Bloomberg | Lincoln Sees ‘Cautious Optimism’ for Private Debt

Dec 2024

Originally posted by Bloomberg on November 27, 2024.

Companies with private debt are seeing improving credit metrics, such as earnings growth, painting a positive picture for direct lending, according to a report from the valuations division of advisory firm Lincoln International. Lincoln’s head of valuations for Europe, Richard Olson, is “cautiously optimistic” on the private credit sector, which has been threatened by a cocktail of risks in recent years.

Regulators have flagged concerns around how firms value their debt. Debt for equity swaps, where direct lenders take the keys to firms they lend money to, have also been on the rise. However, interest coverage, a measure that compares acompany’s earnings to its interest burden, has improved slightly, according to the private markets-focused report. The ratio rose to 1.6 times in the third quarter from a low of 1.57 times in the second quarter of the year.

“If we don’t experience some other shock, Q2 should be a floor for interest coverage ratios,” Olson said, adding the firm is expecting interest coverage ratios to move slight upwards in the future, based on forward rates and leverage forecasts. The proportion of loans analyzed by Lincoln valued at their original cost or at least 97 cents on the euro stayed stable at 88% — significantly higher than the 2022 quarterly low of 43% in the last three months of the year.

While 4% of the deals Lincoln analyzed were marked at four-fifths of their original cost or less, Olsen noted it wasn’t a cause for concern.

“There is a stubborn minority continuing to have problems, but that’s hinging around the smaller companies,” Olson said. “Theres a consistent group of companies in a distressed position, but the vast bulk are valued close to par.”  Since the private credit market started booming in 2022, the main beneficiaries have been the largest firms. The top dogs in direct lending, such as Ares Management Corp. and Blackstone Inc., have deployed more than half of the market’s capital historically, according to the Alternative Credit Council.

Demand for capital from lenders and competition from the broadly syndicated loan market have also led to tightened spreads for direct loans, according to Lincoln’s report. Spreads have tightened an average of 75 basis points year-to-date across the UK, Europe and the US on loans for firms with an earnings before interest, taxes, depreciation and amortization of more than €10 million ($10.6 million).

View additional insights in the original Bloomberg terminal article.