Defaults in corporate private credit will exceed those in the syndicated loan market next year if interest rates remain higher for longer, Bank of America Corp. says.
(Bloomberg) — Defaults in corporate private credit will exceed those in the syndicated loan market next year if interest rates remain higher for longer, Bank of America Corp. says.
Private debt defaults will reach 5% by early 2024 as portfolios see an estimated one-third of deals come due in the next two-and-a-half years, according to a new report from Bank of America credit strategists Neha Khoda and Dong Ba. That’s compared to an estimated 3% default rate for broadly-syndicated loans in the same environment, they said.
“Potential problematic situations within private debt remain unaddressed and are likely to surface near term,” they wrote in the Oct. 2 note. “At particular risk are unitranches, business development companies, older vintage funds with highly levered deals, and recurring revenue loans.”
Proskauer’s Private Credit Default Index, which tracks senior secured and unitranche loans in the US, showed a default rate of 1.64% for the second quarter of this year. The default rate in the US leveraged loan market stood at 1.9% in August, according to S&P Global Ratings.
Read more: Struggling Borrowers Turn to Private Credit to Defer Interest
The private credit market has grown rapidly in recent years as banks scaled back lending and investors such as pension funds increasingly allocated more money. Private credit lenders took significant market share from the broadly-syndicated loan market last year as public credit seized up over fears of a recession.
Now, those loans have been slower to correct for higher interest rates at the same time that companies face sharp declines in their ability to cover their borrowing costs, the analysts said in the note.
Private credit platforms face “unparalleled” opportunity as newer funds are expected to outperform public credit and lenders expand outside direct lending into markets like consumer loans, commercial real estate and venture lending, the authors wrote.
“Banks scaling back in the aftermath of the regional bank turmoil has widened private debt platforms’ ability to gain lending market share and disintermediate traditional banking,” they said. “Though cost of capital has increased for everyone, nonbanks’ cost still remains 200 basis points lower than that of banks.”
(Updates current default rates in fourth paragraph.)
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