US Banks Tighten Lending Terms for Private Credit Funds Amid Valuation Concerns

US banks are increasing borrowing costs for private credit funds, particularly affecting back leverage facilities, which are loans secured by a fund’s own loan portfolio. Spreads on these facilities have risen to approximately 2 percentage points over the Secured Overnight Financing Rate (SOFR), up from around 1.8 percentage points since November 2025. This shift marks a reversal from a previous trend of easing terms and is indicative of growing concerns over valuations within the private credit sector.

US Banks Are Making Private Credit Funds Pay More To BorrowUS banks raise costs for private credit funds as valuation fears grow: reportBloomberg

Private credit, which has seen substantial growth, particularly in lending to non-depository financial institutions (NDFIs), now totals around $2 trillion. As of the end of 2025, lending to NDFIs has surged to approximately $1.4 trillion, accounting for about 11% of banks' total loans. This rapid expansion raises potential credit risks, as highlighted by Moody’s Ratings, which notes that a lack of seasoning in rapidly growing portfolios can lead to unpredictable performance.

BloombergUS banks raise costs for private credit funds as valuation fears grow: reportUS Banks Are Making Private Credit Funds Pay More To Borrow

Wells Fargo & Co. has emerged as a leader in lending to business credit intermediaries, with approximately $70 billion extended, significantly more than Bank of America Corp.'s $35 billion. Other notable banks involved in this lending include Citigroup Inc., PNC Financial Services Group Inc., JPMorgan Chase & Co., and Goldman Sachs Group Inc. The loans primarily support large private equity and private credit funds, allowing them to make swift investments using their investors' committed capital as collateral.

BloombergUS banks raise costs for private credit funds as valuation fears grow: reportUS Banks Are Making Private Credit Funds Pay More To Borrow

However, recent scrutiny has intensified around private credit’s exposure to software borrowers, particularly as concerns mount regarding the potential impact of artificial intelligence on business models. Additionally, high-profile bankruptcies in the sector, such as those involving Tricolor Holding and First Brands Group, have prompted banks to reassess their lending practices.

Bloomberg

The tightening of lending conditions is expected to limit private credit funds' ability to invest and manage operations effectively. Analysts warn that higher borrowing costs directly affect net interest income and internal rates of return (IRR), creating a challenging environment for these funds. Sean Dunlop, a banking analyst at Morningstar, noted that the current climate represents a "rough spell for private credit," with elevated redemption requests and questions surrounding the creditworthiness of underlying portfolios.

US banks raise costs for private credit funds as valuation fears grow: report

Wells Fargo Chief Financial Officer Michael Santomassimo emphasized the importance of the non-bank financial book, stating, “The risk-return there is quite good. We focus that exposure on the more established, bigger firms.” Meanwhile, analysts at Moody’s have expressed caution regarding the rapid growth of private credit, indicating that “if an area expands much more rapidly than the broader market, that raises broader credit questions about seasoning.”

Bloomberg

While the overall trend indicates a tightening of lending conditions, there are variations in the specific rates and terms being offered by different banks. Some sources report that spreads on comparable facilities have moved from about 1.75 percentage points to between 1.85 and 1.90 percentage points, suggesting inconsistencies in how banks are adjusting their lending practices.

US banks raise costs for private credit funds as valuation fears grow: report

“Any interest cost directly affects a private credit fund’s net interest income and IRR,” — Sean Dunlop, Banking Analyst at Morningstar

US banks raise costs for private credit funds as valuation fears grow: report

“People have questions about valuations now that they didn’t necessarily have six months ago,” — Seth Kleinman, Chair of Special Situations Practice at Benesch

US banks raise costs for private credit funds as valuation fears grow: report

“The era of low rates for a sustained period of time seems like it is over.” — Seth Kleinman, Chair of Special Situations Practice at Benesch

US banks raise costs for private credit funds as valuation fears grow: report

As banks proceed with increased caution, the private credit landscape faces significant challenges in maintaining profitability amid rising costs and valuation uncertainties.

US banks raise costs for private credit funds as valuation fears grow: report