KBRA released research that considers the themes that matter for private credit in 2025.
Key Takeaways:
Trump 47 is expected to have a mixed impact on the private credit industry. The prospects for lower taxes and reduced regulations are likely to add fuel to the pent-up desire for exits, driving private credit loan growth and acting as a tailwind to portfolio company credit quality. Meanwhile, renewed inflationary concerns have already caused markets to anticipate fewer rate cuts. A mere two quarters ago, the implied fed funds rate was below 300 basis points (bps) at the end of 2025. That same measurement is now around 400 bps. KBRA sees an extended period of elevated rates as a risk to some borrowers’ credit quality.
KBRA believes most borrowers will have improved access to incremental debt capacity in 2025. In tandem with the nearly 60% of the nearly 2,000 companies in KBRA’s credit assessment portfolio that de-levered last year, base rate cuts and the 32% of borrowers who lowered their loan spreads through Q3/24 have bolstered overall debt serviceability. But with the likelihood of larger rate cuts already dwindling, and at least two signs of revenue growth slowing in our portfolio, KBRA believes some of the obligors who struggled to service their debt and delayed defaults in 2024 may have to face the music. These obligors contribute to a higher projected default rate estimated at 3% by count in 2025.
Portfolio company valuation catalysts including stronger credit fundamentals, lower rates and rallying public market multiples have started to crystallize, which should inspire more exits and leveraged buyouts. KBRA believes even some struggling borrowers, with attractive assets or synergistic operations, could benefit from the return of mergers and acquisitions (M&A), particularly bolt-on acquisitions, as it can provide a fresh start at capital structure redesign or the benefits of consolidation.
Private credit’s share of the growing loan market will be challenged by the banking sector which has come roaring back amid strengthening balance sheets, the prospect for much-tempered changes to regulatory capital requirements and the health of the broadly syndicated loan market. KBRA believes competition will continue to squeeze loan spreads and could have future negative impacts on undisciplined private lenders that are too aggressive on leverage, credit agreement terms and pricing.
KBRA maintains the strategic repositioning made by some alternative asset managers in 2024 reduces their reliance on M&A and leveraged corporate lending in 2025. With private credit’s total addressable market pegged at $40 trillion by some, KBRA believes the significant growth opportunities lie in investment-grade debt and specialty finance. For example, there was a 4x year-over-year jump in the amount of KBRA-rated specialty finance issuance in 2024. KBRA believes private credit’s track record of successfully navigating past challenges positions the industry well for the year ahead. The degree to which higher for longer rates hampers momentum is worth a close watch. Meanwhile, with managers demonstrating their ability to adapt distribution and fundraising strategies to minimize friction, KBRA expects the asset class to continue evolving. Supported by flexible capital sources and relatively light regulation, the shift from traditional financing channels to private credit is likely to continue.
