The risk of private credit in the US is being exposed at an accelerated pace! The default rate rose to a record 6.3%. The number of default cases in August hit a one-year high
The Zhitong Finance App learned that credit pressure in the US private credit market is heating up further. According to a report released by Fitch Ratings on Monday, as of the end of August, the default rate of the 1,300 US private credit borrowers it tracked in the past 12 months had risen to 6.3%, surpassing the previous high of 6.1% set in July, once again setting a new record. Meanwhile, the number of private credit default cases in August also hit the highest level in a single month in the past year.
Lyle Margolis, head of private credit at Fitch North America, said that private credit defaults continued to increase in August, mainly driven by loan maturity rollover transactions for struggling companies. According to Fitch's rating standards, some of these rollover deals are deemed to be in default. There is still great uncertainty about current interest rates and inflation prospects, curbing trading activity, making it more difficult for private equity sponsors to sell portfolio companies with poor business conditions before loans expire, and eventually have to ease debt repayment pressure through extensions, etc.
According to the data, Fitch recorded a total of 14 private credit default cases in August. Of these, 11 involved borrowers who defaulted for the first time or independently, and 3 involved companies that repeatedly defaulted.
Judging from the default structure over the past year, there are also obvious signs that corporate cash flow is under pressure. There have been 89 default cases in the past 12 months, including delays in payment of interest and replacement of interest in kind (PIK) with interest paid in kind (PIK), accounting for 47% of all default cases. This means that some borrowers are easing short-term liquidity pressure by reducing current cash interest expenses.
Meanwhile, loan maturities, driven by financial pressure, have been the most important type of default in the private credit market for the third month in a row. Fitch said that in August alone, the extension of such dilemmas accounted for 45% of all default cases in that month.
By industry, credit pressure is most prominent in healthcare, industry, and manufacturing. In August, these industries all had a default rate of 9.9%, up from 9.5% in July, making it the area with the highest concentration of default activity in the industries covered by Fitch.
It is worth noting that although the software industry is being dragged down by concerns about artificial intelligence disruptions this year, investors are becoming more cautious about the growth prospects of traditional software companies. Judging from the quality of private credit, the software industry has shown strong resilience.
According to Fitch data, the tech software industry's default rate in August was only 0.6%, a further decrease from 1.2% in July, and continues to maintain the lowest default rate in the Fitch Ratings industry. This is in stark contrast to the nearly 10% default rate in healthcare, industry, and manufacturing.
Private credit default rates continue to set new records, which also shows that the pressure of the high interest rate environment on some highly leveraged companies is gradually showing. In particular, when mergers and acquisitions and asset sales activities are blocked, it is more difficult for private equity institutions to exit by selling portfolio companies, and as loans expire one after another, some companies with weak operating performance can only rely on rollover, delay cash interest payments, or use PIK to obtain more time.
If uncertainty about interest rates and inflation continues, and the trading market is slow to recover significantly, the pressure on private credit borrowers to refinance and exit may remain high, and credit events in the form of difficult extensions will continue to be the focus of market attention.