LGIM: Private credit ‘here to stay’ despite risks in sub-IG market

Private credit is “here to stay” despite rising risks in the sub-investment grade (IG) part of the market, according to Lushan Sun, private credit research manager at Legal & General Investment Management.

Sun said that the sector has proven itself as a stable source of funding and returns, and has successfully diversified its borrower base in recent years.

However, she highlighted future issues when the economic cycle turns.

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“What would be a concern would be a recession,” she told Alternative Credit Investor. “The sub-IG part of the private credit market hasn’t experienced that, as it developed post-GFC. The IG part of the market I’m less concerned about given its longer track record and higher credit quality.

“I definitely think risks are rising in the sub-IG market. Firms are increasingly struggling to meet higher debt costs. There’s a lack of transparency and disclosure. It’s quite hard to lift the bonnet on what’s going on.

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“There’s a risk of a blowout but there’s a lot of flexibility in private credit so I think the industry will manage through the cycle.”

Industry professionals and regulators have been raising concerns about private credit of late, as the prolonged high-rate environment takes its toll on borrowers.

Default rates are predicted to tick up, albeit from a low level. Law firm Proskauer’s latest private credit quarterly index showed an overall default rate of 2.71 per cent between April and June 2024, up from 1.84 per cent in the previous quarter.

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