KBRA Releases Research – Private Credit: Recurring Revenue Loans in a Rising Rate Environment

NEW YORK--(BUSINESS WIRE)--KBRA releases research that examines the $1.2 trillion private credit industry. The industry 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.

In a recent report, KBRA described the interest rate and economic headwinds impacting middle market corporate borrowers and noted that most private credit lenders are well positioned to navigate the more challenging environment and absorb an increase in loan workouts and defaults. Meanwhile, KBRA also noted that some borrowers will be more challenged than others as they grapple with higher interest costs. One example will be smaller or earlier stage recurring revenue companies that have limited capacity to absorb higher interest costs from operating cash flow.

In this report, as part of a series focused on the private credit market, we provide perspective on how rising interest rates and a slowing economy may impact credit risk for some companies financed with loans underwritten based on their annual recurring revenue (ARR), as opposed to more traditional EBITDA metrics.

Key Takeaways

• ARR lenders and sponsors may face more defaults and workouts in a higher interest rate and slower growth environment.
• ARR companies that have access to liquidity and the scale and ability to reduce expenses and redirect growth investment toward higher interest costs will fare better than smaller or earlier stage companies with less flexibility.
• ARR companies that have strong business models, are less susceptible to declining valuations, and have lower leverage will be more likely to receive support from their financial sponsors.

Click here to view the report.

Related Publications

• Private Credit Funds in Pictures: Safety in Numbers
• Private Credit: A Boon for Private Credit and Private Placements in Aviation
• Private Credit: 12% Is Not Affordable for Many Borrowers
• Private Credit: Well Positioned to Navigate the Looming Storm
• Pension Funds Increase Their Allocations to Private Credit
• General Corporate Global Rating Methodology

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.