Private credit defaults slow in 2024
Defaults in private credit have slowed so far in 2024, according to data from S&P Global Ratings.
It marks a change in the direction of travel, following an acceleration in defaults in 2023.
S&P’s data recorded a default rate (excluding selective defaults) of 0.5 per cent on a trailing-12-month basis to the end of first quarter 2024. This is based on S&P’s universe of more than 2,000 credit-estimated issuers, which represent approximately $500bn (£396bn) of debt held by middle-market collateralised loan obligations (CLOs).
This compares to a rate of just under two per cent in the broadly syndicated loan (BSL) market over the same period.
Between 2020 and mid-2024, the ratings agency identified 66 cases of defaults in the private credit market, where companies missed an interest or principal payment without a forbearance agreement in place. There was an average committed debt amount of approximately $250m.
“We also noticed that slightly more than half of the defaulted entities had some sort of subordinated debt (second lien or other mezzanine excluding preferred stock),” S&P wrote.
Read more: S&P: Rising defaults will test asset quality of private credit funds
In 2023 there were 19 defaults, which compares to 17 combined defaults in 2021 and 2022.
The ratings agency puts this down to higher interest rates which affected the liquidity of weaker borrowers. At the same time, many companies were hit with higher operating costs and deteriorating demand.
Read more: UK’s largest lenders forecast more than £19bn of consumer defaults this year
Fortunately, during the first half of 2024 defaults have slowed to just four, with S&P pointing to better financing conditions, a resilient economy and lower inflation.
“These factors have also helped borrowers navigate challenges, seeking short-term relief in the form of loan-term extensions, payment-in-kind structuring, and sponsor equity infusions – which have kept quite a few troubled entities afloat,” S&P noted.
While private equity sponsors have, in many cases, been willing to inject capital into underperforming portfolio companies, S&P expects they will become increasingly selective with the investments they continue to support if there is an extended period of higher interest rates.
“We have already seen at least 15 instances from our study where sponsors gave control in certain companies over to their lenders after failing to agree to an alternative restructuring,” S&P wrote.
Healthcare hit
The healthcare sector recorded a disproportionate share of defaults over the past four years, the study found, followed by business and consumers services, hotels, restaurants and leisure.
Healthcare companies have been hit with high labour costs and a restrictive regulatory regime, which led to increased defaults in both the BSL and private credit space.
Whilst a significant portion of these defaults took place in 2020 during the pandemic, S&P noted that healthcare and software companies continue to exhibit an elevated share of defaults because overleverage and heavy interest charges are eroding borrowers’ cashflows and liquidity.
Read more: Direct lending returns will “more than offset” higher defaults this year
