Separating signal from noise

Key takeaways

• Last week, we discussed the signaling from default trends in the liquid corporate credit market. The key takeaway: while there are some visible pockets of financial stress (smaller firms, loan-only capital structures, repeat defaulters, etc.), we view the bar as quite high for a widespread disruption in performance. Instead, we expect a continuation of the trend of dispersion – which underscores the importance of granular credit selection in the current environment.
• This week, we turn our focus to the private credit market, and address a few of the most cited questions related to valuations (in aggregate, and across private credit lenders) and fundamental trends (non-accrual rates, payment-in-kind (PIK) utilization).
• On valuations, we find that private credit implied recoveries do indeed reflect potential credit stress in the three and six months prior to default – similar to the trends visible in the liquid credit market. And while valuation differentials can exist (for the same loan) across lenders, data from multiple third-party sources shows this is relatively modest, in aggregate. We believe residual post-pandemic shifts may be playing a role, as some business disruptions have yet to normalize.
• On fundamentals, we find that non-accrual rates remain below the long-term average. On PIK, the distinction between PIK inclusion (in a deal) and PIK utilization (due to cash flow stress) is notable, in our view. We favor the latter and find that PIK as a percentage of total interest income has been relatively range-bound (and moderate, at 7%-8%) for the past several quarters.
• We attribute much of this fundamental resilience – in aggregate – to the supportive growth backdrop in the U.S. For example, as of January 17^th, the Atlanta Fed GDPNow continued to track U.S. real GDP at an above-trend pace of 3.0% - extending the pattern which has been in place for much of the past several quarters. This is similar to the “warranted resilience” we have previously identified in the USD HY bond market. That said, as we outlined in our 1Q2025 Global Credit Outlook, we expect dispersion to remain a key theme in 2025 – especially given the significant policy shifts anticipated following the U.S. presidential election.

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Past commentaries

• Week of January 16th
• Week of January 9th
• Week of December 19th
• Week of December 5th
• Week of November 21st
• Week of November 14th
• Week of November 7th
• Week of October 31st
• Week of October 24th
• Week of October 17th
• Week of October 10th
• Week of October 3rd
• Week of September 26th
• Week of September 19th
• Week of September 12th
• Week of September 5th
• Week of August 15th
• Week of August 8th
• Week of August 1st
• Week of July 25th
• Week of July 18th
• Week of July 11th
• Week of July 3rd
• Week of June 27th
• Week of June 20th
• Week of June 13th
• Week of June 6th
• Week of May 30th
• Week of May 23rd
• Week of May 16th
• Week of May 9th
• Week of May 2nd
• Week of April 25th
• Week of April 18th
• Week of April 11th
• Week of April 4th
• Week of March 21st
• Week of March 14th
• Week of March 7th
• Week of February 29th
• Week of February 22nd
• Week of February 15th