The prolonged Iran war has led to emerging risks of non-performing loans in the private equity credit market warning

Some analyses point out that as the long-term conflict in Iran persists, combined with high interest rates and economic uncertainty, the potential bad debt issues in the private credit market are increasingly likely to become reality. Although the overdue scale appears small on the surface, in reality, the repayment burden on borrowing companies is continuously accumulating, and risks may spread throughout the financial sector.

According to financial industry sources on the 21st, researchers Shen Zaizan, Han Junxi, and research committee member Huang Xigui from NH Financial Research Institute diagnosed in a report published on the 20th that the prolonged conflict in the Middle East is intensifying inflation concerns and the possibility of further interest rate hikes. Private credit refers to loans made outside of bank loans or public corporate bond markets, which have rapidly expanded in recent years relying on low-interest funds. The problem is that a significant portion of loans executed during the COVID-19 pandemic under low-interest environments adopted floating interest rate structures. As interest rates rise afterward, companies face increased interest burdens and pressure to refinance. The research team explained that current borrowing costs are about 55% higher than in 2021.

The institute specifically pointed out that restructuring related to artificial intelligence industries may stimulate private credit defaults. By the end of last year, 19% of private credit loans were concentrated in service-oriented software, namely SaaS companies. Meanwhile, a growing market perception is forming that AI is not only a supplementary tool for existing software businesses but may also become a substitute in certain fields. Under such circumstances, the profitability prospects of related companies will weaken, and the value of assets used as collateral for loans may also decline accordingly. Ultimately, this could create a structure where technological changes lead to both deteriorating corporate performance and weakening collateral values.

The research also noted that it is difficult to fully identify risks based solely on superficial indicators. This is because, when borrowing companies are unable to pay interest in cash, the proportion of using payment-in-kind (PIK)—that is, adding the interest to the principal and repaying it at maturity—is increasing. Under this structure, although it may not be immediately classified as overdue, and the apparent health of the company is maintained, bad debt problems could be delayed or concealed in reality. If combined with a sluggish M&A market for acquisitions of operational rights, additional collateral requirements triggered by declining net asset values, and prepayment pressures, the financial conditions of companies and funds could deteriorate more rapidly.

The institute emphasized that these bad debt issues will not be confined to individual companies but could trigger a series of chain reactions such as surge in fund redemptions, banks demanding additional collateral, and liquidity shortages in funds. The International Monetary Fund (IMF), in its financial stability report released on the 15th, listed private credit as one of the six major pathways for amplified risks in financial markets. The IMF assessed that, following the escalation of the Middle East conflict, global financial markets are still undergoing orderly adjustments but are under increasing gradual pressure. It also pointed out that companies that have not shown signs of overdue payments through physical payment methods are increasingly entering default status. If this trend continues—especially with prolonged high interest rates and successive geopolitical shocks—the problems in the private credit market could worsen further, potentially exceeding the non-bank financial sector and spreading to banking and the real economy.