Last October KBRA published an interest rate stress test1 of our portfolio of middle market corporate credit assessments. In that report, we concluded that up to 16% of companies in a portfolio of roughly 2,000 companies, all else being equal, would transition to becoming unable to meet interest payments from current cash flow if the terminal reference rate rises to 5.5%. The two questions we receive most frequently since the report was published are: (i) What if terminal rates rise even further, and (ii) Has stress started to materialize on the landscape of middle market borrowers, their private equity sponsors, and their private credit lenders?
In this update, we demonstrate the impact of terminal reference rates at 6%, 6.5%, and 7% on KBRA’s private credit assessment portfolio (see Figure 1). We apply interest rate stresses to most of the middle market private companies in our portfolio of over 2,400+ credit assessments, which are evaluations of…