Happy Thursday evening.

The current thing is private credit ratings pose systemic risk. They're fighting the last war.

Let’s get into it:

UBS Chair Colm Kelleher warned last week that insurers shopping for optimal ratings creates "looming systemic risk." Bank of England Governor Andrew Bailey said industry figures had echoed the concern. The Financial Times has been investigating ratings agencies in private credit and highlighted that Egan Jones issued 3,600 ratings with 20 analysts. The criticism is mounting, and the regulatory scrutiny is real.

But the critics are fighting the last war.

When banks held loans in 2008, ratings mattered systemically. A downgrade could trigger margin calls, force asset sales, and create contagion across interconnected balance sheets. The systemic consequences of downgrades were so severe that ratings remained stickier than underlying credit quality warranted. Failures cascaded when they finally came because they sat inside a leveraged, deposit-funded system where dominoes could fall in hours.

Fast forward to 2025 and a decidedly twitchy commentariat. As pools of institutional capital seek returns in non-bank financial institutions, concern is mounting that these vital sources of savings could be at risk. Fair enough.

But private credit funds are not banks. They are capital vehicles with no deposits, no overnight funding, and no ability to create bank runs. When a private credit rating turns out to be inflated, the loss stays contained in that fund. No dominoes fall. The LP who invested knew they were buying illiquid credit exposure. The insurance company holding the asset has long-duration liabilities matched to long-duration assets.

An insurer discovering its private credit portfolio is rated too generously does not create a liquidity crisis. It creates a capital buffer problem that gets solved over quarters and years, not in a weekend emergency Fed meeting. Insurance company insolvencies typically take many years to resolve, not hours or days. Regulators have time to intervene through rehabilitation or orderly liquidation. Policyholders have state guarantee funds.

Not all ratings agencies are created equal. Apollo CEO Marc Rowan defended DBRS and KBRA on a recent earnings call, noting they've developed real specialist expertise in structured products and compete effectively with the big three. He was notably careful to distinguish them from Egan Jones, which Athene does not use. When the largest players draw these lines publicly, they signal where serious infrastructure is being built versus where concerns are valid. DBRS and KBRA have been expanding analyst teams and building expertise in complex structures like collateralized fund obligations. Moody's and S&P continue issuing around 1,000 private letter ratings annually. This is ratings infrastructure maturing to serve a new market.

Skeptics will argue that insurance failures still create taxpayer risk. True. But insurance failures do not cascade the way bank failures do. The resolution timeline is measured in years, not hours.

The system is not riskless, but it is materially less fragile than what existed in 2008.

The real challenge isn't regulatory - it's informational. Illiquid investments now account for $685 billion, or 18 percent of the fixed-income assets held by U.S. life insurers, according to Moody's Ratings. Some firms hold more than half their portfolios in hard-to-trade debt.

At that scale, private credit needs standardized collateral data, transparent performance metrics, and consistent reporting frameworks. LPs want and deserve better information. As the market scales, the ability to value and monitor assets in real time will separate functional markets from fragmented ones."

The infrastructure is being built in real time by firms that understand the asset class. Non-deposit-taking institutions providing loans is a feature, not a bug. Losses get absorbed by equity capital that signed up for illiquidity.

That is a structurally sounder system than what came before.

Thanks for reading,

Marc.

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