Private Credit Market Continues to Flourish: KBRA
The private credit market is expanding at a “rapid pace” and exhibiting stable returns, according to KBRA research. The credit reporting agency noted that direct lending and infrastructure have seen particularly rapid growth, as evidenced by the volume of KBRA-rated private credit transactions.
The pace of KBRA-rated private credit fund transactions increased in the first half of 2024, and both the magnitude of transactions and the rate of issuance suggest that these structures are becoming more widely accepted, the company said.
“KBRA-rated funds with exposure to middle market corporate credit remain resilient, despite higher borrowing costs and observed credit deterioration among certain middle market obligors,” the report said. “The levels of portfolio loan defaults the rated structures can withstand are generally materially higher than observed historical stresses.”
KBRA had assigned ratings to 220 tranches of debt across 122 private credit transactions to middle market credit funds, infrastructure funds, and private credit fund-of-funds by June 30, 2024.
“Elevated inflation and the higher-for-longer interest rate environment have been major headwinds for private credit borrowers since 2021,” the report noted. “Nevertheless, KBRA’s recent research found that many private credit borrowers appear to have successfully passed the impact of inflation and higher interest rate costs onto their customers, as stronger revenue and EBITDA growth helped cushion the effect of higher interest expenses.”
Still, KBRA added that it “remains vigilant about the potential credit deterioration of middle market obligors and the resulting impact on our funds debt ratings.”
KBRA noted that corporate downgrades outpaced upgrades in the first half of 2024, and the direct lending default rate is expected to rise to 2.75% in 2024, up from 2.3% in 2023.
KBRA’s private credit fund portfolio has maintained relative stability, with only four rating downgrades and three rating upgrades since its inception, despite these headwinds.