Ratings agency S&P Global Ratings warns that no one knows how private credit will fare in a credit crisis due to its lack of transparency, and private credit performance issues could spill over into the much larger market. syndicated loans.
In a Feb. 9 private credit report, S&P said it was difficult to assess the extent of long-term risk and the vulnerability of borrowers in the event of a credit crisis. Much depends on the credit underwriting, portfolio management and restructuring capabilities of asset managers, according to the report.
S&P has analyzed the companies in the middle market secured loan bond portfolio. The vast majority of enterprises, 94%, were privately owned. The report says most of the companies it reviewed had “a low or vulnerable business risk profile” due to their relatively small size. S&P calculated that the companies’ median earnings before interest, taxes, depreciation and amortization was $24 million and their median adjusted debt was about $175 million.
Three-quarters of companies analyzed by S&P received a credit valuation rating of b-, one of the lowest rating levels in the company.
Another risk is that no one knows for certain the size of the private credit market and “who ultimately owns the risk”, due to the growing investor base and the wide spread of loans across managers’ portfolios. private credit companies, business development companies and CLOs, S&P said.
“As a result, problems in the private markets could spill over into the more transparent and much larger syndicated market,” the report concludes.
And private credit a relatively new market, which began its massive growth in the years following the global financial crisis of 2008-2009, the rating agency noted.
“The resilience of this (private direct lending) market was not truly tested during a protracted credit crisis,” S&P said.