KBRA Releases Research – Private Credit: Well Positioned to Navigate the Looming Storm

NEW YORK--(BUSINESS WIRE)--KBRA releases research that examines the $1.2 trillion private credit industry, which is likely entering the most significant period of credit stress it has experienced since becoming such an integral part of the U.S. and European corporate lending landscape. This KBRA report is the first in a series focused on the opaque private credit market, as we seek to leverage our expansive view across the entire landscape of the private credit industry to offer perspectives on the evolving risks and the effectiveness of the industry’s responses.

KBRA’s views are informed by our numerous ratings and credit assessments of the industry’s lenders, sponsors, and borrowers. Our coverage includes 20 public and private business development company (BDC) ratings; 123 ratings backed by the collateral inside of private credit funds; 40 ratings of alternative asset managers; and 73 ratings of middle market collateralized loan obligations (CLO) and related transactions. In addition, KBRA has developed more than 2,400 credit assessments of middle market companies that source loans from these various pillars of private credit financing. All of this activity in the private credit market provides KBRA with a perspective on the potential impact of the worsening macroeconomic challenges.

Key Takeaways

• The large number of new lenders and the run-up in private company valuations in recent years suggest that the impact of the macroeconomic challenges will be highly differentiated. For example, larger, more diversified lender platforms and larger borrowers with higher liquidity will likely fair best during the coming period of higher defaults and workouts.
• The size, profile, and sector concentrations in KBRA’s 2,400+ middle market corporate credit assessment portfolio mirrors the private credit landscape in many ways, with the exception that our current portfolio of assessments is somewhat skewed toward smaller obligors.
• The European segment of the market has less immediate pressure from rising interest rates, having average borrower costs reaching only 8.5% so far. This is because their starting point of negative interest rates gave that market more time to penetrate their loan floors, and more cushion to absorb recent rate hikes. However, in Europe, the impact of higher inflation is more acute, driven by much higher energy costs, and the possibility of deeper recessionary pressures also presents other challenges.
• In the U.S. market, the question of affordability means the tools that helped the industry successfully navigate the COVID pandemic will be necessary but likely insufficient to weather the less transient challenges of the coming cycle. In particular, the successful cooperation between lenders and sponsors to “amend and extend” and/or infuse equity during COVID will not be successful if permanently higher rates are simply unaffordable for some borrowers, and/or if equity infusions cannot be justified in the context of weaker valuations.
• Nevertheless, (i) the industry’s typically highly diversified platforms, (ii) lower susceptibility to dramatic swings in valuations, (iii) limited exposure to the corrosive impact of capital charges and forced liquidations (relative to banks), and (iv) the mutually beneficial collaboration among sponsors and lenders provide all the necessary ingredients for the industry to maintain its reputation for being patient capital that can better absorb and disperse the impact of higher default rates than traditional lenders.

Click here to view the report.

Related Publications

• Pension Funds Increase Their Allocations to Private Capital
• Private Credit: Private Corporate Credit Market Poised for Resiliency
• Private Credit: Business Development Company (BDC) Ratings Compendium: Where Does the Sector Stand on Liquidity
• Private Credit: Business Development Company (BDC) Ratings Compendium: The Impact of Higher Rates and a Potential Recession

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.