Private Markets

Private credit has long been an important source of funding for small and middle-market borrowers, alongside the broadly syndicated loan and speculative-grade bond markets. But it wasn’t until recently that the private credit market has seen such explosive growth. This decade-long expansion (against the backdrop of rising credit pressures) has put the focus on the burgeoning risks in an opaque market.

The risk factors associated with private credit are the same as those for mainstream credit—but the emphasis will differ depending on where a borrower is in its life cycle, as well as broader credit conditions. As signs of credit stress emerge and defaults creep up, it remains to be seen whether this “golden age of private credit” can continue.

At S&P Global Ratings, our independent opinions on creditworthiness take a holistic view to provide greater transparency for the totality of private markets participants—from direct lending, business development companies, and middle-market collateralized loan obligations, to private equity, fund financing, and beyond.

Scenario Analysis: Testing Private Debt's Resilience Through The Credit Estimate Lens

In an effort to provide insights on the broader private debt market, we generated a scenario analysis on more than 2,000 credit estimated (CE) issuers with more than $400 billion of aggregate outstanding debt to help assess middle-market issuer durability in the face of rising interest rates and margin erosion. Most borrowers for which we have credit estimates are highly leveraged, and median credit metrics could approach precarious levels under moderate or severe stress scenarios. Some CEs scored predominantly at 'b-' could present characteristics often associated with the 'ccc' category and may be at risk of downgrades under these scenarios, potentially increasing the proportion of 'ccc' assets in middle-market collateralized loan obligations (CLOs). Even though we expect less than half of the issuers would generate positive free operating cash flow (FOCF) in a mild stress scenario, overall liquidity appears supportive for the near term. Like broadly syndicated loans, debt maturities for CEs appear manageable for the next 12-18 months, but a sustained higher interest rate environment would cripple many issuers ahead of a heavier maturity schedule that begins in 2025. Although default rates have remained low, recent downgrade trends point to vulnerabilities in the middle market.

Business Development Companies' Assets Provide A Glimpse Into The Private Credit Market

Business development companies' (BDCs) public filings of their asset holdings provide some insight into the private credit market. In the 12 months through first-quarter 2023, private credit loans accounted for much of the growth of BDC assets, and non-traded BDCs grew at a faster rate than publicly traded BDCs. Maturities of private credit loans that BDCs hold peak in 2028, as do broadly syndicated loans in the U.S., which could add to funding pressure as interest rates remain higher for longer. Yields on private credit loans increased by 350 basis points over the year (rising to an average of 10.7% in first-quarter 2023) and are higher than those on broadly syndicated loans, though the gap has narrowed.

Middle-Market CLO And Private Credit Quarterly: Strong CLO Growth, But Weakening Underlying Credit (Q4 2023)

For third-quarter 2023, U.S. credit estimates saw the highest number of downgrades since the pandemic: an aggregate of 91 entities saw credit estimates lowered, with over 75% of these going into the ‘ccc’ category. Year to date, there have been a total of 61 upgrades and 175 downgrades, bringing the aggregate credit estimate upgrade-to-downgrade ratio to 0.35.

Middle-market collateralized loan obligations (CLOs) have seen strong new issuance this year, with year-to-date volume surpassing 2022 total issuance by end of July 2023. Through September, $18.38 billion of middle-market CLOs have been issued, versus $9.38 billion over the same period last year, an increase of 95%. Broadly-Syndicated Loan (BSL) CLO issuance over the same period is down 32.5% this year.