Smaller Private Credit Borrowers Drowning as Rates Stay High

This article was originally published in Bloomberg Law.

May 29, 2024 | LINK

Smaller Private Credit Borrowers Drowning as Rates Stay High

Inflation and high interest rates have continued to take their toll on a swath of private companies that have seen their profits shrink and debt costs soar, according toa new report that warns they could compromise the broader economic momentum.

The average middle-market private company, those valued between $100 million and $750 million based on sales revenue, is near violating or already has breached covenants and is struggling to service debt, the report by Marblegate Asset Management and RapidRatings found.

“Fortune 500 companies may be less affected, but they are reliant on these middle-market borrowers, who are often central to supply chain,” said RapidRatings founder and executive chairman James Gellert. “This can cause all sorts of problems for everybody.”

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RapidRatings Executive Chairman James Gellert spoke to Bloomberg Law on the state of private company distress. Research by RapidRatings and Marblegate Asset Management highlighted that a large portion of middle market companies (the backbone of supply chains and vendor ecosystems for the world’s largest companies) are collapsing under today’s conditions.

Analyzing income statements and balance sheets previously unavailable publicly, the report—obtained by Bloomberg—reveals that 36% of private companies in the U.S. are currently in High and Very High Risk, versus only 15% for public companies.

The aggregate financial data on private companies shows:

  • EBITDA (a measure of profitability) is down 39%.
  • Net Profit after taxes has seen a significant decline of 233%.
  • Leverage (debt compared to equity) has increased by 139%.

In these challenging times, firms can instill confidence by having a comprehensive view of the financial well-being of their suppliers and third-party entities, notably private ones. With the right data, companies can navigate risk and make informed business decisions accordingly.

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