Private Credit Ratings Face Fresh Scrutiny From Global Watchdogs

The private credit industry is facing fresh scrutiny from top global regulators over some of the ratings being assigned to debt in the $1.7 trillion market, people familiar with the matter told Bloomberg News.

The Financial Stability Board, which monitors global risks, has high-level concerns about the potential for ‘ratings shopping’ in private markets, where firms can seek grades on transactions from multiple providers and opt for the most favorable one, one of the people familiar with the supervisor’s work said.

Officials at the Basel-based institute are also concerned that ratings in private credit are not subject to the same rules as securitization, where safeguards introduced after the global financial crisis typically mandate the use of multiple independent credit ratings and strict management of conflict of interests.

The issues under consideration are part of the FSB’s wider work around risks in the broadly-defined ‘non bank financial institutions’ world, which spans everything from hedge funds to asset managers and insurers, two people said. They stressed, however, that the first priority was exploring risks and vulnerabilities in the area, rather than policy recommendations.

A German pension fund whose foray into private markets led to more than €1 billion in losses, has also questioned the integrity of some credit ratings, adding to warnings over valuation risks across the booming asset class, Bloomberg reported on Friday.

The Bank of England meanwhile, will examine the role of ratings firms as part of a ‘system-wide exploratory scenario’ exercise covering private markets, a person familiar with that work said. The stress test, announced earlier this month, aims to capture how private markets as a whole would respond to a sharp economic shock.

The results of the exercise are not expected to be published until 2027. The BOE has not yet done any detailed work on the potential policy actions around ratings firms, the person added.

The FSB did not immediately respond to a request for comment. The BOE declined to comment.

The enhanced scrutiny follows news last month that the SEC is probing Egan-Jones Ratings Co, a key provider of private credit grades. UBS Group AG chairman Colm Kelleher has warned of “ratings arbitrage” in the insurance industry, which has seen rapid expansion in the last 15 years on the back of strict lending restrictions imposed on banks.

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