We were asked yesterday whether private credit is safer than high-yield (junk) bonds — and it ties nicely into today’s discussion. As with most things in investing, it depends.
- Private credit typically involves senior secured loans, directly originated with collateral and tight covenants. Lenders often sit first in the capital stack if something goes wrong.
- High-yield bonds are publicly traded, usually unsecured, and lower in the capital stack. Investors rely on market liquidity rather than control.
Because private credit lenders have security and covenants, they generally experience lower loss severity when defaults occur. However, these loans are illiquid and marked infrequently, which can obscure volatility. Private credit may appear more stable because it doesn’t trade daily — but that stability can be optical.
Junk bonds, on the other hand, reprice instantly — they look riskier in the short term but often recover faster. In a downturn or credit shock, both asset classes can lose money: private credit through defaults and restructures, junk bonds through spread widening. The difference lies in liquidity and timing, not necessarily safety.
