Fitch Ratings expects lenders to broadly recover less on loans to small to mid-sized companies, compared with average recovery expectations in 2017. It forecasts that for about 64% of loans it rates, investors would recover between 30 cents and 70 cents on the dollar in a default, up from around 25% of the loans five years ago.   

The rising expectations for low recoveries stem from weakening contractual lender protections over the years, Fitch report said. Though those protections have grown a bit stronger this year, most outstanding loans were made before this year. On top of that, leverage is high in many transactions. 

“These capital structures were not constructed with 4% to 5% base rates in mind. Rising rates will hurt free cash flows and eat into companies’ liquidity,” said Lyle Margolis, head of private credit at Fitch Ratings.

Eoin Treacy's view

It is a gross misrepresentation to think the pandemic was a true test for the private credit markets. Evictions were banned, defaults were forestalled and the volume of new money that hit the market broke records. The only way we can describe the impact of the COVID panic on private credit is as a hiccup.
I created this global measure for financial conditions by averaging the Goldman Sachs indices for the USA, Eurozone, China, UK, Japan, and India. The chart clearly highlights the tightness in 2020 was on par with the 2015/16 period.

I am more concerned about the uptrend which has been underway since the beginning of this year. The stock market rebound that began in October coincided with a significant reversionary move in the composite Index. It is now firming once more which suggests global financial conditions are tightening again. That’s not good news for asset prices.   

It’s very difficult to monitor private asset prices because they are not publicly traded by definition. Instead, we can only refer to how the owners of these assets are performing. Brookfield Corp is pausing in the region of the October lows but the medium-term downtrend is still intact.