SEC Begins Questioning Rating Agencies' Integrity, Private Credit "Blame Game" Officially Ignited

Pressures in the private credit market are evolving from a wave of redemptions into a deeper crisis of confidence. As several leading asset management firms successively restrict withdrawals, regulators have begun to publicly question whether the rating systems underpinning this market's operation have fundamental flaws from the outset.

The U.S. Securities and Exchange Commission (SEC) recently inquired about whether credit rating agency Egan-Jones can "continue to issue credit ratings in an honest manner." This statement is not a routine review but rather a regulatory body publicly questioning the reliability of the core mechanisms in the private credit market.

Concurrently, Ares Management's Strategic Income Fund announced withdrawal restrictions after redemption requests reached 11.6%, and Apollo Global Management had previously imposed redemption caps on its $25 billion Apollo Debt Solutions product, with a trigger threshold also set at 11%.

This series of events indicates that the private credit market is experiencing a dual shock – liquidity pressure and a crisis of credit credibility are developing simultaneously. This implies that not only are exit channels being blocked, but the rating foundations previously relied upon for pricing and risk management are also facing re-examination.

Redemption Wave Continues to Spread, Leading Institutions Set Gates

Over the past few months, redemption pressures in the private credit market have shown systemic spread.

According to a compilation of public information, on March 3rd of this year, Blackstone's flagship private credit product encountered "record-breaking" redemptions, with investor requests amounting to approximately 7.9% of the fund's $82 billion in assets. On March 6th, BlackRock began restricting withdrawals from its $26 billion HPS Corporate Lending Fund. On March 11th, Morgan Stanley and Cliffwater imposed redemption caps on funds worth $8 billion and $33 billion, respectively.

Even earlier, on February 19th of this year, Blue Owl implemented redemption restrictions on its private credit fund targeted at retail investors. On January 26th, BlackRock made an asset write-down of 19% for TCP Capital Corp. This series of events outlines the trajectory of gradually accumulating liquidity pressure in the private credit market, culminating in a concentrated outbreak.

Notably, on March 16th, a co-president of Apollo publicly stated that asset valuations in some areas of the private market are "all wrong," a rare remark that further shook market confidence.

SEC Inquires with Egan-Jones, Credibility of Rating System Questioned

This SEC inquiry into Egan-Jones shifts market focus from liquidity to more fundamental structural issues. Egan-Jones is a relatively small but deeply embedded rating agency in the private credit sector, and many of its private loan ratings are used by insurance companies for capital treatment purposes.

This is not the first time Egan-Jones has faced regulatory pressure. The agency has been subject to SEC reviews multiple times historically, primarily concerning conflicts of interest, disclosure, and internal control issues. In 2012, the SEC accused the company of misrepresenting its qualifications for rating asset-backed securities, which ultimately resulted in fines and a suspension of its rating qualifications for certain structured products.

If Egan-Jones's ratings exhibit systematic bias, the impact will extend far beyond a single institution. This means that insurance companies relying on these ratings for capital measurement, as well as institutional investors making investment decisions based on them, may bear actual risks far exceeding their book values. This logic is highly similar to the issue of inflated ratings for structured products prior to the 2008 financial crisis.

Enforcement Loosens, Regulatory Pressure Unavoidable

This public inquiry by the SEC occurs at a delicate juncture. Just one day before the inquiry news broke, the SEC's acting director of enforcement reportedly announced his resignation for seeking to take stronger enforcement actions than leadership expected, indicating that the SEC currently has little appetite for proactive measures.

Precisely because of this backdrop, the SEC's decision to publicly question the integrity of private credit ratings underscores that external pressures are now difficult to ignore. Historical patterns suggest that such regulatory statements are often not the beginning of a crisis, but rather a passive response after problems have accumulated to a certain extent.

As redemption gates are gradually closed and asset valuations face scrutiny, the blame game among market participants is accelerating. Fund managers are beginning to distance themselves from rating agencies, investors' calls for accountability are becoming stronger, and regulators are being forced to address issues they had previously deliberately avoided. The path to rebuilding trust in the private credit market may have just begun.