Credit Refinancing Risk and Private Client Portfolios

Introduction

As of May 2025, credit refinancing risk has become a focal point for private client portfolios, particularly those with exposure to private credit and high-yield bonds. The extended period of low interest rates through 2021 and 2022 allowed many borrowers to lock in favourable terms, but a significant portion of that debt is now approaching maturity. With interest rates having risen sharply in 2022-2023 and remaining elevated relative to pre-pandemic levels, the ability of borrowers to refinance without strain is less certain. This note examines the implications for private clients, drawing on the current market context and portfolio construction themes.

Market and Context

Portfolio discussions in early 2025 have centred on resilience, liquidity, and diversification after a long period of concentrated equity leadership. Bond allocations, in particular, have been under review. While yields have improved and now offer meaningful income, duration risk remains a relevant concern given the potential for further rate adjustments. At the same time, private market investors have grown cautious on valuation marks and exit assumptions, as the environment for initial public offerings and mergers and acquisitions has remained subdued.

Within credit markets, the refinancing wall for speculative-grade borrowers is a key source of risk. Many companies that issued debt in the low-rate era now face higher coupon costs when they roll over maturing obligations. In private credit, direct lenders often hold loans to maturity, and the secondary market is thin, making it difficult to gauge fair value. For private clients, this combination of factors introduces both income uncertainty and potential capital impairment.

Main Analysis: Credit Refinancing Risk

Credit refinancing risk refers to the possibility that a borrower will be unable to refinance its existing debt at similar terms, or at all, when it matures. In the current environment, this risk is elevated for several reasons.

First, the interest rate backdrop. While central banks have paused or slowed rate hikes, the level of rates is still high relative to the 2010s. Floating-rate private credit instruments have already repriced higher, but fixed-rate bonds that mature soon will need to be refinanced at prevailing yields. For highly leveraged borrowers, the step-up in interest expense could strain cash flows.

Second, credit spreads have tightened from their 2023 peaks but remain sensitive to economic signals. If growth slows or defaults rise, spreads could widen, making refinancing more expensive or inaccessible for lower-rated issuers. In private credit, where loans are often covenant-lite, lenders have less ability to intervene early.

Third, the maturity wall is concentrated. According to available data, a significant volume of leveraged loans and high-yield bonds are scheduled to mature in 2025 and 2026. The ability of borrowers to tap capital markets depends on investor appetite, which can shift quickly. In private credit, refinancing often relies on existing lender relationships, but those lenders may be less willing to roll over exposure if their own portfolio constraints tighten.

For private client portfolios, the impact manifests in two ways. Direct holdings of individual bonds or private credit funds face mark-to-market volatility if refinancing risk is repriced. More importantly, if a borrower defaults or restructures, principal loss can occur. Private credit funds may also gate redemptions or suspend valuations, locking investors in at uncertain prices.

Implications for Investors

Private clients should assess their exposure to credit refinancing risk across both public and private allocations. In public fixed income, high-yield bonds with near-term maturities may offer attractive yields but carry rollover risk. Short-duration strategies can mitigate some duration risk but do not eliminate credit risk.

In private credit, due diligence on underlying borrower fundamentals is critical. Investors should understand the maturity profile of the funds they hold, the proportion of loans that are floating versus fixed rate, and the fund's liquidity terms. Many private credit funds have quarterly or semi-annual redemption windows with gates, and liquidity can be constrained during periods of stress.

Diversification across sectors, geographies, and credit quality can help, but correlation tends to rise in downturns. Holding a portion of the portfolio in liquid, high-quality bonds or cash provides a buffer and the ability to rebalance.

Another implication is the reconsideration of bond allocations overall. As yields offer income, some investors have been tempted to extend duration or reach for yield. However, the refinancing risk argues for a measured approach, favouring issuers with strong free cash flow and manageable debt maturities.

Risks to Watch

Several risks bear monitoring. First, a sharper-than-expected economic slowdown could increase default rates, particularly among cyclical industries such as retail, energy, and commercial real estate. Second, if inflation proves sticky and central banks are forced to keep rates high for longer, refinancing costs will remain elevated. Third, regulatory changes or shifts in bank lending standards could reduce the availability of credit, affecting private borrowers that rely on bank lines or alternative lenders.

In private credit, valuation marks have been a source of debate. If underlying asset values decline, loan-to-value ratios could deteriorate, triggering covenant breaches or making refinancing difficult. Investors should be aware that reported net asset values may lag true market conditions.

Finally, liquidity risk in private client portfolios is a concern. If a wave of redemption requests hits private credit funds, managers may be forced to sell assets at distressed prices, amplifying losses. Private clients with significant illiquid allocations should ensure they have sufficient liquid reserves for spending needs and rebalancing.

Closing

Credit refinancing risk is a nuanced but material consideration for private client portfolios as of May 2025. While not a crisis in itself, it adds to the case for careful portfolio construction that emphasises resilience, liquidity, and diversification. Investors should work with their advisers to stress-test portfolios against a scenario of rising defaults and tighter credit conditions. Those who manage refinancing risk prudently will be better positioned to preserve capital and capture opportunities as they arise.

In this environment, patience and discipline remain virtues. Avoiding the temptation to chase yield without regard for credit quality, and maintaining a clear-eyed view of liquidity needs, will serve private clients well.