Private Debt Defaults Set to Climb as Middle-Market Firms Wobble

Invesco Chief Global Market Strategist Brian Levitt explains why he thinks private credit remains attractive amid stable inflation and easing policy.

Defaults are poised to rise across the $1.7 trillion private credit market next year as a growing number of middle-market firms are experiencing stress, according to Kroll Bond Rating Agency.

A record 61 borrowers with private debt have a rating of CCC-, KBRA said in a report on Tuesday, which analyzed more than 2,200 middle-market companies backed by private equity in the 12 months through September. The firm tacks on that label for borrowers “facing severe operational or liquidity challenges.”

The rising share of firms falling into the CCC- cohort is “a clear signal that pressure is building in certain segments of the direct lending market,” KBRA said in its report. The companies in this group collectively held a record 1.4% of the more than $1 trillion of debt assessed by KBRA. The largest companies sitting in the riskiest rating bucket were concentrated in the health care and technology sectors, according to KBRA.

As more borrowers are sitting at the riskier end of junk, they’re also facing upcoming maturities, KBRA said.

Nearly 30% of companies with debt maturing before the end of 2026 had high leverage or negative earnings before interest, taxes, depreciation and amortization and fell into the CCC- bucket, according to the firm. Those factors make defaults more likely next y

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