Private credit stress mounts as troubled loans reach highest level since 2017
Private credit is facing renewed pressure as the proportion of troubled loans held by major lenders rises to levels not seen since 2017, highlighting growing risks across the $2tn asset class, according to a report by the Financial Times.
The troubled loan landscape within the private credit sector has worsened, reaching its most precarious point since 2017, according to a report by the Financial Times. Data from Solve, a fixed-income provider, reveals that non-accrual loans at the 20 largest publicly-traded business development companies (BDCs) climbed to a median of 2.8% of loan cost in the second quarter, an increase from 2% just three months prior.
Non-accrual status is a critical indicator of credit stress, signaling borrowers who have halted payments or lenders suspect impending defaults.
The worsening situation is compounded by rising defaults, declining loan valuations, and a scarcity of new deal activity. Private credit managers face mounting challenges as they navigate these turbulent waters. Fitch Ratings recently reported record private credit defaults in July, while PitchBook LCD data indicated that the largest listed BDCs contracted during the same period, with repayments and loan sales outpacing new commitments.
Several major private credit managers, including KKR, Blue Owl, and Apollo Global Management, have experienced repayment outpacing new lending, with KKR's FS KKR Capital Group reporting that 7.1% of its loan portfolio was classified as troubled during the quarter. However, this figure still represents a significant improvement from the previous quarter but remains far above the sector average.
The mounting pressure within the private credit sector could have far-reaching consequences, as the asset class has emerged as a significant growth engine for alternative asset managers. Private credit has drawn substantial capital from insurers, pension investors, and wealthy individuals, fueling rapid expansion among prominent managers such as KKR, Blue Owl, Ares Management, Blackstone, and Apollo.
Yet, weakened returns and liquidity concerns have taken a toll on listed private credit vehicles, subsequently impacting the share prices of their managers.
Private credit executives are becoming increasingly aware that defaults, restructurings, and bankruptcies are resuming their march towards more typical historical levels after years of unusually low losses. This trend is particularly pronounced among companies financed during 2020 and 2021, when near-zero interest rates fueled private equity firms to chase acquisitions at elevated valuations.
Many of these businesses are now grappling with higher borrowing costs, a challenge particularly acute for software companies. Lenders have already reduced the value of their positions in software companies like Medallia and Cornerstone OnDemand, and some, such as Blackstone and KKR, have assumed control of troubled borrowers, such as dental services company Affordable Care.
Despite these mounting challenges, major private credit managers have attempted to downplay concerns, claiming that credit metrics remain healthy and that issues are largely isolated.
Written by urgent.news from Private Equity Wire's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
