Standard & Poor (S&P) analysts have run a severe stress test model on US mid-market private credit borrowers finding that some 75% of firms would struggle to make a profit, according to a report by Bloomberg.
The ratings agency tested 2000 credits issued in the US between August 2022 to August 2023 to explore the resilience of the booming private credit market and found that in the worst-case scenario whereby the EBITDA of a business falls by 30% and the base rate rises to 6.5%, a typical company’s leverage would increase to over ten times its earnings.
The report also noted that even at the current base rate of 5.5%, less than half the firms surveyed would generate positive cash flow if earnings dropped by 10%.
The report also cited S&P analysts as saying that while the most severe scenario is unlikely, near term levels of overall liquidity, low default rates, and sustained higher rate environments would be detrimental to the sector.
According to the report, technology and software services were the most vulnerable sector with firms facing low Ebtida and cash flow in their early growth stage.
