In this second of a series of research articles regarding the 2024 outlook for private credit middle market borrowers, we examine the status of two variables that KBRA believes are worthy of focused attention in 2024: interest coverage and liquidity. In late 2022, KBRA published a report1 in which we analyzed the impact of potential interest rate hikes. At that time, our assumptions of fed funds rates at 5.5% and total average interest costs at 12% seemed conservative. Interest costs at 12% finally arrived for most borrowers in third-quarter 2023.
In this report, we provide a baseline of where interest coverage and liquidity stood at the time of our most recent credit assessment, then proportionately drag forward interest costs to 12% if the most recent financials available at the time of our assessment were for a period prior to Q3 2023. This update report also introduces distinct interest coverage and liquidity ratios for the direct lending…