Recent headlines (e.g. from UBS research) about complications with large private credit funds have reignited concerns about the resilience of private credit, particularly within the U.S. direct lending market. In their recent report, UBS outlines a tail risk scenario in which rapid and severe AI driven disruption leads to a sharp rise in corporate stress, pushing domestic private credit default rates as high as ~14–15% in an extreme case.
These warnings—and related commentary questioning the stability of private credit—are best understood as stress tests of specific vulnerabilities rather than a sweeping assessment of the asset class as a whole. The risk UBS highlights is most acute where sector concentration, late cycle underwriting practices, and structural liquidity mismatches overlap, elevating the probability of tail risk scenarios.
In our view, UBS’ research is not a broad indictment of private credit globally. As always, underwriting discipline, sector selection, deal structure, and liquidity terms matter, now more than ever—and this is precisely where emerging markets private credit can differentiate. Investors should focus less on whether a U.S. centric software shock is possible and more on building portfolios resilient to global shocks, while capturing downside protection from uncorrelated assets. Many EM private credit investments are anchored in real economy cash flows—trade linked businesses, asset backed and contractual revenue streams, essential services, export oriented industries, and select financial intermediation—rather than venture adjacent software underwriting. Moreover, in periods when default rates dominate headlines, structure becomes the true driver of outcomes: collateral coverage, covenants, amortizing vs. bullet structures, cash coupons as opposed to PIK, security packages, reserve accounts, and call protections can materially mitigate potential loss severity and recovery timing.
Amongst this backdrop, we believe emerging markets direct lending today resembles where developed market private credit stood roughly a decade ago—less crowded, structurally undercapitalized, and offering attractive pricing for disciplined lenders. EM corporates typically operate with lower leverage, stronger coverage ratios, and long experience managing through higher rate environments, allowing us to focus on highly collateralized senior loans while maintaining meaningful downside protection and pricing power.
As scrutiny of private credit intensifies, investors should emphasize avoiding indirect AI-driven disruption, prioritize disciplined underwriting and downside protected structures, steer clear of crowded trades and single factor sector exposure, focus on resilient cash flows, and maintain realistic expectations around liquidity. These considerations are discussed more fully in our recent private credit white paper, which provides a broader framework for assessing risk, structure, and resilience across private credit—particularly in emerging markets.
For questions, please contact:
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
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