KBRA predicts 3pc private credit default rate for 2025
Credit ratings firm KBRA has predicted that private credit defaults will rise in the year ahead as revenue growth and rate cuts start to slow.
In a new outlook report on private credit, KBRA said that most borrowers will have improved access to incremental debt capacity in 2025.
The firm noted that almost 60 per cent of the nearly 2,000 companies in KBRA’s credit assessment portfolio de-levered last year, while 32 per cent of the borrowers who lowered their loan spreads through the third quarter of 2024 have bolstered their overall debt serviceability.
But KBRA warned that it has spotted at least two signs of revenue growth slowing in its portfolio. In tandem with dwindling rate cuts, the credit ratings firm has predicted that “some of the obligors who struggled to service their debt and delayed defaults in 2024 may have to face the music.”
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These obligors will contribute to a higher projected default rate estimated at three per cent, KBRA added.
The firm also said that it expects the incoming Trump presidency to have a mixed impact on the private credit industry.
“The prospects for lower taxes and reduced regulations are likely to add fuel to the pent-up desire for exits, driving private credit loan growth and acting as a tailwind to portfolio company credit quality,” the report noted.
“Meanwhile, renewed inflationary concerns have already caused markets to anticipate fewer rate cuts.”
Deal making activity is expected to pick up due to portfolio company valuation catalysts such as stronger credit fundamentals, lower rates, and rallying public market multiples, the firm added.
Furthermore, private credit’s share of the growing loan market will be challenged by the banking sector which has “come roaring back amid strengthening balance sheets, the prospect for much-tempered changes to regulatory capital requirements, and the health of the broadly syndicated loan market”.
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KBRA said that competition will continue to squeeze loan spreads and could have future negative impacts on undisciplined private lenders that are too aggressive on leverage, credit agreement terms, and pricing.
“KBRA believes the significant growth opportunities lie in investment-grade debt and specialty finance,” the report concluded.
“KBRA believes private credit’s track record of successfully navigating past challenges positions the industry well for the year ahead. The degree to which higher for longer rates hampers momentum is worth a close watch.
“Meanwhile, with managers demonstrating their ability to adapt distribution and fundraising strategies to minimise friction, KBRA expects the asset class to continue evolving. Supported by flexible capital sources and relatively light regulation, the shift from traditional financing channels to private credit is likely to continue.”
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