A new private credit market index: how to capitalize on Wall Street fears

S&P Dow Jones Indices has launched a new index for the private credit market, which is on the brink of a potential crisis. This is Wall Street's first attempt to "make visible" the risk of the opaque $2 trillion sector and the opportunity to capitalize on its problems. How does it work and who might be interested?

The launch of the Credit Default Swaps (CDS) index for a basket of 25 North American financial companies - CDX Financials - was reported by the media on April 10. According to its calculation methodology, the basket includes CDS for banks, insurers, real estate funds (REITs) and public investment funds (BDCs), including those managed by Apollo Global Management, Blackstone and Ares Management.

The basket has equal weighting among all participants and is updated regularly to ensure that the index remains current in composition and maturity and that the market has a standardized, liquid contract for the next several years. S&P maintains the index as part of the CDX North America lineup. You can find out the value of the instrument through trading terminals like Bloomberg, as well as through the systems of JPMorgan, Bank of America, Barclays, Deutsche Bank, Goldman Sachs, and Morgan Stanley - all designated as distributors of the product.

This is the first indicator where CDS are directly tied to companies in the private credit sector. They have faced a wave of investor withdrawal requests this year, and questions about the sustainability of the sector have emerged, including from prominent investors.

American analysts call the index the first organized market instrument that reflects risks specifically in the private credit segment. A credit-default swap is a contract that works as insurance against an issuer defaulting on its debt securities. CDX Financials essentially aggregates a set of such insurances, and it is a kind of defense against the credit risk of an entire sector.

If an investor believes that problems in the private credit sector are getting worse and there will be more defaults, he or she buys protection through CDX Financials and pays quarterly premiums - a fixed coupon from par. If the market begins to book higher risk, the cost of that protection rises and the investor earns a revaluation of his position.

The private credit market has become the main alternative to bank loans and bonds for SMEs over the past decade. The IMF has previously estimated that the global private corporate lending market will exceed $2.1 trillion by the end of 2023, including loans already disbursed and investor capital committed to funds but not yet invested. Three-quarters of that amount is in the United States. According to the Alternative Credit Council and Houlihan Lokey, companies in the sector have approximately $3.5 trillion in assets under management in 2025.

At the same time, this market remains opaque: private loan portfolios are evaluated only periodically, reporting is lagging, and as a result, the investor sees the risk in this market with a delay.

In this context, such an index can be called a "barometer of fear": it shows how much the market is willing to pay for insurance against defaults in this segment, says Eugeniu Kyreu, partner at Movchan's Group and chief investment advisor at ARGO, CFA fund.

To do this, those who wish to do so can buy CDS on individual issuers or open short positions on their shares. However, this approach has a number of problems, says Kyreu.

First, an investor who wants to protect himself against defaults needs to find someone willing to sell such insurance. This is usually another professional market participant - a major bank or insurance company. When most of the big players have assets with private credit risk on their balance sheets, sellers of insurance become hard to find. This means that it is extremely difficult to redistribute risks within the system and one has to look for "insurers" outside the system.

Secondly, the expert adds, the volume of the private lending market exceeds the capitalization of these companies by times. Under such conditions, opening short positions on a significant share of shares may make the investor vulnerable to the actions of other market participants and cause the so-called short squeeze - a situation when the price of an asset rises sharply because the sellers, who bet on a decrease in the price of the asset, are forced to massively close (buy back) their short positions at a higher price.

The circle of potential users is quite wide. Firstly, they are institutional investors - banks, insurance and investment funds, who are looking for opportunities to hedge risks on existing investments. Secondly, they are speculators and macro funds. The latter are, in fact, hedge funds that make money on large macroeconomic trends rather than on individual stocks.

Thirdly, the new index is interesting for the market as a whole - to benchmark systemic risks.

The CDS index looks like a "ready and convenient tool" for investors, says Eugeniu Kyreu of Movchan's Group. On its basis, banks can launch derivatives and structured products, involving hedge funds in "insurance" and then retail players through structured notes and fund solutions, he summarizes.

He believes that in the sector there is a problem of risk redistribution between large financial institutions, work with private credit may require involvement of a wider range of professional participants or even "mass investor". This includes individual investors, to whom brokers usually sell structured notes, the expert specifies.

Independent analyst Mikhail Zavaraev has a different opinion: this product from S&P is unlikely to become a mass product, and there is definitely no great sense for a private investor to invest in it, he believes. For those who want to hedge the risks of their investments in the private credit market, it is more logical to buy swaps on a specific company, he added.

After the launch of the index from S&P, major players on Wall Street joined the "bet against the private credit sector" movement. As the Financial Times wrote with reference to sources, in particular, JPMorgan, Barclays, Morgan Stanley and Citigroup began trading CDS on large private credit funds managed by Blackstone, Apollo Global Management and Ares Management. Investor activity, the FT writes, has so far remained relatively moderate. Since the launch, CDS spreads on all three funds have narrowed, traders told the publication, while JPMorgan Chase strategists expect them to narrow further for the fund managed by Blackstone.

Experts surveyed by Oninvest agree that the value of the new index from S&P Dow Jones will determine how it will be used and how liquid the market will become.

At the very least, the emergence of such an index will make the market more transparent, as it will allow participants to reduce the concentration of risk on a few large players. But on the other hand, if CDX Financials becomes popular, the "self-fulfilling prophecy" effect familiar from other derivatives may occur.

Massive purchases of protection raise the price of CDS, the growth of the spread is read as a signal of deteriorating credit quality, banks and funds are tightening the terms of financing, and this in itself increases the likelihood of problems for borrowers. Then there is a threat that the index indicator will only increase the likelihood of a crisis, says Mikhail Zavaraev.

Another important nuance is representativeness. CDX Financials does not directly show the quality of private loans: the basket includes instruments for large funds, insurance, REITs and others, so Zavaraev admits: the index can be called an "indicator of fear", but it is more a reflection of the general hype around the private loan market.

In Europe, the structure of corporate finance is very different from the U.S.: here, banks are still at the center of the system, regulation is stricter, and the private lending market is still noticeably smaller, says Tero Pesonen, director of private equity and private credit in the Finnish financial group LocalTapiola Asset Management.

In recent years, large international companies have been vigorously building up assets in the private lending sector, including actively offering private investors to invest in open-end direct lending funds. According to Pesonen, this market is now undergoing "the first real test": the expert expects an increase in the number of defaults and restructurings. However, from his point of view, some "cleansing" process may benefit the market: speculative capital will leave, and aggressive strategies will receive deserved losses.

The European private credit market is still smaller and more conservative than the U.S., but already institutional investors are starting to shift their attention from the U.S. to Europe, points out Niina Bergring of Armada. In such a situation, having its own "stress barometer" in the form of a CDS index on European private credit companies would help both investors and regulators better understand where risks are accumulating, she adds.

The new index from S&P is unlikely to become a popular tool. But it has important advantages.

First, it becomes another indicator of the health of the financial system, especially the private credit market. It makes sense for investors in funds, BDCs or in shares of banks and insurers to follow the dynamics of this index.

Second, he reminds us of a key change in recent years: low apparent volatility and modest yields no longer mean low risk. Private credit or structured notes on CDS indices - such products may look "almost like bonds", but the real risk is in what happens to the asset in a moment of stress.

On the other hand, how the new index is used by banks, funds, hedge funds and regulators will determine whether it becomes a tool for more transparent risk assessment, or whether it becomes another factor for risk emergence.

This article was AI-translated and verified by a human editor