KBRA releases an update to its research regarding the 2024 outlook for private credit middle market borrowers, with a special focus on two variables that are worthy of focused attention: interest coverage and liquidity.

In late 2022, KBRA published a report that analyzed the impact of potential interest rate hikes. At that time, KBRA’s assumptions of fed funds rates at 5.5% and total average interest costs at 12% seemed conservative. But interest costs at 12% finally arrived for most borrowers in third-quarter 2023.

In this report, we provide a baseline of where interest coverage and liquidity stood at the time of KBRA’s most recent credit assessment, then proportionately drag forward interest costs to 12% if the most recent financials available at the time of our assessment were for a period prior to Q3 2023. This update report also introduces distinct interest coverage and liquidity ratios for the direct lending industry’s top three sectors: Software, Commercial and Professional Services, and Health Care Services and Technology, as well as by company size. KBRA plans to publish more reports that take deeper dives into the data and companies in each of these sectors.

Key Takeaways

• Latest financials show that most borrowers and sponsors were tightening belts, bolstering both interest coverage and liquidity heading into 2023’s interest hikes.
• Pulling forward the remaining increments of higher interest costs for companies in our portfolio reveals that most obligors will see reduced EBITDA-to-interest and cash coverage metrics but, even at the bottom quartile, will remain able to meet interest costs for a full fiscal year.
• Interestingly, the stress test reveals significant differences in interest coverage and liquidity across the three largest sectors, with business and professional services companies tending to have the strongest interest coverage metrics.
• The software sector, as might be expected given its recurring revenue business models, generally had higher leverage and weaker interest coverage but also higher margins and more cash on balance sheets.
• In our portfolio, the size of a company, all else equal, mattered less than we would have expected for its interest coverage metrics, perhaps serving as evidence of the strength of the lending standards in our portfolio of lenders.

Click here to view the report.

Related Publications

• Private Credit: Well Positioned to Navigate the Looming Storm
• Private Credit: 12% Is Not Affordable for Many Borrowers
• Private Credit: Middle Market Stress? Another 50 Basis Points?
• Private Credit: 2024 Maturity Wall Is a Myth

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1003286

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