Direct lending default rates are expected to rise in 2025, spurred by the consumer sector, according to a report from Kroll Bond Rating Agency. The firm reported its expectation that the KBRA DLD Direct Lending Index will increase to 3% this year, up from an estimated 1.9% in 2024.
The projection for 2025 came as demand for direct lending and other private credit strategies continues to grow and Wall Street banks have reorganized in anticipation that the growth will continue.
The KBRA index includes approximately 2,400 borrowers financed in the U.S. direct lending market. KBRA defines defaults as bankruptcies, missed payments, distressed debt exchanges and restructurings.
The 3% forecast would translate to 72 defaults, with consumer-related borrowers expected to contribute 20% of those. As of the end of 2024, the estimated 1.9% rate equaled approximately 46 defaults; however, according to KBRA, the 2024 figures will not be finalized until business development companies report their 2024 fourth quarter holdings, beginning in February. The firm added that there were 17 borrowers in the index that had the potential to restructure in the fourth quarter, which would boost the final 2024 default rate to approximately 2.75%.
As for sponsored-only deals, which are backed or owned by a sponsor, KBRA forecasts a default rate of 2.75%, amounting to 53 defaults in 2025.
“Here, the consumer sector has the potential to jump to 6.5%, from a preliminary 2024 rate of 3.1%,” the report stated. “Software should remain low, at 1.5%, benefitting from the heavy 23% concentration in the Index.”
According to KBRA, its forecast for 2025 is associated with the growing number of issuers on KBRA’s Default Radar, which identifies U.S. direct lending loans for potential default. Credits are designated as red or orange, based on the severity of their credit situations, with red considered the most likely to default. The firm’s radar has 188 borrowers with default potential, a 12-month high and up from 144 one year ago. Those borrowers include 113 issuers designated as red (KBRA’s second highest amount in 12 months) and 75 as orange.
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Tags: consumer sector, defaults, direct lending, direct lending rate, KBRA, KBRA DLD Index, Private Debt