Rising Defaults in Private Credit Seen Cutting Into Fundraising
Comment of the Day

December 23 2022

Commentary by Eoin Treacy

Rising Defaults in Private Credit Seen Cutting Into Fundraising

This article from Bloomberg may be of interest. Here is a section:

Fitch Ratings expects lenders to broadly recover less on loans to small to mid-sized companies, compared with average recovery expectations in 2017. It forecasts that for about 64% of loans it rates, investors would recover between 30 cents and 70 cents on the dollar in a default, up from around 25% of the loans five years ago.   

The rising expectations for low recoveries stem from weakening contractual lender protections over the years, Fitch report said. Though those protections have grown a bit stronger this year, most outstanding loans were made before this year. On top of that, leverage is high in many transactions. 

“These capital structures were not constructed with 4% to 5% base rates in mind. Rising rates will hurt free cash flows and eat into companies’ liquidity,” said Lyle Margolis, head of private credit at Fitch Ratings.

Eoin Treacy's view

It is a gross misrepresentation to think the pandemic was a true test for the private credit markets. Evictions were banned, defaults were forestalled and the volume of new money that hit the market broke records. The only way we can describe the impact of the COVID panic on private credit is as a hiccup.

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