Private debt markets face reality check as companies grapple with rising rates, recession
Stellar growth in private debt markets over the past decade looks set to face a reality check as a looming recession and higher interest rates squeeze companies' earnings and their ability to…

- Private debt market has grown to $1.4 trillion since 2010 * Defaults on private credit have been on rise from low base * Central banks ramp up in rates adds to pressure * Private credit funds look to in-house restructuring, legal
experts LONDON, Dec 20 (Reuters) - Stellar growth in private
debt markets over the past decade looks set to face a reality
Check out the looming recession and high interest rates squeeze
companies' earnings and their ability to service borrowing
costs. An era of ultra-easy cash from central banks lured investors
into private credit, attracted by juicy returns in the
high-single to low-double-digits. Regulation in the wake of the global financial crisis forced
Banks to reduce lending to corporations -- especially
These are more risky. This allowed for the creation of investment funds such as
Blackstone was created to help fill the gap in financing and to lend money to companies.
Private equity firms often own these companies. Private debt markets -- which are the fastest growing in the country -- are often owned by private equity firms.
credit sector since the financial crisis -- is about to hit a
speed bump as investor appetite for risky assets is tested by
aggressive monetary tightening and recession. The private debt market has expanded to $1.4 trillion, up
According to Prequin data provider, the 2010 figure was $250 billion
with funds including Ares, Blackstone and KKR
holding big positions. "Some of those companies – particularly in the mid-market
space – will face real difficulty, especially if it's not, as
the market is anticipating, a shallow recession," said Jason
Friedman, Global Head of Business Development at Marathon Asset
Management. The jury is out on how private lenders will react if the
downturn might be more prolonged rather than "six months and I'm
through it", said Friedman, with the threat of a lengthy decline
in earnings and potentially higher defaults looming large. Major central banks have ramped up rates at breakneck speed,
the European Central Bank is delivering its fastest tightening
cycle ever. Meanwhile, the global economy is expected to tip
into recession as high rates and inflation take their toll,
This creates a more difficult environment for corporates
WARNING SIGNS Central banks drain trillions in extra cash
They pumped money into the economy for the past decade, warning signs
are already flashing, such as a surge in redemption requests at
an unlisted Blackstone real estate income trust. Corporate default risks are rising, making investors think
twice about holding riskier private debt. A Private Credit Default Index by law firm Proskauer showed
A default rate of 1.56% applies to U.S. Dollar-denominated transactions in the
third quarter, the first notable increase over the past 18
months. This is similar to a 1.6% default rate in the public debt
markets for speculative-grade corporates in the United States,
based on data as of September 2022 from S&P Rating. The agency expects the speculative-grade default rate to hit
3.75% by September 2023. "The (private credit deals) default rate was extraordinarily
It was low over the last 18 months, so it is not surprising to see it
rise, particularly when the market is generally under pressure,"
said Peter J. Antoszyk, Co-Head of the Private Credit
Restructuring Group at law firm Proskauer. "While the default rate is likely to go up, I wouldn't
expect to see a significant spike in 2023," he added. After the COVID-19 pandemic, support from private equity
owners and private creditors helped to keep payment defaults to
a minimum, according to S&P Global Ratings. Whether that happens in the coming year depends on the
severity of any recession. "In the worst-case scenario of a protracted recession, some
of these businesses will need to restructure their debt in a
higher rates environment and perhaps raise the cost of funding
to 10% interest plus – I am not sure how they will all be able
to come out of it," said Ruth Yang, Global Head of Thought
Leadership at S&P Global Ratings. PROS AND CONS The private, largely bilateral nature of the market could
prove to be a saving grace. Yannick Le Serviget, Global Head of Leveraged Loans and
Private Debt at 184 billion euro asset manager AXA IM Alts, said
one advantage was companies have to deal with only a handful of
lenders rather than a large pool of creditors, making it easier
to extend maturities and survive a downturn. But a big challenge will be cash management with companies
often not having a variety of financing lines to access
regularly. "If they need cash, the capacity of the shareholders to put
additional money in the business will be critical," Le Serviget
said. A number of debt funds are looking at strategies such as
bringing restructuring and legal experts in house to tackle
potential problems at companies in their portfolio in advance. But it is not all doom and gloom. "There will be very interesting (prospects for) rescue
financing and opportunistic lending, where if you can see
through the problem twelve months from now, you can finance your
way through it," Friedman said. (Reporting by Chiara Elisei, editing by Dhara Ranasinghe, Karin
Strohecker and Jane Merriman)