May 22 (Reuters) - Institutional investors are increasing exposure to listed private credit vehicles even as default rates climb and weaker borrowers face higher borrowing costs.

A Reuters review of 13F filings showed 11.5% of more than 6,000 filers increased holdings in a universe of 45 publicly traded private credit vehicles in the first quarter, while only 3.2% cut stakes.

Asset managers including Ares Management ARES.N, KKR KKR.N and Blue Owl OWL.N have said institutions are returning to direct lending as new-deal terms improve.

Citigroup C.N and BlackRock's BLK.N HPS Investment Partners announced a €15 billion ($17.40 billion) private-credit programme to expand direct lending across Europe, the UK and eventually the Middle East, showing that large financial firms continue to see growth opportunities even as scrutiny increases.

But credit markets are drawing sharper distinctions among lenders. A Reuters analysis of 884 bonds issued by 41 BDCs showed smaller private-credit lenders trading at much wider spreads than larger rivals.

BCP Investment Corp BCIC.O had the widest spread with a 680-basis-point weighted average OAS, while Prospect Capital PSEC.O, Trinity Capital TRIN.O and Fidus Investment FDUS.O also traded far wider than larger BDCs clustered around 150 to 200 bps.

Broader default data also point to rising borrower stress. Fitch said the default rate among U.S. private-credit borrowers it tracks rose to a 12-month high of 6% in April, the highest since the agency began its monitor in August 2024. Fitch recorded 99 defaults by 91 unique borrowers over the past 12 months, with healthcare accounting for the largest number of unique defaulters.

Fitch revised its outlook on Goldman Sachs BDC to negative, citing credit deterioration, a thin asset-coverage cushion and elevated non-accruals.

Goldman Sachs BDC said non-accruals rose to 4.7% of amortized cost in the first quarter from 2.8% in the previous quarter, while about 10% of total interest and dividend income came from payment-in-kind income. Goldman said the problem loans were concentrated in older investments made before the current management team took over.

Meanwhile, shares of BlackRock TCP Capital fell 3.9% on May 18 after Bloomberg reported that U.S. prosecutors were examining valuation practices at a BlackRock private-credit fund. The report said the probe may end without charges, while TCPC had separately disclosed in January that it expected to cut asset values by about 19%.

In Australia, the country's prudential regulator warned that domestic institutions are exposed to global private-credit risks and said it had intensified oversight of banks, insurers and superannuation trustees as AI, geopolitical volatility and complex markets reshape the risk environment.

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