Private credit portfolios are currently under considerable strain, with some of the largest funds experiencing writedowns and issuing warnings about problem loans. This represents the most significant challenge the industry has faced in almost a decade. An analysis of data from Solve, a fixed-income provider, indicates that the value of troubled loans held by major private debt investors has reached levels last observed in 2017, following an oil price crash.
The median percentage of loans placed on non-accrual status by the 20 largest publicly traded business development companies (BDCs) increased to 2.8% of their cost in the second quarter, up from 2% at the end of March. This status signals that borrowers have either ceased payments or are anticipated to default soon. Fitch Ratings analysts reported a new record in private credit defaults in July, and separate data from PitchBook LCD showed that the largest publicly listed BDCs shrank in the second quarter due to impairments and a higher rate of loan repayments and sales compared to new commitments.
Several prominent funds, including those managed by KKR and Blue Owl, as well as Apollo Global's MidCap Financial, saw repayments surpass new lending. FS KKR Capital Group's listed fund reported that 7.1% of its loan book was troubled in the second quarter, although this was a slight improvement from the previous quarter, it remained well above the industry average. High borrowing costs have hindered some businesses' growth, with Barings' Bryan High noting that companies are using all their generated cash to service interest payments, thereby limiting investment.
Blackstone and KKR, among other lenders, marked down the value of their loan to software group Medallia. Blackstone's fund valued this investment at less than $0.50 on the dollar by the end of June, a decrease from $0.60 in March. Ares' fund also wrote down its loan to human resources software company Cornerstone OnDemand, and lenders like Blackstone and KKR took over dental services company Affordable Care after its debt default. The share prices of listed BDCs managed by KKR and BlackRock have dropped over 15% in the past year, while Apollo's fund has lost 14.5% for investors. BlackRock, through its TCPC vehicle, restructured its portfolio by selling a $523 million block of loans to strengthen its balance sheet, and is considering options for the vehicle's future, including asset sales and winding it down. Despite some industry executives dismissing alarmism, Mitchel Penn, an analyst at Oppenheimer, commented that the sell-off in BDC share prices means funds are "priced for death," and that underwriting standards were not as rigorous as they should have been.
