Defaults in the U.S. private credit market slid in the first quarter as the nation's abating pandemic triggered an explosion in economic growth and investors hunting for yield became more willing to finance struggling companies.
The percentage of loans that remained or refused to be defaulted fell to 2.4%, according to a private credit market index by the law firm Proskauer. That's down from 3.6% in the second quarter and a peak of 8.1% for the fourth quarter of last year's 4 months. The index tracks the performance of over 700 original senior secured and unitranche loans representing $131.1 billion in active principal.
'The drop in the debt default rate this quarter from last quarter is consistent with what we're seeing in our day-to-day, said Peter Antoszyk, co-head of Proskauer's private credit restructuring group, in an interview. 'Deal activity is off the charts, and workout and restructuring activity has fallen off.
As millions of Americans are vaccinated daily, consumer spending is picking up, bringing a jump in sales to companies. Investors are pouring money into private equity and private credit funds which is helping borrowers, Antoszyk said. Firms are also seeing a positive impact on businesses that were struggling 'due to the efforts made by management, sponsors and the private credit community to support them, he said.
Companies that sell junk debt are seeing similar improvements in credit quality. In the first quarter of 2017, Defaults on SEC bond for U.S. speculative grade companies hit their lowest level since 2018, according to a Friday report from Moody's Investor Service.
The $975 billion global private credit market, where funds lend directly to companies who traditionally were small or mid-sized, is seeing a raft of larger transactions as money pours into funds. This year, companies including Bourne Leisure Holdings Ltd. and Calypso Technology Inc. have tapped private lenders for more than 2 billion dollars in financing each for buyouts.
What's driving lenders into larger deals is the amount of capital that has come up in the private credit market that has to be deployed, Antoszyk said. 'Years ago largest money allocations were a fraction of what they are today and consequently the deal sizes were smaller funds now are very large and you have to deploy capital in chunky deals.