The private credit crisis is spreading, and the CLO market is becoming the next flashpoint for risk.

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The turmoil in the private credit market has spread from BDCs (Business Development Companies) to the broader credit ecosystem. Although JPMorgan CEO Jamie Dimon believes it does not yet pose a systemic risk, the latest research from Barclays and UBS reveals an overlooked blind spot: the deep binding between private credit and the collateralized loan obligation (CLO) market.

As BDCs face massive redemptions, private credit valuations may be forced to shift from “model-based pricing” to “mark-to-market,” and investors should be wary of the impact on net asset value caused by declines in the prices of underlying assets, especially software/SaaS loans.

Meanwhile, current spreads on BDC unsecured bonds have widened significantly, while private credit CLO pricing has yet to fully reflect this reality. Barclays notes that BDCs are highly comparable to single-A CLOs; as software loan default rates rise, the CLO market is likely to become the next risk point to be triggered.

UBS warns that rising defaults in private credit will sharply reduce leveraged loan and CLO issuance, and due to the high overlap of investors between public and private credit markets, liquidity pressures could quickly spread to the broader public credit market.

Crisis Starting Point: BDC Redemption Wave and Valuation Transparency Crisis

Over the past two months, private credit-related assets have been sold off.

Investors in two Blue Owl private credit funds (Technology Income Fund and Credit Income Corp) requested redemptions of 41% and 22% respectively, causing several listed private credit/BDC securities to hit historic lows.

JPMorgan CEO Dimon warned, “Private credit generally lacks transparency and strict loan valuation marks,” resulting in current actual losses exceeding levels seen in a normal environment.

Dimon further predicted that insurance regulators will eventually demand stricter ratings or write-downs, and if problems arise, retail investors may resort to legal action.

Data from Pimco clearly shows that publicly traded BDCs are trading at a significant discount to their net asset value (NAV), and the valuation gap between public and private markets continues to widen.

Nonetheless, Dimon also stated that private credit "may not" pose a systemic risk, because its overall size within the credit market is relatively limited—a view echoed by earlier reports from Goldman Sachs.

Barclays Warning: CLO Pricing Is Severely Out of Step with Reality

However, Barclays' research believes Dimon's judgment may overlook the deep linkage between private credit and derivatives markets like CLOs.

Credit analyst Gavin Zhu notes that, compared with widespread selling of broadly syndicated loan (BSL) CLO assets, private credit CLOs are yet to see similar sell-offs.

So far this year, private credit CLO price changes have been minimal: loans above par have declined from 42% to 39%, loans below 95 have risen from 7% to 8%, and about 14% of loans remain unpriced.

In contrast, in US BSL, loans above par have plummeted from 59% to 22%, and loans below 95 have risen from 13% to 19%. Barclays believes current BDC pricing is already seriously disconnected from CLO market reality.

BDC Asset Coverage Test Becomes Key Constraint, Single-A CLO Is the Best Benchmark

To quantify the relative value of BDC unsecured bonds, Barclays constructed a systematic comparative analysis framework.

Barclays notes that since the start of the year, BDC unsecured bond spreads have widened by 80 basis points (bp), now hovering around 260bp, severely lagging the investment grade (IG) index (which only widened 15bp to 92bp). To find a suitable relative value reference, Barclays turned its attention to CLOs.

According to the 1940 Act, BDCs are strictly regulated by asset coverage tests, requiring assets to cover debt by at least 150% (meaning a leverage cap of 2x).

If a default occurs, BDCs cannot issue new debt or pay dividends, and could lose their Regulated Investment Company (RIC) status and become cash taxpayers. Currently, the average/median regulated asset coverage ratio for investment grade BDCs is 205%/191%.

Barclays calculates that to hit the 150% red line, median BDC asset values would need to fall by 21%. This attachment point is closest to the single-A tranche in standard BSL CLO structures. Thus, single-A CLO is the best benchmark for evaluating the relative value of BDC unsecured bonds.

Quantitative Impact and Relative Value Calculation of Software Loan Sell-Off

Regarding the current devaluation of software/SaaS assets driven by AI disruption, Barclays conducted quantitative calculations.

The direct software risk exposure in US BSL CLOs is about 11-13%, with total exposure around 22%. In the current environment, assuming software loan prices drop 1 point (with non-software loans dropping 0.2 points simultaneously), the spread on single-A CLOs will widen by 4bp.

