Bank of America identifies rising strain in private credit, according to their recent statements.
In the second quarter of 2022, the private credit market, valued at a staggering $1.7 trillion, has been experiencing increased stress. The Federal Reserve's interest rate hikes have led to an uptick in losses, particularly in the business development companies (BDCs) sector.
BDCs, which hold a significant portion of the private credit market, have been carrying unrealized losses from loans originated in the low-rate environment of 2021. These unrealized losses amount to an additional $1.3 billion, according to a recent report. Moreover, the report suggests that these unrealized losses are expected to lead to further credit losses as interest rates are not forecasted to drop to 2021 levels.
Bad payment-in-kind (PIK) deals, where borrowers defer interest payments during the life of the loan, represent 2.5% of BDC holdings in Q2. About 30% of all PIK loans are scheduled to mature within the next two years, potentially impacting companies with these loans, as these loans represent a substantial portion of the market. The upcoming maturities of these PIK loans could pose a challenge for companies unable to pay interest.
The maturity walls in private credit are at record highs, with a significant portion of deals coming due in the near future. In the private credit market, 17% of deals have maturity dates within the next two years. The upcoming maturities of these deals could potentially strain companies, especially given the current economic climate.
However, the presence of substantial dry powder could help mitigate the impact of the upcoming maturities on the private credit market. Approximately $160 billion of dry powder is allocated for domestic direct lending strategies, which may help alleviate the effects of upcoming maturities.
Despite these challenges, default rates in the private credit market remain higher than those in public credit. Default rates have been higher than usual, with metrics varying widely depending on datasets. However, a report suggests that the upcoming maturities shouldn't pose major threats due to the presence of this substantial dry powder.
It's important to note that, as of the latest search results, no specific names of business development companies that became insolvent in Q2 2022 and incurred realized losses exceeding $1 billion USD have been identified.
US middle-market issuers are expected to require approximately $170 billion in capital over the next two years. As the private credit market navigates these challenges, it remains to be seen how companies will meet these capital needs and address the upcoming maturities.
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