KBRA releases research following the Federal Reserve's highly anticipated monetary easing cycle on September 18 with a 50 basis point (bps) reduction of its target base rate. Lower rates will be a windfall for most private credit borrowers, but what may appear as a blessing may not be enough for those already struggling.

In August, KBRA reported how strong revenue and EBITDA growth cushioned the blow from climbing interest costs for many of the 1,067 unique corporate borrowers assessed in 1H 2024. In this report, we wanted to determine how those 1,067 borrowers would be impacted in a falling rate environment. With rates projected to decline to 300 bps, from over 500 bps before the rate cut announcement, we determined all-in rates for the population would fall 20% on average, equating to roughly $9 billion of annual interest savings in the aggregate—cash that otherwise would have gone to lenders can now be reallocated to other initiatives.

Key Takeaways

• Assuming a 3% base rate, 70% of borrowers with positive EBITDA would see their interest coverage ratio (ICR) increase 0.25x or more, an important boost to the group of sub-investment grade borrowers' financial stability.
• Companies with weaker starting financial positions are set to benefit the least from rate cuts, considering their higher leverage of over 10x at the median and debt that costs over 200 bps more than the strongest private credit borrowers.
• Of the 25% or 265 companies that KBRA found with an ICR below 1.0x in the first half of the year, around 90 would see their ICRs boosted to above 1.0x, assuming base rates were cut to 300 bps, leaving roughly 16% of the total population still underwater.
• Private credit’s defaults remained constrained through the rate peak, helped by growing payment-in-kind interest and maturity extensions. In KBRA’s view, further reductions in the default rate may be a tall task. Assuming a 3% base rate, KBRA found around 50 companies still with a sub-1.0x ICR that also have a maturity between now and 2026. In addition, 71 companies reported negative EBITDA. An ICR below 1.0x or negative EBITDA tends to strain a company’s financial flexibility, which could cause further defaults and losses.

Click here to view the report.

Related Publications

• Private Credit: Q2 2024 Middle Market Borrower Surveillance Compendium–EBITDA to the Rescue
• Private Credit: Business Development Company (BDC) Ratings Compendium: Second-Quarter 2024
• Private Credit Funds: KBRA-Rated Portfolio Displays Stable Credit Performance and Structural Evolution
• Private Credit: Well Positioned to Navigate the Looming Storm
• Private Credit: 12% Is Not Affordable for Many Borrowers
• Private Credit: First-Quarter 2024 Middle Market Borrower Surveillance Compendium
• Private Credit: Impact of Pluralsight’s Potential Restructuring Will Be Widely Dispersed and No Effect on Ratings Expected
• Private Credit: Khoros’ Potential Default Sprinkled Across Private Credit

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.

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