INTRODUCTION Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
Regulatory developments As the private credit market matures, it may face increased scrutiny from regulators even as public mar - ket options become more competitive. In the United States, the Office of the Comptroller of the Currency and FDIC issued a joint statement in December 2025 rescinding the 2013 Leveraged Lending Guidance. This could allow banks greater flexibility to underwrite risk and compete more directly with private credit across leverage levels. Additionally, new guidelines from the National Association of Insurance Commis - sioners that took effect on 1 January 2025 reclassified certain sections of insurers’ financial statements, pro - viding better insight into their private credit activities and increasing transparency regarding “ratings infla - tion” concerns in privately rated placements. Against that changing competitive backdrop and as private credit continues to expand its LP base, there have been calls for closer regulatory scrutiny of private credit funds and its suitability for certain investors. In the UK, the Bank of England announced in early December 2025 its intention to stress-test the private markets to reveal any risks and their interconnect - edness with the broader UK financial system, amid concerns that the resilience of private markets to a severe downturn has not yet been tested, and Gover- nor Andrew Bailey highlighted the need for continued vigilance. These regulatory developments underscore the case for private credit providers to enhance their compliance and reporting frameworks to mitigate potential risks. Innovative financing structures and the rise of AI infrastructure Private credit providers are continually innovating to meet the evolving needs of borrowers. The surge in AI-related investments has become a major theme, with private credit playing an increasingly crucial role in funding the upfront costs of purchasing graphics processing units (GPUs), building data centres and upgrading power grids. Increasing demand for private credit in 2026 is likely to be no different from 2025, and we expect that the pace of AI-related infrastructure spending will only accelerate. BlackRock estimates that AI investments through to 2030 will require sig - nificant upfront spending on computing, data centres and energy infrastructure. JPMorgan reports that US
data centre-related bond issuances reached USD15.1 billion in 2025, and estimates that around USD150 bil - lion will be needed in 2026–27 to convert short-term construction loans into long-term financing for nearly 20 gigawatts of data centre capacity. Private credit stands to benefit from that strong demand. Portfolio challenges Private credit has historically had low default rates even through multiple credit cycles, and the product has shown remarkable resilience. That said, private credit loans from the very active 2021 vintage are likely set to mature in 2028, encouraging early refinancing and, where required, restructuring, and we expect to see significant refinancing activity if those transac - tions are not paid off via exit events. The immediate post-Covid vintage might present par - ticular challenges, with leverage levels consistent with the high valuations of the time and significant borrow - er bargaining power. With those credits in mind, direct lenders are increasingly proactive about engaging with borrowers about potential problems and developing solutions before the problems materialise, includ - ing through proactive amendments, negotiating with sponsors for additional equity injections and manag - ing liquidity through PIK flexibility. Junior and hybrid capital Junior and hybrid capital solutions provided by pri - vate credit, structured equity funds and private equity have emerged as a crucial financing tool for sponsor- backed and non-sponsored companies alike. These capital providers are increasingly offering junior and hybrid capital solutions that blend debt and equity ele - ments, enabling sponsors to monetise assets effec - tively, de-lever debt capital structures, and provide more dry powder for acquisitions, while providing investors with downside-protected returns. For the right issuers, the availability of non-cash pay instruments (which is a customary feature of junior and hybrid capital solutions) allows for greater flex - ibility to conserve cash as businesses ramp up, and remains an attractive option for some sponsors and creditors alike.
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