Overall private credit default rates climbed to 2.71% in Q2 2024, according to the latest Private Credit Default Index from law firm Proskauer, which comprises 922 active US senior-secured and unitranche loans loans with an approximate original principal amount of $150.7bn.
This marks the third consecutive quarter of rising default rates. Previous rates were 1.84% in Q1 2024, 1.60% in Q4 2023 and 1.41% in Q3 2023.
In a press statement, Stephen A Boyko, a partner in Proskauer’s private credit group and co-chair of its corporate department, said: “Defaults are not necessarily indicative of distress; instead, they provide managers with the ability to take steps to reduce their risk.”
The Proskauer Default Index, which categorises default rates by EBITDA band, reported increases across all bands from Q1 to Q2 2024. Companies with less than $25m in EBITDA saw their default rate rise from 1.9% to 2.6%, mid-sized companies ($25m to $49.9m EBITDA) experienced an increase from 2.0% to 2.7%, and companies with more than $50m in EBITDA faced the largest rise, from 1.5% to 2.8%.
Boyko added: “It is clear that defaults are rising. However, the overall default rate for broadly syndicated loans remains significantly higher than those in private credit. For the twelve-month period ending 31 May 2024, Fitch Ratings reported a default rate of 4.33%. Using a similar definition of default, Proskauer’s corresponding default rate for the second quarter was 0.9%.
“We believe that structural differences between the products account for the variance in default rates—stricter underwriting standards, tighter documentation (including financial maintenance covenants), regular access to information/management, and loans typically held to maturity and not distributed.”
The full Default Index includes comparisons to default rates published by rating agencies, historical trends by industry and EBITDA bands, defaults by default type, defaults in cov-lite loans and defaults by year of origination. It is exclusively available to the firm’s direct lending clients.
