ObservationFrameworkCreditDeals and M&A
Private credit lends larger, with thinner coverage and lower recoveries
Private Credit: Characteristics and Risks · 2024
The idea
Private credit is now a standard interview topic in private equity, leveraged finance and credit funds, and the Fed note gives the loan-level facts. The market reached nearly $1.7 trillion, comparable with leveraged loans and high-yield bonds. Its borrowers carry mean interest coverage of about 2.0 times EBITDA over interest against about 2.7 for leveraged loan borrowers, and post-default recoveries of around 33 percent against 52 for syndicated loans. Dry powder has nearly quadrupled since 2014, which is the mechanism by which standards loosen: capital that must be deployed chases deals on weaker terms.
Private credit's borrowers are more levered and its recoveries lower than the syndicated market's, and the capital waiting to be deployed is what pressures underwriting.
When it works
Credit fund, leveraged finance and private equity interviews, and any discussion of where the risks in private credit sit.
When it may fail
The data are from before the market's latest growth, and private loans are hard to observe; the note's own sample is limited. The direction of the comparison is more reliable than any single figure.
How to use it
In the Credit model, set coverage to 2.0 times and recovery to a third, and see what spread the loan needs to earn its risk. Then compare with where private credit actually prices.
Where it came from
Research Private Credit: Characteristics and Risks · Fang Cai and Sharjil Haque, Board of Governors of the Federal Reserve System (FEDS Notes)
What the source says. Total private credit reached nearly $1.7 trillion; mean interest coverage is around 2.0x against 2.7x for leveraged loans; post-default value is around 33 percent for direct loans against 52 percent for syndicated loans; dry powder has nearly quadrupled since 2014.
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