Rating agency S&P Global Ratings is warning that no one knows how private credit will fare in a credit crisis because of its lack of transparency, and that problems with private credit performance could ripple to the much larger syndicated loan market.
In a Feb. 9 private credit report, S&P said that it is difficult to assess how much long-term risk exists and how vulnerable borrowers would be in a credit crisis. Much depends on the asset managers' credit underwriting, portfolio management and restructuring capabilities, the report said.
S&P analyzed portfolio companies of middle-market collateralized loan obligations. The vast majority of the companies, 94%, were private equity-owned. The report said most of the companies it reviewed had "a weak or a vulnerable business risk profile" because of their relatively small size. S&P calculated that the companies' median earnings before interest, taxes, depreciation and amortization was $24 million and their median adjusted debt was about $175 million.
Three-quarters of the companies S&P analyzed received a credit estimate score of b-, one of the company's lowest rating levels.
Another risk is that no one knows for sure the size of the private credit market and "who ultimately holds the risk," due to the growth of the investor base and the broad distribution of loans across private credit managers' portfolios, business development corporations and CLOs, S&P said.
"Consequently, problems in the private markets could ripple through to the more transparent and much larger syndicated market," the report concluded.
And private credit a new relatively new market, which began its massive growth in the years following the 2008-2009 global financial crisis, the rating agency noted.
"The resilience of this (private direct lending) market has not been truly tested in a protracted credit crisis," S&P said.