(Bloomberg) -- Fitch Ratings pegged the private credit default rate at 5% in August in a new report, as questions swirl around how long companies can weather higher interest rates.
Fitch, which analyzed almost 1,200 firms that received private credit financing, said 39 landed in default from January through August. In the first quarter, 18 of those defaulted, according to the report.
Given the opacity of private credit, defaults have been hard to measure. Some have come to light, as publicly traded lenders have had to mark down loans on their balance sheet or have reported them as non-accrual, meaning the fund managers are not expecting the borrowers to make payments.
Still, some have raised concerns that private credit defaults are rising, which may start to hurt lenders.
“We’re about to come to a reckoning moment,” Jae Yoon, the chief investment officer at New York Life Investment Management, said of private credit at a conference earlier this week. “The recovery rate is coming down, there are too many players and too much money chasing deals and covenants are getting lighter and lighter.”
Fitch’s report specifically looked at middle-market issuers of non-broadly syndicated debt, whose loans have been packaged into collateralized loan obligations, as well as firms within its privately monitored rating portfolio. Health care and technology companies drove defaults, according to the Fitch report.
Health care firms saw “labor issues and high operational costs as factors negatively impacting free cash flow,” Fitch said.
A majority of the defaults also involved payment-in-kind, an arrangement that allows to defer interest payments.
“This indicates higher lender need for providing short-term cash flow relief as opposed to extending maturities,” the report said.
Kroll Bond Rating Agency pegged direct lending defaults at 1.5% — 13 out of 846 firms — in the first half of this year, according to a report released Thursday, adding that many companies have scored loan extensions.
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