruals: Blackstone's private credit fund reported a rise in non-accruals to 2.4% at cost and 1.4% at fair value, indicating heightened potential risks in its investment portfolio that could adversely affect future earnings performance.
- Key Contributors Identified: The increase in non-accruals was primarily driven by Medallia, a software platform, and Affordable Care Holding, a consumer healthcare company focused on tooth replacement solutions, suggesting challenges in these sectors may impact Blackstone's overall investment returns.
- Market Reaction: The rise in non-accruals may undermine market confidence in Blackstone's credit fund, prompting investors to closely monitor its future risk management strategies and asset allocation adjustments.
- Industry Implications: This situation at Blackstone could trigger scrutiny across the private credit industry, especially amid increasing economic uncertainty, leading investors to reassess their risk appetite and investment strategies.
See More
Senior Plc Raises 2026 Performance Outlook Amid Strong Demand
- Upgraded Performance Outlook: Senior Plc expects its 2026 performance to be 'comfortably better' than prior expectations, primarily due to strong demand in Q1 offsetting weaker sales in its Flexonics industrial unit, demonstrating resilience in the aerospace and defense sectors.
- Acquisition Plans Advance: The company is moving forward with a planned £1.4 billion ($1.89 billion) acquisition by a consortium comprising Tinicum and Blackstone, which is expected to enhance its market position and resource integration capabilities.
- Aerospace Market Recovery: With customers like Boeing ramping up production, Senior Plc benefits from increased commercial aircraft production, indicating a recovery in the aerospace market and driving growth in related supply chains.
- Increased Defense Spending: The company also benefits from higher defense spending and improved pricing strategies, which not only enhance its profitability but also lay a foundation for future business growth.
See More
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- Market Recovery Signals: Despite a 0.6% drop in all three major U.S. indices on Tuesday, Cramer highlighted that stock sell-offs often present opportunities for investors to reassess fundamentals, particularly as companies like CrowdStrike recover from short-term price drops and return to pre-pandemic levels, indicating potential market rebounds.
- CrowdStrike's Comeback: After a more than one-third drop in 2024 due to a software update failure, CrowdStrike's stock rebounded in 2025, with Cramer arguing that AI tools could actually drive increased cybersecurity spending, further supported by KeyBanc's upgrade that boosted the stock by 3.8%.
- Microsoft's Core Strengths: Although Microsoft's stock fell from a July high of over $555 to $356 amid skepticism about its AI offerings, Cramer emphasized the enduring strength of its Azure cloud platform and enterprise software, with a bullish note from Citi helping the stock recover to $424.16, reflecting market recognition of its long-term value.
- Blackstone's Quick Reversal: Facing concerns about private credit exposure and weak software investments, Blackstone's stock dropped from around $130 to near $100, but quickly rebounded to $128.50, with Cramer noting that the pressure from short-sellers did not lead to significant failures, showcasing the market's resilience.
See More
Major Fund Managers Increase Investment in Private Credit
- Record Inflows: According to LSEG Lipper, 22 BDC funds attracted $868 million in the first quarter, marking the highest inflow ever, indicating strong investor confidence in private credit despite redemption pressures.
- PIMCO's Bond Purchase: Bond fund manager PIMCO made headlines last week by purchasing the entire $400 million bond issuance from private credit firm Blue Owl Capital, demonstrating that large investors are still actively seeking opportunities amid market uncertainty.
- Successful Direct Lending Fund: Golub Capital launched a direct lending fund that raised approximately $320 million from 14 institutional investors, showcasing robust demand for private credit despite concerns over risks in the software services sector.
- Continued ETF Inflows: VanEck's GPZ ETF has seen no outflows in the past three months and attracted $110.06 million in inflows, suggesting that investors perceive current market conditions as an opportunity to invest at discounted prices.
See More
Alternative Asset Managers Face Major Test Amid AI Concerns
- Investor Exodus: Wealthy individuals are pulling money from illiquid private loan funds due to concerns over AI's potential impact on portfolio companies, leading to significant outflows for alternative asset managers, with Blackstone's retail funds now accounting for 24% of total assets.
- Stagnant Private Credit Fundraising: According to S&P Global, private credit fundraising was nearly flat at $49.9 billion in Q1 2023, with direct lending dropping to $10.7 billion, the lowest level in three years, indicating structural concerns about liquidity and valuation credibility.
- Shift in Market Sentiment: Oppenheimer analysts have cut price targets for several firms ahead of quarterly earnings, reflecting a change in investor perceptions, particularly under pressure from direct lending and retail redemptions.
- Private Equity Exit Constraints: While there were high expectations for private equity exits, with around 29,000 companies anticipated to exit by 2026, high interest rates and geopolitical tensions have dampened market sentiment, leading to decreased confidence in liquidity and valuations.
See More
BLACKSTONE PRIVATE CREDIT FUND: "IS STRATEGICALLY PLACED TO THRIVE IN CURRENT CONDITIONS AND SUSTAIN INCOME FOR INVESTORS"
- Current Position: Blackstone Private Credit Fund is well-positioned to navigate today's economic environment.
- Focus on Income: The fund continues to generate durable income for its shareholders.
See More
