Goldman Sachs AM: Falling rates will normalise private credit spreads

Falling interest rates should benefit private credit by mitigating the supply/demand imbalance and normalising spreads, Goldman Sachs Asset Management has said.

In its 2025 outlook report, the asset manager noted that spreads have tightened in recent quarters as investors sought greater exposure to floating-rate credit, at a time when new origination activity has been muted.

It cited LCD data which found that around 80 per cent of loan activity from the start of this year to 30 September was refinancings, repricings and extensions.

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“Falling rates may therefore paradoxically prove constructive to private credit, mitigating the supply/demand imbalance and normalising spreads,” the report said. “An equilibrium between demand for public and private credit should arise as well, in which companies will choose between the lower cost of capital available in public markets versus a more tailored capital structure and financing solution in private markets.”

The asset manager has also predicted an increasing bifurcation between companies’ default risk based on their earnings growth.

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It said that companies that have achieved average or better-than-average operational growth would fare well in a lower rate environment as their debt servicing capacity would improve, with some firms even able to incur additional debt where prudent.

However, a company whose fundamentals have not kept up would see little relief from lower rates and would come under strain if they took on any additional debt financing.

“Dispersion in fundamentals will therefore drive dispersion in ultimate outcomes,” the report said.

“This dispersion will be amplified as recent recapitalisation and refinancing activity comes to its ultimate conclusions. Record levels of amend-and-extend and pay-in-kind activity over the past three years will have helped companies manage their cash interest expenses and prudently support growth initiatives in some cases and have forestalled inevitable defaults in others.”