The Zhitong Finance App learned that Fitch Ratings released a report on Thursday showing that in the second quarter of this year, the default rate in the US private credit market continued to rise, reaching a record high, reflecting the continued pressure on highly leveraged borrowers in the high interest rate environment.
According to data from about 1,300 US private credit borrowers, by the end of the second quarter, the private credit default rate had risen to 6% in the past 12 months, higher than the 5.7% record high set in the first quarter. In the second quarter, Fitch recorded a total of 32 private credit default cases involving 20 new defaulting companies, bringing the cumulative number of defaulted companies to 84.
The report points out that among the default cases that occurred in the second quarter, loan term extensions have replaced in-kind interest payments and interest deferred payments, and have become the most important form of default. More than half of the 32 default cases recorded in the second quarter involved various forms of debt rollover, reflecting the fact that more and more borrowers are easing short-term debt repayment pressure by extending debt maturities.
Lyle Margolis, head of private credit at Fitch North America, said that at the beginning of the year, the market originally anticipated that the Federal Reserve would enter a cycle of interest rate cuts. Coupled with the recovery in mergers and acquisitions, the private credit default rate is expected to gradually decline. However, as the market now recapitulates expectations of interest rate hikes, and the M&A market continues to be sluggish, it is expected that the private credit default rate will remain high for the rest of this year.
From an industry perspective, industry and manufacturing have become the areas with the highest risk of default. By the end of the second quarter, the industry's private credit default rate had risen to 10.4%, a sharp increase from 5.9% in the first quarter; the healthcare industry's default rate also rose from 6.9% to 9.4%, indicating that financing pressure continued to increase.
In contrast, although the rapid development of artificial intelligence (AI) is reshaping the competitive landscape of the technology industry, the overall credit status of the software industry remains relatively stable. Fitch pointed out that the software industry's default rate is only 1.2%, which is not only the lowest among major industries, but also a further drop from 2.3% in the first quarter, indicating that the credit pressure on related companies is currently relatively limited.
Fitch said its overall outlook on the global private credit market remains “neutral.” However, the report also pointed out that the situation in the Middle East, especially the risk of inflation brought about by the Iran conflict, has weakened market expectations for short-term interest rate cuts, which means that highly leveraged borrowers will still face higher financing costs and debt repayment pressure for some time to come.