> But no one can answer, why would anyone lend PE firms money if it's a bad investment?

Remember the housing crisis? As long as you can align the debt with an appropriate tranche, institutional investors like diversification and risk (in that part of the portfolio).

Also, these types of debt can make money in the short term. My father in law bought a beach house with a KMart bond trade. After they emerged from bankruptcy, everything was great! (Lol)