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Executive Summary

  • We were asked to present to a group of government officials in Washington D.C. last week on the private credit market following the release of our collaborative three-part primer series combining our own analysis with tremendous work done by our colleagues in Covenant Review, LevFin Insights and Fitch Ratings. A PDF of the slide deck we put together is attached in the body below.
  • In preparation for the conference, we looked at the US direct lending market more closely from a systemic risk lens and our takeaway is the private credit market is unlikely to pose a material risk to the financial system in our base case forecast. As a reminder, our base case forecast is for economic growth to slow to modestly below potential this year with the Fed cutting rates in 2H24.
  • However, if our hard landing scenario comes to pass with the US economy falling into recession in the next twelve months, companies that borrow in the private credit market are likely to feel acute fundamental pain as they tend to have higher leverage than companies that borrow in the BSL or HY bond markets. Liquidity pressure could be transmitted through the drawing of revolving credit facilities by the borrowers in the private credit market (typically PE-owned portfolio companies), which may cause the private credit direct lending funds to draw on their revolving credit facilities provided by traditional commercial banks.
  • The available data show that leverage is limited within private credit direct lending funds and US commercial banks are well capitalized/have plenty of liquidity. There is also plenty of cash in the financial system broadly, with nearly $9 trillion combined between private credit dry powder, private equity dry powder and cash held in money market mutual funds.
  • The popularity of private credit is another risk factor to consider, as heavy inflows into the product may pressure lenders to weaken documentation in order to put large cash piles to work. Our colleagues in Covenant Review note that the average documentation score for private credit funds dipped to the lowest in the history of the data set in 1Q24. This is not a private credit-specific trend, as doc scores for BSLs also fell to a recent low. We will be closely monitoring this trend.
  • Our colleagues in LevFin Insights do not currently see broad-based undue risk-taking by direct lenders, but note the possibility of increased risk-taking by new entrants who do not have the same underwriting standards/experience as other firms/funds that have been active in the space over the past seven or eight years.

We present a brief slide deck summarizing our coverage of the private credit market in our three-part primer series published in March 2024. In addition to the core topics we covered in Private Credit Primer: Part I – Private Credit 101Private Credit: Part II – Fund & Deal Structures and Private Credit: Part III – Future of the Market, we focused on the potential for private credit to cause larger risks in the financial system.

See below for a PDF of the slide deck we used to convey our views on the market as well as an overview of the basics of private credit.

Download Here: Private Credit 101



Zachary Griffiths, CFA
Head of IG & Macro Strategy

Winnie Cisar
Global Head of Strategy

Logan Miller
Head of European Strategy

Brian Perez
Analyst, Credit Strategy

Kathleen Tang
Analyst, Strategy



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