DBRS Morningstar: Rising rates to hit private corporate credit first and hardest
Large corporates will be affected next through refinance and earnings cycles.
Key takeaways:
- Private credit issuers are most exposed to higher interest rates because of their predominantly floating-rate debt, with rising interest expenses pressuring interest coverage and cash flow generation.
- For project finance, elevated borrowing costs are slowing greenfield development; increasing refinancing risk; and placing greater emphasis on contracted revenues, strong counterparties, and robust debt service coverage.
- Large corporate issuers are generally more insulated from rising interest rates in the near term because of their largely fixed-rate debt and staggered debt maturity profiles.
The rapid rise in market interest rates is affecting corporate asset classes at different speeds and with varying intensity. This commentary examines how tighter financing conditions affect private credit, project finance, and large corporate credit ratings.
Private corporate credit is hit first, and hardest, given the sector’s typical floating interest expenses. Project finance follows, mainly through potential funding mismatches, while large corporates are affected through the refinance and earnings cycles.
Tighter financing conditions on both sides of the Atlantic
Global borrowing costs have increased since 2020, following market and policy responses to global shocks including the COVID-19 pandemic and the rise in energy prices from Russia’s 2022 invasion of Ukraine. As seen in Exhibit 1 and Exhibit 2, those shocks triggered significant price growth in 2022 in the U.S. and the euro area. The ensuing tightening of monetary policy helped reduce inflation toward central bank targets, but the current conflict in the Middle East has again increased input costs and pushed headline inflation higher. Consequently, short-term policy rates, after declining since 2024, appear likely to remain higher than they were pre-pandemic.
Source: FactSet. Data as of Sept. 24.
There are also more structural factors behind the recent increase in long-term yields across government and corporate debt markets. The combined effect of a gradual shrinking of central bank balance sheets, competition for long-term capital to fund large private-sector investment, and pressure to increase public spending on defense and a range of domestic priorities have increased the cost of financing. Public interest expenditure has also increased, especially for countries with large existing debt stocks. These conditions, which we expect to remain, have resulted in structurally higher borrowing costs for countries across the Atlantic than a decade ago.
Private credit: more immediate pass-through to reprice interest expenses
Private credit issuers are small to midsize companies that generate revenue of approximately $1 billion and EBITDA of up to approximately $200 million. Many are much smaller, however, with EBITDA under $10 million. Private credit issuers are highly sensitive to fluctuations in the interest rate environment since private credit loans are mainly issued with floating rates. Typically, private credit loans carry interest rates quoted as a base rate plus an applicable margin (e.g., Secured Overnight Financing Rate + 6.00%); they bear maturities of five to eight years and are underwritten with high leverage (the median leverage in our portfolio was 6.6 times (x) as of June 30, 2026). Short debt maturities and modest standard amortization rates of 1.0% imply that debt may not be repaid in full prior to maturity but rather will be refinanced or extended, which creates material refinancing risk.
These features of private credit capital structures are reflected in their credit ratings. As of June 30, 2026, 78% of our private credit issuers were rated B or lower.
Source: Morningstar DBRS. Data as of Sept. 18, 2026.
Private credit issuers more vulnerable to distress or default
The impact of higher interest rates on private credit borrowers is most clearly visible through higher interest expenses and the resulting pressure on interest coverage ratios. Nearly 70% of private credit issuers had interest coverage ratios under 2.0x as of June 30, 2026, which means they have limited room to absorb additional interest expense if interest rates rise. However, the second- and third-order impacts can also be material. As smaller, often niche-oriented companies, private credit borrowers are often more vulnerable to economic and idiosyncratic risks (e.g., customer concentration, input price volatility, and/or geographic concentration) than public market borrowers and therefore experience more volatility in revenue, profitability, and cash flow generation. This, combined with typically high leverage at underwriting, means that private credit issuers are more vulnerable to distress or default when higher interest rates strain the company’s ability to generate sufficient cash flow, thus negatively affecting cash flow-to-debt and interest coverage.
Source: Morningstar DBRS. Data as of Sept. 18, 2026.
Sponsor and lender support can moderate credit deterioration
Private credit issuers benefit from ownership by private equity firms (or sponsors) and debt issuance through a coordinated group of private credit lenders, which can act as a defense against distress. Generally, private credit sponsors and lenders can coordinate responses if an issuer encounters temporary operational stress. Typical actions include extending debt maturities; accepting payment in kind instead of cash (e.g., added as incremental debt to the principal balance); temporarily waiving principal payments and/or financial covenants in the credit agreement; and/or sponsors provisioning additional equity capital. Despite these measures, periods of operational stress can lead to credit rating downgrades, but issuers will likely not default on their debt (a credit rating of D) unless material interest and/or principal payments are missed and not cured within a specified period. This additional leeway provides issuers time to stabilize operations, cut costs, and perhaps ready themselves to be sold to a new sponsor.
Project finance: slower pass-through tighter margins
Project finance and infrastructure assets are generally less immediately affected by rising interest rates than private credit because many projects typically benefit from long-term contracted cash flows and fixed-rate financing. However, higher borrowing costs increase the cost of new projects, thus making financing more difficult to obtain. Existing projects with long-dated fixed-rate debt are largely insulated from near-term elevated rates, while projects with near-term refinancing risk face higher debt service costs at refinancing and weaker coverage metrics.
