KBRA has released research following the Federal Reserve’s September 18 decision to begin its anticipated monetary easing cycle with a 50 basis point (bps) reduction in the target base rate. While lower rates will provide significant relief for most private credit borrowers, the benefits may fall short for those already facing financial difficulties.
In August, KBRA reported that strong revenue and EBITDA growth helped mitigate rising interest costs for many of the 1,067 corporate borrowers assessed in the first half of 2024. This latest report analyzes how those borrowers would fare in a declining rate environment. With the base rate expected to decrease to 300 bps, down from over 500 bps before the cut, KBRA found that average all-in rates for borrowers would drop by 20%, translating to approximately $9 billion in annual interest savings. These funds, which would have otherwise gone to lenders, could now be redirected to other business initiatives.
Key Findings:
- With a 3% base rate, 70% of borrowers with positive EBITDA are expected to see their interest coverage ratio (ICR) increase by at least 0.25x, boosting financial stability for many sub-investment grade borrowers.
- Companies with weaker financial positions are likely to benefit the least, given their higher leverage (median of 10x) and debt costs that are over 200 bps higher than those of stronger borrowers.
- Of the 265 companies with an ICR below 1.0x in the first half of 2024, around 90 could see their ICR rise above 1.0x with a 300 bps base rate, but roughly 16% of the total borrower population would remain under financial strain.
- Private credit defaults remained limited during the rate peak due to payment-in-kind interest and maturity extensions. However, further reductions in default rates may be challenging. KBRA identified around 50 companies with a sub-1.0x ICR and debt maturities between now and 2026, alongside 71 companies reporting negative EBITDA, indicating potential for future defaults.
For a detailed analysis, read the full 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
About KBRA: KBRA is a full-service credit rating agency registered in the U.S., EU, and UK, and authorized to provide structured finance ratings in Canada. Its ratings are widely used by investors for regulatory capital purposes across multiple jurisdictions.
