Private Funds Finance: Big cushions offer protection against defaults
KBRA Direct Lending Deals (KBRA DLD)
Direct lending news & analysis for investors in the U.S. and Europe. DLD was acquired by KBRA Analytics in 2022.
The private credit market is about to face its biggest stress test yet: Borrowing costs have more than doubled in the past 12 months for portfolio companies, and the Fed signaled last week that additional rate hikes were in the works for 2023.?KBRA DLD’s parent,?Kroll Bond Rating Agency?(KBRA), recently analyzed the effects of 12% interest on middle market borrowers and reported that managers are staring at a 16% increase in the number of companies that can’t generate enough cash flows to service interest.?
What does this mean for the lenders backing the private credit funds that lend to portfolio companies??For the $14.5 billion of fund financing rated by the agency, there’s actually considerable breathing room.
In an analysis this month, KBRA found that fund financing rated investment grade — about 90% of the $14.5 billion — would be able to, on average, withstand a cumulative default rate of 61% and still meet interest obligations. Default scenarios for portfolio companies ranged from a low of 18%, to a high of 81%.?
Meanwhile, non-investment grade fund financing could withstand portfolio default rates ranging from 12% to 71%, with an average of 52%, and still meet interest payments.??
The investment grade and non-IG scenarios assume average recovery rates of...
To read the rest of this report and others published by KBRA DLD, contact Niki Masino .
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