Older mid-market deals set for more ratings downgrades

Older mid-market direct lending deals will see more ratings downgrades as high levels of leverage bite in a high-interest rate environment, industry experts have said.

At Morningstar DBRS’ 2025 Credit Outlook London event this week, stakeholders said that mid-market companies have been hardest hit from higher rates due to higher leverage on deals, sometimes as high as eight or nine times.

Most of their financing tends to be variable, floating rate loans which were heavily impacted when central banks began aggressively hiking interest rates in 2022.

Read more: Eurazeo eyes less competitive lower-mid market for direct lending

Morningstar DBRS has been taking 3.4 negative rating actions for every positive one, in this segment of the market.

Older deals are expected to see more downgrades but new deals in 2024 are stronger than those signed in previous years, according to stakeholders.

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“Investors are incorporating higher interest rates, leverage is lower and credit quality this year is different,” one participant said.

Attendees also discussed the recent US election result and the potential impact that incoming President Donald Trump may have on the private credit industry.

Panellists agreed that it is too soon to tell, but one stakeholder noted that access to markets and supply are two areas to consider.

Read more: Lower-quality borrowers struggling with liquidity, DBRS Morningstar says