Credit Estimate Snapshot: Q1 2024 Credit Quality Holds, New Activity Rebounds Some

During the first quarter of 2024, Morningstar DBRS issued and refreshed a total of 316 Credit Estimates (CEs) across 310 borrowers for 31 lenders including collateralized loan obligations (CLO) and fund managers. CEs are not credit ratings, but rather point-in-time assessments of credit quality. Currently, we assign CEs to about 1,400 leveraged corporate borrowers. We use CEs to estimate borrower default likelihood in CLOs, rated feeder funds, investment fund debt, equipment leases, and other structured finance transactions. Key insights from our analysis include:

-- We observe lower leverage for most sectors this year as borrowers have been cautious on their overall debt levels and earnings have generally been stable. For financial services, the increase in leverage has been driven primarily by 2024 financings of new borrowers.
-- Median interest coverage has declined slightly. While EBITDA has generally increased, interest expense has increased as well in 2024 versus 2023 (as measured on a trailing 12 month basis).
-- Revenue growth has increased in most sectors, with industrials and financial services leading the way. A decline in the consumer cyclical sector is indicative of the uncertainty surrounding the health of the U.S. consumer because of the long and variable lags of monetary policy.

“Total CE volume declined slightly in Q1 2024 compared with the same period last year, but is expected to reverse in Q3 2024 as refreshes historically pick up during the second half of the year,” says Orest Gavrylak, Senior Vice President.