Weakest US loans flash warning signs for private credit
XLF•Spreads on CCC-rated US leveraged loans reached 2,449 basis points, their highest since May 2009. Moody’s put private-credit defaults at 5.8% when distressed deferrals and extensions were included, while listed BDCs traded at 0.72 times net asset value.
1. Borrower stress builds
Spreads on CCC-rated loans rose about 280 basis points from the end of September to 2,449 basis points last week, their highest level since May 2009. Moody’s said the default rate among the private-credit borrowers it assessed was 5.8% when distressed interest deferrals and maturity extensions were included, compared with a reported rate of 4%. The weakest borrowers accounted for more than half of loans maturing in 2027 and 2028.
2. Investors price in losses
Listed business development companies traded at about 0.72 times net asset value, below their long-term average of 0.92, KBW said. The discount implied further portfolio losses of about 9.1%, on top of the 2% recognised through the second quarter, KBW said. Its analyst Paul Johnson said the upcoming earnings season would test whether credit issues remained contained or were becoming more widespread in the sector.
3. Other stress indicators
Allianz Research said payment-in-kind interest made up about 11% of direct-lending interest income, twice its late-2022 low, and loans carrying PIK were about 2.8 times as likely to move to non-accrual status. Barclays defended its accounting treatment of total-return swaps and said most of its roughly £15 billion of private-credit exposure was held in its banking book. Direct-lending volumes rose 33% in the third quarter from the second, but remained 35% below first-quarter levels, according to Apollo Debt Solutions BDC.
