High Rates and High Leverage: Negative Credit Rating Actions Will Likely Continue for Weaker Private Credit Borrowers

DBRS Morningstar’s private credit group maintains private credit ratings on a portfolio of approximately 300 higher-leveraged corporate issuers throughout North America and Europe. The group mainly covers private equity-backed companies with operating earnings ranging from approximately USD 10 million to USD 100 million. This commentary provides an updated outlook for the rated portfolio.

Key Takeaways:
-- Higher interest rates and a weakening ability to pass through price increases are resulting in a ramp-up in negative rating actions for weaker private credit borrowers, and we expect this trend to continue.
-- However, payment defaults within our rated portfolio remain below the broader average for public and private companies in the deep non-investment-grade segment (i.e., B credit rating quality and below), likely due to relatively strong credit profiles and tight, supportive management by private equity sponsors and private lenders.
-- A significant deterioration in projected liquidity resources and interest-paying ability in the next 12 months would signal that negative rating actions may accelerate.

“We expect ratings for weaker private credit issuers to move further down the rating scale in the current environment, pressured by high interest rates and lower margins,” said Jordan Kremblewski, Vice President, Private Credit Group at DBRS Morningstar. “We have seen an increase in negative rating actions as a percentage of rating changes to 65% in the year-to-date period.”