What’s going on here?
US banks and insurers are increasingly asking credit agencies to rate their risky loans to private equity funds, which are backed by these funds’ investments and cash flows.
What does this mean?
Top rating agencies like S&P Global Ratings, Moody’s, and Fitch are wary of rating these loans due to the opaque investor base and challenging
asset
valuations. With
interest
rates staying high, private equity managers are struggling to exit investments profitably, turning to these loans for reinvestments, new acquisitions, or investor dividends. This ‘
leverage
on leverage’ approach is raising flags in the private credit market. Lenders are seeking ratings to lower capital requirements and improve due diligence. Currently, only S&P Global Ratings and KBRA have methods to assess net-asset value (NAV) loans, which are particularly risky due to their reliance on theoretical values.
Why should I care?
For markets: Uncertain waters ahead.
Seeking ratings for private equity-backed loans highlights shifting market dynamics, where investors and lenders aim to mitigate risks as interest rates climb and exit strategies toughen. With the NAV loan market around $150 billion and potentially doubling in the next two years, these ratings could be vital for maintaining investor confidence and market stability.
The bigger picture: Global economic shifts ahead.
This trend could reshape the investment landscape. As rating agencies develop new methods for NAV loans, including those backed by secondary market deals, the transparency and reliability of private equity valuations might improve. This could influence global economic strategies as investors and governments navigate a future marked by persistent high interest rates and evolving private credit markets.
