How Risky Is Private Credit? Analysts Are Piecing Together Clues

livemint.com:

A boom in private credit has been moving a huge portion of corporate borrowing away from public view, taking it from the world of banks and the bond market and into the more opaque realm of private funds. Now analysts are piecing together clues showing how risky those loans might be. A recent analysis by S&P Global Ratings used the firm’s confidential credit assessments for clients to offer a rare view of roughly 2,000 private corporate borrowers with more than $400 billion in debt between them.

Without identifying the companies, the firm ran stress tests to see how they might fare in varying economic scenarios. The findings offer a glimpse into the private credit market, which grew in popularity after the financial crisis in 2008-09 and surged more recently after conventional lenders pulled back following this year’s banking crisis. Much of that private lending has gone to smaller, less-profitable companies that are already loaded with debt.

With the market growing, the Securities and Exchange Commission recently approved new rules for private fund managers. The S&P analysis offers a snapshot of the market in the meantime. The firm’s analysis looked at midsize companies with corporate debt pooled in collateralized loan obligations.

Since slices of many of those loans are also directly held by private credit funds, S&P said the sample represents a sizable portion of the private credit market. S&P used the confidential “credit estimates" that it provides to collateralized-loan managers for companies with private debt in CLOs. The estimates are akin to credit ratings and tend to be updated about every six months on average.