Leverage levels in private credit are to get higher as alternative asset managers’ share of the private credit market increases, according to a report.
Alternative managers will build out their own origination capabilities, which will increase their market share – but these instruments will push only leverage levels but also concentration risks in financial markets higher, said Moody’s Investor Services.
Moody’s published the research in a private credit research report titled ‘Escalating private credit competition will increase risk and scrutiny’. The report also predicts further growth in private lending to corporates in Europe.
“Leverage will increase in a number of ways that may not be immediately visible or obvious, be-cause many of these instruments are already commonly used for a range of financing needs,” said Rory Callagy, an associate managing director with Moody’s private credit team.
Moody’s also found that companies are “eager to pocket big interest cost savings” of, in many cases, 200 to 300 basis points by refinancing $8.3 billion of debt to claw back $16 billion of loans that were repaid in favor of private credit in 2023.
Christina Padgett, head of private credit research at Moody’s Investor Services, added: “We expect LBO activity to gain more traction as private credit lenders put a pile of dry powder – capital on hand to invest – to work in the markets to take advantage of cheaper borrowing costs.”
