Private credit spreads expected to tighten

Private credit spreads are expected to tighten while covenant protections loosen, as demand for private credit investments outpaces supply.

According to PitchBook LCD’s inaugural Global Private Credit Survey,  deal activity is expected to increase, but GPs could have difficulty sourcing new assets, while geopolitical headwinds may also impact on private credit performance.

However, the survey also found that credit conditions for borrowers are improved from a year ago.

Read more: GPs poised to take 8-11pc in credit revenue from banks

PitchBook noted that new-issue spreads have declined significantly this year amid increasing competition, while further compression is expected. The average spread of US leveraged buy-outs financed by the direct lending market has contracted to 555bps, according to PitchBook, down by 115bps from 2023 and 161bps from 2022.

“Looking beyond just buyouts, the spread for a unitranche loan to a $50m EBITDA business in a non-cyclical business pricing today was estimated at roughly S+500-549, according to a plurality of respondents,” said Marina Lukatsky, global head of credit research at PitchBook LCD.

“In six months, the share of respondents who see spreads below S+500 increased, and the share of respondents who expect spreads above S+600 decline.”

Read more: Private credit market passes $3tn valuation

Approximately 45 per cent of the survey respondents said that they expect covenants to loosen slightly on private credit deals in the core middle market over the next few months. Meanwhile, 40 per cent of respondents believe that covenants on lower middle market deals will stay the same.

The survey also found that roughly 57 per cent of respondents expect deal activity to increase “slightly” over the next 90 days, while 17 per cent expect a significant increase. Approximately 11 per cent expect a decrease.

Read more: Private market investors prioritise sustainable mandates