Private Credit Ratings Face Fresh Scrutiny From Global Watchdogs

Core Viewpoint - The private credit industry, valued at $1.7 trillion, is under increased scrutiny from global regulators regarding the integrity of ratings assigned to its debt instruments [1]. Group 1: Regulatory Concerns - The Financial Stability Board (FSB) has raised concerns about "ratings shopping" in private markets, where firms may select the most favorable ratings from multiple providers [2]. - Officials at the Basel-based institute are worried that private credit ratings lack the same regulatory safeguards as securitization, which requires multiple independent credit ratings and strict conflict of interest management [3]. - The FSB's focus is on identifying risks and vulnerabilities in non-bank financial institutions, including hedge funds and asset managers, rather than making immediate policy recommendations [4]. Group 2: Market Integrity Issues - A German pension fund has reported over €1 billion in losses from private market investments, questioning the integrity of some credit ratings and highlighting valuation risks in this asset class [5]. - The Bank of England is set to examine the role of ratings firms in a system-wide exploratory scenario covering private markets, with a stress test planned to assess the sector's response to economic shocks [6]. - The results of the Bank of England's stress test are not expected until 2027, and no detailed policy actions regarding ratings firms have been developed yet [7]. Group 3: Ongoing Investigations - The scrutiny of ratings firms has intensified following the SEC's investigation into Egan-Jones Ratings Co, a significant provider of private credit ratings [8]. - UBS Group AG's chairman has also warned about "ratings arbitrage" in the insurance industry, which has expanded rapidly due to strict lending restrictions on banks over the past 15 years [8].