KBRA Research: Private Credit – First Look at Middle Market Borrowers’ Interest Coverage and Liquidity

KBRA Updates Research on 2024 Outlook for Private Credit Middle Market Borrowers”

KBRA has released an update to its research focusing on the 2024 outlook for private credit middle market borrowers, with a specific emphasis on interest coverage and liquidity. The report analyzes the impact of potential interest rate hikes, noting that interest costs at 12% have become a reality for most borrowers by the third quarter of 2023.

The report provides insights into the current state of interest coverage and liquidity based on KBRA’s recent credit assessment. Additionally, it projects interest costs to 12% for companies whose financials were assessed prior to the third quarter of 2023. The report also introduces interest coverage and liquidity ratios for the top three sectors in the direct lending industry: Software, Commercial and Professional Services, and Health Care Services and Technology, as well as by company size. KBRA plans to publish more reports delving deeper into the data and companies within each sector.

Key Takeaways from the report include:

  • Most borrowers and sponsors tightened their belts, strengthening interest coverage and liquidity ahead of the 2023 interest hikes.
  • While higher interest costs will lead to reduced EBITDA-to-interest and cash coverage metrics for most obligors, they will still be able to meet interest costs for a full fiscal year.
  • Significant differences in interest coverage and liquidity exist across the three largest sectors, with business and professional services companies generally exhibiting stronger interest coverage metrics.
  • The software sector, characterized by recurring revenue business models, showed higher leverage and weaker interest coverage but also higher margins and more cash on balance sheets.
  • Company size had less impact than expected on interest coverage metrics in KBRA’s portfolio, indicating the strength of lending standards among portfolio lenders.

The report offers further insights into these findings and can be accessed by clicking the provided link. Additional related publications by KBRA are also available for reference

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