Private Credit Outlook: Pace of Downgrades May Slow in 2025

Morningstar DBRS published its 2025 private credit rating outlook, covering recent rating actions and operating performance for the private credit sector and offering its forecast for credit ratings and trends in credit quality for the year ahead.

Key Highlights:
-- We expect more downgrades and rising defaults into 2025, though at a slower pace compared with this year.
-- Fundamentals of higher-rated middle-market credits are trending better, while credit quality among lower-rated credits continues to slide.
-- Until leveraged buyout activity picks up, corporate actions for middle-market borrowers will mostly reflect refinancings rather than mergers and acquisitions.

According to Michael Dimler, Senior Vice President, Private Credit: "We expect more-vulnerable, low-rated private credit borrowers to remain stuck in the mud in 2025, continuing to contend with sluggish or declining sales, weak margin trends, and still-elevated borrowing costs. Meanwhile, fundamentals have been strengthening across a broader set of higher-rated middle-market firms." Mr. Dimler also added: "Given these diverging performance trends, we believe the pace of downgrades across our rated portfolio could slow in 2025, though already-weakened issuers may continue to drive further default events."