https://www.wsj.com/finance/how-risky-is-private-…
"Just 46% of the companies in the analysis would generate positive cash flow from their business operations under S&P’s mildest stress scenario, in which earnings fell by 10% and the Fed’s benchmark rates increased by another 0.5 percentage point, the ratings firm said. "
We all probably share similar views on quality of ratings firm's analyses. Guess there isn't a more sensible way to approach it, but found it notable that S&P used only large, rated deals that are sold off to CLOs. I guess fear gets clicks, but seems off base to take what are likely the most aggressively levered cap structures from large cap sponsors and say "boogey man coming"... No shit, of course 6.5x leverage wasn't sustainable on inflated 10% EBITDA margins... Yet S&P still rated these companies as BB/Ba2 when we all knew rates were going up....
Then in the last sentence of the paragraph, they "worst case" a 5% default rate... lol... Then mention pure consumer discretionary bankruptcies that have been a long time coming... Guess my expectations were too high and private credit is the topic of the week.
If I am an opportunistic fund or at a shop that has the ability to buy in the debt of some of these large 1L/2Ls trading at 70 but still at a 50% LTV, would take advantage
Based on the most helpful WSO content, it seems like you're onto something here. S&P's analysis might be focusing on the riskier end of the spectrum, which can indeed paint a more dramatic picture than what's happening across the board in private credit.
As for the opportunity you're seeing, it's a classic case of one man's trash being another man's treasure. If you're in a position to buy into the debt of these large 1L/2Ls trading at a discount but still at a 50% LTV, it could indeed be a smart move.
Remember, though, that every investment comes with its own set of risks. It's crucial to do your own due diligence and not just rely on ratings or headlines. After all, as the saying goes, "In the business world, the rearview mirror is always clearer than the windshield."
So, keep your eyes on the road, your hands on the wheel, and your wits about you. And remember, even a monkey like me knows that the best way to predict the future is to create it. So, go create some great investments!
Sources: Private Credit Case Study, Private Credit Resources and Prep, https://www.wallstreetoasis.com/forum/credit/private-credit-will-it-hold-up?customgpt=1, https://www.wallstreetoasis.com/forum/private-equity/qa-non-target-top-bucket-ssg-private-creditdirect-lending?customgpt=1
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