Cues from Public Markets for Private-Credit Distress
Private credit as a strategy is experiencing its first real rate cycle, and investors who hoped those loans would be light on credit risk may be disappointed.1 Using the MSCI private-credit security-terms dataset and leveraged loan prices, we find that write-downs in private credit have closely tracked trends in leveraged-loan markets, with rates of distress surging as interest rates lifted off from zero.
Rising rates sink all boats
Since mid-2022, senior-loan distress rates have nearly tripled, as our earlier research found. As signs of distress in private-credit senior-loan markets have followed trends in leveraged loans, monthly data and faster reporting for leveraged loans may provide a glimpse into the future for private credit.
Distress rates among leveraged loans have come down from their peak of 14.5% in May 2023 and stabilized around 11% since late 2023, as interest-rate uncertainty has receded. We see similar stabilization in senior private-credit loans, with around 12% of loans exhibiting signs of distress over the four quarters ending in June 2024. In contrast, rates of distress for mezzanine private-credit loans have been persistently higher and much more volatile. Data from the second quarter of 2024 showed an apparent jump in mezzanine distress, but this could be a false alarm given previous volatility.
Investors concerned about credit risk in their private-capital portfolios should proactively monitor the loans held by their private-capital funds — and keep a close eye on the leveraged-loan markets.
Distress rates stabilized for leveraged and private-credit senior loans
Proxy distress rates for Markit iBoxx USD Leveraged Loan Index and senior and mezzanine private-credit loans. We treat private-credit loans marked at least 20% below cost and leveraged loans trading at least 20% below par as distressed. Leveraged-loan data through August 2024; private-credit loan data through June 2024. Source: MSCI, S&P Dow Jones
Signals of Distress in Private Credit
Private-credit funds are in the spotlight because of their growth — and the opaque credit risk of the loans they hold. We use a signal of nonperformance to examine the trends in defaults for the asset class.
When Spreads Meet: A Changing Picture on Private-Credit Loans
Spreads on corporate mezzanine loans in private-credit funds have fallen dramatically since 2022, changing the picture on the loans that are normally deemed higher-risk than senior loans. Funds treated real-estate borrowers differently, however.
1 Robin Wigglesworth, “How is private credit weathering its first big rate hiking cycle?” Financial Times, Nov. 21, 2024.
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