Private Credit's Default Recovery Rates Are Worse Than Its Biggest Rival.

New data reveals that direct loans from private credit firms are worth less after a default compared to syndicated loans. This challenges the assumption that private credit firms have stronger loan protections and closer relationships with borrowers, providing them with extra protection during troubled times. The analysis also shows that direct lenders tend to be more optimistic about their loans' prospects leading up to a default. However, private credit firms have had fewer defaulting borrowers compared to syndicated lenders or junk bond providers. Recovery rates for corporate borrowers have been falling, with recent examples showing significantly lower returns for struggling businesses. Moody's Ratings predicts that recovery rates for direct lending and leveraged loans will be similar, but there are concerns about the ability of some private credit firms to handle a wave of defaults. The syndicated loan market, which lends to larger companies, may have higher recovery rates due to more options for restructuring and improving performance. Some private credit firms with well-established workout teams and less leveraged borrowers may also fare better in default situations. The industry needs to become more transparent to establish itself as an asset class and provide investors with greater comfort regarding loan values. [Extracted from the article]

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