US Banks Raise Borrowing Costs for Private Credit Funds
Banks are charging higher rates on loans to private credit funds as valuation doubts grow. This shift follows concerns over AI impacts on software investments.
Financial institutions in the United States are increasing interest rates on loans provided to private credit funds, driven by growing uncertainty regarding the valuations of their underlying investments. This shift is particularly evident in the software sector, where the potential for artificial intelligence to disrupt established business models has prompted a re-evaluation of asset worth and lending standards.
The cost of "back leverage"—a financing method where debt managers borrow from banks using their loan portfolios as collateral—has seen a notable uptick since late last year. Interest rates for certain credit facilities extended to special purpose vehicles have climbed to as much as 2 percentage points over the Secured Overnight Financing Rate (SOFR) benchmark, rising from approximately 1.8 percentage points in November. Other market participants reported similar increases, with rates moving from 1.75 percentage points to a range between 1.85 and 1.90 percentage points.
