Growing bifurcation between higher- and lower-risk private credit issuers
There is a growing bifurcation between higher- and lower-risk private credit issuers, Morningstar DBRS research has found.
The ratings agency said that among the private credit issuers it rates, the highest-risk group – rated at CCC or lower – increased during the second quarter of 2024 to represent 7.6 per cent of the portfolio, up from six per cent at the end of 2023.
Meanwhile, certain lower-risk issuers have seen conditions improve.
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“As we noted in our first quarter commentary, we continue to observe a growing bifurcation between the highest-risk credits and a subgroup of issuers where operating pressure has begun to recede,” said Anna Mosiyan, assistant vice president, private credit ratings.
While downgrades continue to outpace upgrades, total negative rating actions actually declined slightly in the second quarter of 2024, to 24 per cent of total actions from 26 per cent in the second quarter of 2023.
Meanwhile, positive rating actions increased to 20 per cent from 11 per cent year-on-year.
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“We believe the shift reflects performance recovery for some issuers following a two-year adjustment period dominated by rising interest rates and weakening demand for more economically sensitive issuers,” the report said. “As a result of this shift to more directional actions, we continue to observe a migration in rating actions away from neutral.”
Morningstar DBRS’ private credit portfolio is composed of around 400 issuers, with two thirds located in North America and the remainder based in Europe.
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Issuers rated B or higher represent 76 per cent of the portfolio, while issuers rated B (low) accounted for 16.4 per cent of the portfolio, a decline from 20.9 per cent at the end of 2023.
The firm said that it attributes this shift to an increase in credit quality for new issuers relative to the existing portfolio.