The primary credit impact is likely to emerge gradually through lower leverage levels, slower greenfield development, and refinancing at higher borrowing costs. As financing remains more expensive, lenders may place greater emphasis on contracted revenues, stronger counterparties, and robust debt service coverage. Consequently, highly leveraged projects and those with weaker revenue visibility are likely to face the greatest pressure in a prolonged higher rate environment.
Source: Proximo. Data as of Sept. 21, 2026.
Tighter credit conditions favour stronger fundamentals
Greenfield projects across the energy, digital, and infrastructure space are particularly sensitive to higher interest rates because they require substantial upfront capital investment and recover costs over their long operating lives. Higher financing costs may need to be offset by higher pricing under power purchase agreements or leases, or additional equity contributions to make the project viable; development activity may slow as sponsors reassess project economics and lenders adopt more conservative underwriting standards. This is particularly evident for lower-rated and non investment-grade issuers or issuers with complex credit stories, where borrowing costs have risen and credit appetite may diminish as lenders become more selective about where they deploy capital. Nonetheless, strong investment-grade issuers with stronger underlying project fundamentals are still accessing the market, albeit at slightly higher borrowing costs. Overall, transaction volumes remain broadly resilient, particularly those with digital infrastructure assets, although heightened refinancing risk and structural complexity have become more pronounced.
Project and infrastructure finance volumes have grown substantially in recent years, largely driven by the build-out of data centers, digital infrastructure, and large liquefied natural gas projects. While global financing volume is forecast to moderate in 2026 following a substantial increase in volume in 2025 as per Proximo, its forecast for volume remains well above historical levels, suggesting a more normal financing year rather than a market contraction. For North American project finance issuers, although financing volume is forecast to increase through 2028, growth is expected to slow materially in 2026. In our view, higher interest rates are one factor tightening financing conditions for project finance in the near term; higher borrowing costs are likely to contribute to greater lender selectivity and tighter project economics, but financing should remain available for well-structured projects with strong fundamentals.
Higher rates drive credit differentiation
Refinancing risk remains a key pressure point for project finance and digital infrastructure assets in a higher rate environment. While many project finance assets are financed through long-term fixed-rate debt and are therefore insulated from immediate rate increases, those approaching debt maturity may face materially higher borrowing costs when refinancing. Projects that were financed with the expectation of lower long-term interest rates at refinancing may support less debt than originally anticipated, requiring additional equity contributions or smaller refinancing proceeds. In some cases, sponsors may defer refinancing transactions, accept shorter maturities, or seek alternative funding sources until financing conditions improve.
Projects with merchant revenue exposure, weaker counterparties, or limited operating cushions are likely to see the most credit rating impact from higher interest rates. Conversely, assets supported by long-term contracts, regulated revenue frameworks, or strong market positions are generally better positioned to absorb higher refinancing costs, although they are unlikely to be completely immune to leverage pressures.
Large corporate issuers: the slow burn of rising interest rates
The direct near-term effect of rising interest rates on the operating performance and cash flow of our publicly rated large corporate issuers is generally more muted because of their largely fixed rate debt obligations.
Source: Morningstar DBRS. Data as of Sept. 21, 2026.
Even when near-term maturities require refinancing, the effect on weighted-average borrowing costs, operating cash flow, and interest coverage is gradual given large corporate issuers’ generally well spread-out maturity profiles, resulting in only a portion of total debt being refinanced at prevailing market rates at any given time.
Rising interest rates also indirectly affect operating performance and cash flow for both investment-grade and non-investment-grade large corporate issuers. Such effects generally manifest through weakened demand, resulting in slower revenue growth, compressed operating margins, and reduced operating and free cash flow. These trends are particularly prevalent in industries exposed to discretionary consumer spending, including consumer product manufacturers and retailers on the more discretionary end of the staple/discretionary spectrum, automotive and automotive parts manufacturers, as well as airlines.
Source: Morningstar DBRS. Data as of Sept. 21, 2026.
Shifting priorities for capital allocation
Rising borrowing costs also cause large corporate issuers to reassess their capital allocation priorities, particularly (1) non-investment-grade issuers; and (2) issuers in capital-intensive sectors, such as automotive and automotive parts manufacturers and telecommunications providers. Such issuers’ capital allocation decisions generally become more conservative in a rising interest rate environment, potentially delaying expansionary capital projects, discretionary investments, mergers and acquisitions, and debt-funded share repurchases.
Uneven credit rating implications for large corporates
Higher interest rates alone are unlikely to affect large corporate issuers’ credit ratings. However, when combined with weaker operating performance and diminished financial flexibility, elevated borrowing costs can contribute to deteriorating leverage, interest coverage, and cash flow metrics, potentially pressuring credit risk profiles. That said, the timing and severity of the potential effect varies by sector and issuer. Consumer product companies and retail issuers, for example, may experience pressure sooner because of weaker demand, while capital-intensive sectors such as automotive and automotive parts manufacturers and telecommunications providers may face longer-term challenges as large debt balances are refinanced and capital investment requirements remain significant. Regardless of sector, credit rating actions are driven primarily by the evolution of an issuer’s individual credit risk profile rather than by macroeconomic trends alone.
