Cues from Public Markets for Private-Credit Distress

Private credit as a strategy is experiencing its first real rate cycle, and investors who hoped those loans would be light on credit risk may be disappointed.¹ Using the MSCI private-credit security-terms dataset and leveraged loan prices, we find that write-downs in private credit have closely tracked trends in leveraged-loan markets, with rates of distress surging as interest rates lifted off from zero.

Rising rates sink all boats

Since mid-2022, senior-loan distress rates have nearly tripled, as our earlier research found. As signs of distress in private-credit senior-loan markets have followed trends in leveraged loans, monthly data and faster reporting for leveraged loans may provide a glimpse into the future for private credit.

Distress rates among leveraged loans have come down from their peak of 14.5% in May 2023 and stabilized around 11% since late 2023, as interest-rate uncertainty has receded. We see similar stabilization in senior private-credit loans, with around 12% of loans exhibiting signs of distress over the four quarters ending in June 2024. In contrast, rates of distress for mezzanine private-credit loans have been persistently higher and much more volatile. Data from the second quarter of 2024 showed an apparent jump in mezzanine distress, but this could be a false alarm given previous volatility.

Investors concerned about credit risk in their private-capital portfolios should proactively monitor the loans held by their private-capital funds — and keep a close eye on the leveraged-loan markets.