Santa’s Underwriting Desk: Private Credit’s Naughty & Nice List (2025 Edition)
Hello everyone, I wanted to write a Christmas special post on the topic of Santa’s Naughty & Nice list of Private Credit for 2025. If I had to surmise the holiday movie that would explain the 2025 season for Private Credit, it would be one where the camera keeps panning from images of a cozy, tranquil fireplace (we can call this steady coupons, contractual cash flows, with the headline: “private markets are built for patience”) to a hallway that looks like it leads to that of a horror movie with flickering warning lights (refinancing pressure, loosening terms, rising bankruptcies, and government regulators asking sharper questions).
Source: ChatGPT
The sector, to which I am referring, is now large enough that I would not really consider it to be “alternative” in the colloquial sense of things. I would venture out on a limb and basically say that private credit is now the central channel through which non-bank lenders can provide financing opportunities to companies. Central banks and rating agencies now see this sector as a potential source of stress, whereas in the past, it was regarded as relatively insignificant. This month alone, for example, we have seen a major credit rating agency come out and basically give the space a negative outlook due to margin compression, higher leverage, and weaker interest coverage, especially here in the U.S., as some are now stating that the default risk is rising to unprecedented levels as we head into 2026. Across the pond in the U.K., the Bank of England has launched a system-wide exploratory scenario exercise, which is basically aimed at giving regulators a better understanding of how private markets can behave and operate under times of stress and volatility, and how interactions among banks and non-banks could transmit shocks into the real economy.
Against that backdrop, let’s hop straight into our Naughty & Nice Private Credit 2025 edition, but before we do that, let’s take a deeper look at the 2025 year-to-date and look at the Private Credit events that had airtime.
January – March: The yield curve is still the magnet, but credit is still credit.
Looking at the beginning of the year, we can see that it opened with the all too familiar private credit paradox of higher base rates making the overall headline yields attractive, while the underlying borrower fundamentals carried the lingering strain of the prior tightening cycle. Credit research across public markets continued to emphasize that spreads were tight and the room for error was limited, which is an important reminder for everyone, including private lenders pricing off similar risk.
Come March, we saw a major credit rating agency’s data pointing out the elevated default risk across U.S. corporates, with leveraged-loan default expectations remaining notable for 2025. For my non-financial professionals out there, this is an early-year cue that “all-in yields” should not be confused with “free lunch.” Because we all know, there is nothing of the sort.
April–May: Convergence with the syndicated market, and banks re-enter the chat
Spring emphasized that there is a growing convergence between broadly syndicated loans and direct lending in the market. Market commentary from around this time duly noted that there is an ongoing “tug of war” between these channels, depending on where terms were most favorable, with implications for pricing power and deal selection.
In May, the Federal Reserve published an analysis documenting the growing links between banks and the overall private credit space, noting that banks are increasingly lending to, partnering with, or using affiliated structures to access middle-market credit exposure in ways that may differ from traditional balance-sheet lending. Why this matters is that it quietly converts “private credit risk” into a networked system risk question, which is exactly the kind of thing that becomes visible only in stress. To learn more, see my blog post on the Leverage Loan rescission guidance.
June–July: Liquidity engineering moves center stage
Mid-year data from the secondary market seemed to capture the liquidity mood. A leading private capital advisory report indicated that global secondary market volume reached $103 billion in the first half of 2025, with average limited partner pricing at approximately 90% of net asset value. The report also highlighted the increasing significance of continuation vehicles, particularly within credit strategies.
For non-financial professionals: investors kept looking for ways to turn “patient capital” into “optional capital.” While not necessarily negative, this alters private markets by increasing sensitivity to valuations, timing pressures, and dependence on financial engineering to address liquidity needs.
August–October: Headline bankruptcies and the confidence problem
Across the late summer and early fall months, it was widely discussed that bankruptcies in consumer-adjacent lending/credit ecosystems amplified public scrutiny. A market note from October specifically referred to this time as a period of “recent private credit noise,” connecting these developments to broader concerns regarding the identification and recognition of losses. We know that around this the same time, regulators and researchers came out and kept highlighting the related fault lines, being fund finance, risk transfer, and how leverage migrates through the financial system.
November–December: Stress testing the ecosystem; rates turn more supportive
By November, we saw that large U.S. corporate bankruptcies were on pace for a multi-year high, which is a reminder to all of us that “soft landings” can still produce hard pockets of distress. In my opinion, December brought two macro signals that mattered for private credit:
1. The Federal Reserve’s December statement reflected a policy environment moving toward easing, which supports borrowers mechanically via lower interest expense at the margin.
2. The Bank of England’s system-wide exercise formalized what the market has already sensed, and that i,s private credit is now large and interconnected enough that authorities want to understand spillovers before they occur.
Santa’s Naughty List: behaviors that raised risk in 2025
Please note, not “everything is doomed.” These were just the recurring themes; the market has tested the edges of prudence.
1) The Rise of Covenant-Lite Structures
The striking trend that we saw in 2025 was the continued drift away from traditional maintenance protections in parts of private credit, particularly as private lenders competed more directly in large-cap style financings. A 2025 market review noted that private credit financings that historically featured maintenance covenants have increasingly shifted toward covenant-lite structures in unitranche (a hybrid debt structure that merges senior and subordinated debt into a single loan) and senior direct lending.
