American Bankruptcy Institute 2/4/25 newsletter reports Direct Lenders Face Rising Default Risks, Analysis Firm KBRA Says
Direct lenders face rising default risks in 2025, with 5% of middle-market borrowers struggling under heavy debt and worsening business performance, according to a quarterly report by credit rating analysis firm KBRA, WSJ Pro Bankruptcy reported. The prolonged high-interest-rate environment has put pressure on certain sectors, based on KBRA’s analysis of 1,903 private-equity-owned middle-market companies in the U.S. and Europe that hold a collective $922 billion in debt. Housing, construction, discretionary retail and physician practices are among the industries most susceptible to inflation and elevated borrowing costs, said John Sage, one of the lead authors of the report.
Specifically, highly leveraged middle-market borrowers with worsening business performance face higher default risks unless rates drop and asset sale activities recover.
The prolonged high-interest-rate environment has put pressure on certain sectors, KBRA’s analysis indicates. The prolonged high-interest-rate environment has put pressure on certain sectors, based on KBRA’s analysis of 1,903 private-equity-owned middle-market companies in the U.S. and Europe that hold a collective $922 billion in debt.
Direct lenders face rising default risks in 2025, with 5% of middle-market borrowers struggling under heavy debt and worsening business performance, according to a quarterly report by credit rating analysis firm KBRA set for release on Tuesday.
Housing, construction, discretionary retail and physician practices are among the industries most susceptible to inflation and elevated borrowing costs, said John Sage, one of the lead authors of the report.
At-risk borrowers are showing signs of distress with an extended period of revenue and earnings declines, Sage said. Despite strong revenue and earnings growth across the middle market, borrowers are particularly affected in industries tied to housing-related metals and materials as well as consumer-facing companies reliant on discretionary spending, according to the report. The worst performers in these sectors will have difficulty deleveraging or finding repeat lender or sponsor support.
KBRA, however, maintains an optimistic outlook on direct lending. “Overall, we are relatively positive about the credit health among direct loans given the recent challenges related to higher rates,” said William Cox, global head of corporate, financial and government ratings at KBRA. “Private credit defaults are likely to stay below those of broadly syndicated bank loans.”
More than 80% of the companies at a high risk of default have already received lender concessions or sponsor support, the report shows. These measures include covenant amendments, payment-in-kind (PIK) allowances, maturity extensions and forbearance agreements designed to provide financial breathing room.
These measures provide temporary relief, but whether they will be enough for companies to restore liquidity and stabilize performance remains uncertain.
Such concessions also often come with stricter lender oversight, granting increased control over collateral and company operations to safeguard recoveries in the event of default, according to the report.
Meanwhile, the median interest coverage ratio, a gauge of a borrower’s ability to service debt, is expected to improve in 2025, partly because of refinancing efforts after base interest rates fell moderately. Last year, the metric declined slightly to 1.4. A ratio below 1.0 indicates distress. Still, more than 70% of the companies in sectors including chemicals, containers, metals and materials expect to see the ratio deteriorate.