LONDON, Jan 15 (Reuters) – The rate of senior loan writedowns by private credit funds has tripled since 2022 as higher interest rates have pressured the riskier companies that borrow from these shadow banking entities, MSCI said in a report on Thursday.
The roughly $3 trillion private credit market – mostly made up of loans to companies by non-banks like asset managers – has attracted scrutiny in recent months after a few high-profile U.S. bankruptcies raised investor concerns about broader credit quality.
MSCI, an index provider, said that signs of deeper stress in private credit markets were starting to show after two years of elevated rates tested the ability of borrowers to withstand higher interest rate burdens.
It said that writedowns of 20% on senior loans, which it described as a rough threshold for distress, have more than tripled since interest rates surged in 2022.
A senior loan is a type of borrowing that gets paid first if a company defaults.
MSCI said that although investors in private credit funds have not yet responded with widespread restructurings to mop up troubled loans, deeper impairments are creeping into the system.
More than 5% of senior loans have experienced such 50% writedowns, MSCI said.
“These more aggressive markdowns suggest an increasing number of loans are circling the drain, sliding toward restructuring — the point where debt holders risk becoming equity holders,” the report added.
“For now, loans are generating enough income to compensate for credit losses, but the drumbeat of bankruptcy news seems to be getting louder.”
(Reporting by Naomi Rovnick; Writing by Dhara Ranasinghe; Editing by Susan Fenton)
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