S&P Global Expects to Rate More Private Credit as Debt Concerns Rise
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2023-11-22 23:23
S&P Global Inc. expects to generate more revenue from rating private debt financings, as a potential downturn in

S&P Global Inc. expects to generate more revenue from rating private debt financings, as a potential downturn in credit markets spurs investors to seek more information about the risks their money managers are taking, the company’s finance chief said.

The private credit market has grown to $1.6 trillion, up from around $500 billion at the end of 2015, according to Preqin, a data provider. Much of that growth has come in the past few years, and most investors in direct lending funds and similar vehicles haven’t seen their portfolios get hit in bad times, said Ewout Steenbergen, chief financial officer at S&P Global.

When these limited partners, or LPs, see losses in their funds, they will probably demand that their money managers provide them with more information, Steenbergen said.

“There will be much more demand from the LPs to say, ‘we want to really understand what is the risk that you have taken in your portfolio,’ and someone needs to do that objectively,” Steenbergen said.

Private equity investors may seek similar information. S&P is already working with major buyout firms on measuring the credit quality of their portfolios, he said.

Read More: Citi in Talks to Start New Private Credit Strategy by Early 2024

Private credit investors should prepare for a potential decline in returns, or even losses, as the companies they lend to navigate a slowing economy, Steenbergen said. The Federal Reserve’s monetary policy tightening since March 2022 has reduced the availability of credit to many types of borrowers.

“Private credit hasn’t really been tested through a credit cycle. There will be a lot of investors in private credit funds that will experience a loss of principal,” Steenbergen added.

While private lenders usually hang on to the financings they provide until maturity, that may change and the assets may become more liquid, Steenbergen said. For example, lenders may look to package more of the debt they hold into bonds and sell them to investors through collateralized loan obligations.

“At some point, those firms might not want to hold those assets on their books to maturity,” Steenbergen said, pointing to private credit funds. “They might want to put it in structured products and use it as a vehicle to refinance themselves.”

S&P is already rating some private credit deals.

“Sometimes, you have companies that take private credit but have public debt outstanding. So we need to rate it automatically,” Steenbergen said.

It posted about $109 million in revenue from its private market business in the latest quarter, a minority of which was from ratings. The company forecasts about $600 million of revenue from this business for the full year 2026, Steenbergen said.

The company generated more than 25% of its third-quarter revenue of around $3.1 billion with ratings of all kinds, including private credit. Sales in ratings grew about 20% from the same period a year earlier.

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--With assistance from Davide Scigliuzzo.

(Updates with Nomura headline under “Did You Miss?”)

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