Private debt issuance is burgeoning, particularly since some banks are pulling back on commercial lending. Assets under management for private loans reached $1.4 trillion in 2022, up from $250 million in 2010, according to Preqin data.
The default rate is anticipated to rise, but not by much and to remain at around historical levels, assuming a bad downturn does not barge onto the scene. And defaults are expected to stay below the rates for competing debt alternatives—syndicated loans and junk bonds—a new study indicated.
Consider direct lending, the largest subset of private debt, with about half of the asset class’ fund-raising, and a proxy for private credit as a whole. Direct lending’s default rate is low and projections are it will stay low, at least through this year, according to a report from KBRA DLD, KBRA’s direct-lending news and data unit.
What’s more, KBRA DLD predicted that default rates for junk bonds and syndicated loans will be higher. The direct loans are expected to be 2.5%, up from the current 1.2%, and only slightly higher than the historical level of around 2% for private credit overall.
The KBRA DLD study projected that syndicated loans’ default rate should come in at 5.5% and junk bonds at 4% this year. This is in keeping with other forecasts: For instance, Moody’s Investors Service in a report said that high-yield’s default rate will climb to 4.6% by year-end, from 3.4% as of May.
All three types of lending are focused on below investment grade companies. Direct lending is mostly used in private equity buyouts, involving a small number of non-bank providers. Other types of private credit include mezzanine financing and real estate debt. Syndicated loans involved numerous banks and institutional investors. Junk bonds often are issued by Wall Street firms and are the most liquid.
One plus for private debt, which likely helps keep its default rate lower than those of junk and syndicated debt, is that private credit covenants are strict. If there’s a problem, “participants are able to work it out,” says Eric Rosenthal, a KBRA DLD senior director.
To be sure, if a recession arrives, it’s possible that things will get worse than the projections say. Otherwise, the private credit loans look fairly safe.
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Tags: Junk Bonds, KBRA, Private Credit, Private Debt, syndicated loans