KBRA: Private credit funds show stable returns
KBRA has found that the private credit market is growing at “a rapid pace” and showing stable returns.
In a new report, the credit reporting agency noted that direct lending and infrastructure have seen particularly rapid growth, which is reflected in the number of KBRA-rated private credit transactions.
The pace of KBRA-rated private credit fund transactions picked up in first-half of 2024, and both the size of transactions and the pace of issuance indicate further market acceptance of these structures, the company said.
“KBRA-rated funds with exposure to middle market corporate credit remain resilient, despite higher borrowing costs and observed credit deterioration among certain middle market obligors,” the report said.
“The levels of portfolio loan defaults the rated structures can withstand are generally materially higher than observed historical stresses.”
Read more: Growing bifurcation between higher- and lower-risk private credit issuers
By 30 June 2024, KBRA had assigned ratings to 220 tranches of debt across 122 private credit transactions to middle market credit funds, infrastructure funds, and private credit fund-of-funds.
“Elevated inflation and the higher-for-longer interest rate environment have been major headwinds for private credit borrowers since 2021,” said the KBRA report.
“Nevertheless, KBRA’s recent research found that many private credit borrowers appear to have successfully passed the impact of inflation and higher interest rate costs onto their customers, as stronger revenue and EBITDA growth helped cushion the effect of higher interest expenses.”
However, KBRA added that it “remains vigilant about the potential credit deterioration of middle market obligors and the resulting impact on our funds debt ratings”.
Read more: Private debt investors eye asset-backed lending over the next year
KBRA pointed out that corporate downgrades outpaced upgrades in the first half of 2024, while the direct lending default rate is forecast to increase to 2.75 per cent in 2024, up from 2.3 per cent in 2023.
“A few cracks have also recently been emerging for certain middle market borrowers held by multiple lenders who significantly marked down their senior debt positions after these borrowers had experienced credit stresses,” KBRA added.
“It also bears watching whether weakening covenants and liability management transactions are creeping from the broadly syndicated market into the middle market, potentially hurting future recoveries.”
Despite these headwinds, KBRA’s private credit fund portfolio has shown relative stability with just four rating downgrades and three rating upgrades since inception.
Read more: Private debt AUM to hit $2.64tn by 2029