Why I am placing it on the naughty list: Private credit covenants are not moral virtues; in fact, I view them as early-warning instruments. When these safeguards disappear, the lenders often discover problems later, when options are fewer, and recoveries tend to be lower.
2) Liquidity promises layered on illiquid assets
In my opinion, I see the secondary market boom as not automatically negative, but 2025 has made it clear that many investors are trying to “buy optionality” in fundamentally illiquid markets. I'm intrigued by the record H1 secondary volume and the steady pricing that reflects strong demand.
Why I am placing it on the naughty list: When multiple parties create liquidity at once (through secondaries, NAV facilities, or similar structures), the system becomes pro-cyclical, and liquidity can vanish just when it's needed most.
3) There is overconfidence in “all-in yield” as a risk measure
High coupons feel like insulation, when in reality they are not. We all know that when borrower leverage is rising, and interest coverage is weakening, the coupon partly compensates you for the growing probability distribution of adverse outcomes. That basic concern has shown up explicitly, especially in late-2025 commentary from rating agencies that are pointing to weaker coverage and higher leverage pressures for private credit borrowers.
Why I am placing it on the naughty list: it substitutes the arithmetic comfort (coupon) for the economic reality (capacity to pay through a cycle).
4) Thin transparency in a market that now matters systemically
Private credit’s comparative opacity was tolerable when it was small; however, it is less tolerable when it is system-relevant and widely spread out. The Bank of England’s decision to run a system-wide scenario exercise is, in effect, an institutional acknowledgment that data gaps and interconnected leverage deserve scrutiny.
Why I am placing it on the naughty list: opacity, in this sense, is not just an investor inconvenience; it is a stability risk because it delays collective recognition of problems.
Santa’s Nice List: What strengthened the market in 2025
Here are the things that looked like maturity, and not just momentum, therefore has made my “nice” list.
1) Senior-secured discipline and “boring” deal selection
In private credit during 2025, approaches that emphasized senior roles, obvious collateral, strong cash flows, and cautious underwriting outperformed more complex or creative strategies. This is also consistent with the way credit risk research has been framed this year, with tight spreads and a decent macro backdrop, it can still produce asymmetric downside if growth slows unexpectedly.
2) A healthier approach to liquidity, secondaries being a tool, and not a crutch
The secondary market reached $103B in H1 2025, with strong activity and pricing close to NAV. We know that if it is used well, it can be stabilizing by giving investors a theoretical pressure valve and can reduce forced selling elsewhere. If used poorly, it can become a substitute for distributions and an incentive to keep extending time horizons without confronting the fundamentals.
3) Regulators “looking at the ecosystem,” not just individual institutions
A genuinely constructive development was the shift in posture from “who is holding the risk?” to “how does the system behave under stress?” The Bank of England’s private-markets exercise was explicitly aimed at understanding amplification channels and spillovers. That is nice, not because regulation is inherently virtuous, but because clarity about transmission mechanisms lowers the probability of surprise, which makes my nice list.
4) The macro tailwind finally turned supportive
As policy rates moved toward easing late in 2025, borrower interest burdens have become incrementally less punitive by improving near-term refinancing math. The Fed’s December statement reflects that easing direction at year-end.
This is nice in the narrow sense (coverage improves). It is not a substitute for underwriting, because easing can also encourage risk-taking and weaken lender terms, which can be a classic holiday illusion. This is done by showing that lower rates can make everything look more affordable right before discipline fades.
Here is my “stocking stuffer” list, which I will be watching as we head into 2026:
1. Is documentation drift causing covenants and reporting requirements to tighten or loosen further?
1. Borrower health: with a focus on leverage and interest coverage, especially for smaller EBITDA borrowers where stress can concentrate.
2. Liquidity structures: growth in secondaries and related liquidity tools. Is there a difference between healthy portfolio management and systemic crutch?
3. Interconnectedness: bank linkages to private credit, and how these channels behave in a drawdown.
4. Policy and scrutiny: the direction of stress testing and disclosure expectations, particularly in major jurisdictions.
Closing reflection: Santa’s real job is underwriting
The Christmas framing is meant to be playful in nature; however, the substance is very serious. Private credit can no longer be a niche category. What 2025 has demonstrated to me is that both its strengths (patient capital, bespoke financing, stable carry) and its vulnerabilities (term slippage, liquidity engineering, opacity, and stress pockets that become headlines) can coexist, challenging investors to balance optimism with vigilance as market conditions evolve.
If I had to summarize the year in one sentence, it would be that 2025 rewarded discipline, but it also rewarded complacency, right up to where it didn’t anymore. From an additional perspective, the market spent the second half of the year relearning a timeless lesson: in credit, the most important number is not yield; it is resilience.
Disclaimer: This post is for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security or investment strategy.
Credit to where it’s due: this “Naughty & Nice” Private Credit concept is actually not my idea; my friend Jamie Leyden came up with the concept and told me to write about it. Everyone, please give Jamie a shoutout in the comments for this elite holiday-season brainstorming idea.