Morningstar: Weakest private credit issuers will struggle this year
The weakest private credit issuers will continue to experience difficulties this year, according to a new analysis from Morningstar DBRS.
In the rating agency’s latest edition of its monthly credit ratings review, it noted that six per cent of its rated private credit portfolio “continues to contend with challenging operating conditions, high borrowing costs, and dwindling financial resources.”
These weaker players will continue to face headwinds in the year ahead, the agency predicted.
However, Michael Dimler, senior vice president, private credit ratings, at Morningstar DBRS, said that there is no significant concentration of end markets that would signal risk of a broader sector-wide contagion.
“Drivers behind the decline in business performance are varied and specific to each issuer, including unforeseen equipment failure, decline in product/service demand following a spike during Covid-19, and high exposure to a cyclical drop in industry demand (for example, transportation services, shipping, and logistics),” said Dimler.
Read more: Uptick in lower-mid-market borrowers struggling to meet covenants
“We continue to expect additional credit weakness for these names before year-end.”
Elsewhere in the credit update, Morningstar DBRS reaffirmed its belief that there is an emerging bifurcation in the middle market, with a growing number of issuers being downgraded to high risk or lower; while others are seeing their credit prospects improve.
Over the course of April, Morningstar’s ratio of private credit downgrades to upgrades improved, as positive changes in credit rating trends continue to outpace negative changes in the year to date. Morningstar said that it views this as a leading indicator of credit quality.
Read more: Emerging ‘bifurcation’ of quality in middle market private credit
“We continue to monitor domestic political and geopolitical risks, including those that could stem from immense electoral uncertainty this year, particularly with regard to the US,” said Nichola James, managing director, global sovereign ratings.
“Nonetheless, we have already incorporated these risks into our credit rating assessments, and across other asset class credit ratings.”
Read more: Private debt AUM could hit $2.7tn by 2028