In contrast, BDCs have a higher software exposure (about 20%). Barclays estimates that under the same shock, BDC unsecured bond spreads should widen by 4.8bp (about 20% higher than CLOs).

According to the research, combining with actual market performance: Recently, single-A CLO spreads widened about 20bp to 195bp; since January, the BDC unsecured bonds widened nearly 75bp on the Z-spread basis to 270bp.

Based on Barclays' model, a 20bp widening in single-A implies BDC should widen 24bp. This means BDC unsecured bonds have seen approximately 50bp of actual underperformance relative to single-A CLO. As investors look for the next credit weak point, attention will inevitably turn to the CLO market, which has so far not been severely impacted.

UBS: Transmission Pathway from Private Credit Crisis to CLO and Public Markets

In its latest report, the UBS credit team systematically answered seven core client questions, of which three directly concern risk in CLO and wider markets.

Question 1: What is the potential impact of rising private credit losses on structured finance markets?

UBS expects leveraged loan issuance in 2026 to shrink by about 20% to $360 billion, and CLO issuance to fall from $208 billion in all of 2025 to about $150 billion. In tail-risk scenarios, leveraged loan issuance could decline 50-75%, and CLO creation could further shrink to $100-110 billion.

On credit quality, UBS analysis shows that about 11-12% of US and European leveraged loan portfolios are in high AI disruption risk sectors with lower ratings, of which about 8% face the risk of being downgraded to CCC within next two years. This will raise CCC concentration in CLO portfolios, currently at 4.5-5.5% and pushing toward the 7.5% cap.

On rating stability, S&P stress tests show that the loss threshold for average BBB tranche downgrades is a low-to-mid single-digit percentage for leveraged loan CLOs, and a high single-digit for middle-market CLOs. UBS’s base/tail scenarios forecast US leveraged loan losses at 2.6%/6.75% and private credit at 7%/12.4% for 2026, indicating a substantial risk of ratings downgrades over the next year.

Question 2: What are the spillover channels from private credit to public credit markets?

UBS identifies four main transmission channels:

Investor overlap: Insurance companies, foreign investors, and retail investors have substantial holdings in both private and public credit markets;BDC holdings of syndicated loans: The average BDC portfolio holds about 10% exposure to syndicated leveraged loans, which could be sold more aggressively under net redemption pressure;Valuation correlation: Private credit valuations are highly correlated with global leveraged loan valuations, with European leveraged loan portfolios having up to 50% overlap (by debt weighting) with US leveraged loans;Issuance mode correlation: The issuance cycles of US and European leveraged loans and US high yield bonds have historically shown high correlation.

Question 3: How will valuations evolve when private BDCs face redemption pressure?

BDCs account for one-third of private credit investment assets (about $500 billion, with total scale about $1.5 trillion), two-thirds of which are private, non-traded vehicles — the main carriers of redemption risk.

UBS believes that once redemption pressure hits BDC liquidity, private credit valuation will shift from “model marking” to traditional “market marking.” Historically, B3/B- loans traded down to $90 during the 2022-23 Fed tightening cycle, briefly to $80 during the COVID pandemic, mid-$85 during the high-yield shale oil crisis, and mid-$50 during the financial crisis.

UBS thinks these historic data points can serve as reference intervals for the evolution of private credit portfolios’ market-marked pricing.

CLO Is the Next Domino in the Private Credit Crisis

Synthesizing Barclays and UBS analyses, the logical chain is now clear:

First layer: Ongoing AI disruption risk in software/SaaS companies is eroding BDC asset quality, BDC unsecured bond spreads widen sharply, redemption pressure soars;

Second layer: There is a deep structural linkage between BDCs and CLOs, but private credit CLO pricing so far reflects little pressure—this valuation gap will ultimately narrow;

Third layer: Once CLO pricing aligns with reality, it will trigger CCC rating downgrades, OC test pressure, shrinking CLO issuance, and will ripple through investor overlap, valuation correlation, and other channels to a broader public credit market.

As Barclays noted, as investors search for the next weak spot in the credit market, their attention will inevitably turn to CLOs—which so far have been almost untouched by the BDC crash.

UBS further warns that if AI disruption in the software sector deepens and the wider economy falters, the private credit crisis will not only worsen further, but will use CLOs as a springboard to spread across the entire public credit market.

Risk Warning and DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not consider individual users’ special investment objectives, financial situations, or needs. Users should evaluate whether any opinions, views, or conclusions in this article are suitable for their specific situation. Investing based on this article is at your own risk. ```