KBRA Private Credit: Q2 2024 Middle Market Borrower Surveillance Compendium–EBITDA to the Rescue
01 Agosto 2024 - 3:51PM
Business Wire
In KBRA’s Q2 middle market (MM) surveillance compendium, we
examine how revenue and EBITDA growth have cushioned the blow of
higher interest costs among private credit borrowers. The analysis
is especially interesting due to the dearth of observed defaults so
far, relative to our expectations.
In this report, we take a deep dive into three-year revenue,
EBITDA, and interest coverage ratio (ICR) trends for 1,067 unique
MM names that KBRA has assessed in first-half (1H) 2024. In
addition, we also provide new data related to the surveillance of
396 MM corporate credit assessments and the 171 new assessments
assigned in Q2 2024. KBRA has performed over 3,500 corporate credit
assessments over the past two years, and the data related to these
assessments continue to provide unique insight into the otherwise
opaque direct lending landscape. KBRA monitors these credit
assessments as part of the surveillance of hundreds of KBRA-rated
private credit feeder notes, 30 business development corporations
(BDC), dozens of private credit NAV/leverage facility transactions,
as well as collateralized loan obligations (CLO).
Key Takeaways
- Strong revenue and EBITDA growth among many private credit
borrowers is helping to cushion the effect of higher interest
costs. Across 1,067 unique borrowers, KBRA found median annual
revenue growth of 20% during the three most recent periods, and
even stronger median EBITDA growth of 46%. Notably, these trends
are fairly consistent across all quartiles of company size—from the
largest to the smallest companies in our portfolio of year-to-date
assessments.
- KBRA examined the distribution of changes in revenue, EBITDA,
and interest coverage across all companies, as we recognize that a
focus on averages can mask important trends in the underlying
portfolio companies. One data observation identified was that 21%
of the companies migrated from below 1.0x coverage to above 1.0x
interest coverage during the recent two years of rate hikes and
inflationary headwinds, while just 12% of companies moved in the
opposite direction.
- Some companies are experiencing sustained pressure, evidenced
by the fact that 25% of all companies assessed in 2024 have an ICR
below 1.0x in the most recent period and 56% of all companies had
some weakening of their ICR during the periods observed.
- KBRA has observed, anecdotally, that many relatively stronger
companies are demanding and receiving concessions on spreads that
have served to further reduce the blow of higher base rates.
- While KBRA observes weakening credit quality for some
companies, defaults in Q2 2024 remain muted with only five
defaults. Downward credit migration is also more tempered, with 14%
of the surveillance obligors receiving a lower score in Q2 versus
21% in Q1.
- Similar to observations in KBRA’s Q1 compendium, the Software
sector’s relative resilience is evidenced by its smaller relative
percentage of downward assessment actions despite representing a
slightly outsized proportion of Q2’s surveillance portfolio. There
were also more upgrades than downgrades of assessments that began
as ccc+ scores in both quarters.
- KBRA continues to believe its portfolio of ratings backed by MM
private credit collateral will not experience significant credit
migration. Further, private equity returns (which are absorbing the
losses from the ongoing downward pressure on valuations,
particularly from 2020-2022 vintages) will remain the most
vulnerable to the pressures being felt by underlying borrowers. As
mentioned in prior reports, we expect to see increasing divergence
of performance amongst private sponsors in future years.
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
- KBRA Insight on Private Credit: Middle Market Rate
Stress?Another 50 Basis Points?
- Private Credit: 2024 Maturity Wall Is a Myth
- Private Credit: 12% Is Here–First Look at Interest Coverage and
Liquidity for Middle Market Borrowers by Sector
- Private Credit: First-Quarter 2024 Middle Market Borrower
Surveillance Compendium
- Private Credit: BDC Portfolio Valuations Are Rigorous
- Private Credit: Business Development Company (BDC) Ratings
Compendium: First-Quarter 2024
- Private Credit: Impact of Pluralsight’s Potential Restructuring
Will Be Widely Dispersed and No Effect on Ratings Expected
- KBRA’s Global Rating Stability and Transition Study:
2011-2023
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: 1005331
View source
version on businesswire.com: https://www.businesswire.com/news/home/20240801661289/en/
Shane Olaleye, Managing Director +1 646-731-2432
shane.olaleye@kbra.com
Eric Wang, Associate Director +1 646-731-1281
eric.wang@kbra.com
William Cox, SMD, Global Head of Corporate, Financial and
Government Ratings +1 646-731-2472 william.cox@kbra.com
Media Contact
Adam Tempkin, Director of Communications +1 646-731-1347
adam.tempkin@kbra.com
Business Development Contact
Jason Lilien, Senior Managing Director +1 646-731-2442
jason.lilien@kbra.com