In this quarterly update, KBRA reviews the more than 2,200 KBRA assessments completed for 1,903 unique middle market-sponsored borrowers in 2024. These companies collectively account for $922 billion in debt, offering a clear view of the overall private credit direct lending market.

KBRA examines key trends shaping credit quality by company size and sector. In addition, the report identifies and describes the roughly 5% of companies in this portfolio that appear most at risk to default in 2025, given expectations for prolonged base rates, fundamentally weak performance and limited financial flexibility.

Finally, KBRA provides new data on the 496 surveillance assessments and 199 new assessments conducted in Q4/24.

Key Takeaways

• In 2024, strong revenue growth (17% compounded annual growth rate (CAGR) over three LTM periods) and even stronger EBITDA growth (33% CAGR over three LTM periods) helped most MM borrowers withstand the impact of peak base rates. As a result of this growth, the strongest among these companies de-levered and were able to negotiate reduced spreads and term extensions. KBRA believes that most sponsor-backed MM companies have acclimated to a higher rate environment, and for the vast majority, 2025 will offer more opportunities than hurdles compared to any year in at least the past five.
• The industries where private credit invests the most, (commercial & professional services, software and health care services & technology) consistently ranked among the top performers across all credit metrics in KBRA’s analysis of 24 sectors. Accounting for nearly 60% of the portfolio, we expect these industries will continue to reinforce direct lenders’ stable credit performance.
• Payment defaults remained muted throughout 2024. KBRA observed only 21 payment defaults (1.1% by count) in full-year 2024. As a percentage of total debt, the rate totaled 0.7%. This is due to the higher default frequency among the smallest companies in the portfolio, by revenue, which accounted for 48% of the total. These lower-than-expected default rates may partly stem from the one- to two-quarter lag in receiving financial statements.
• KBRA identified 5% of the portfolio as struggling, prompting expectations of increased direct lending defaults in 2025 — unless lower-than-expected interest rates, exits, intervention, or capital injections provide relief. This pool is mostly exposed to industries affected by inflation and higher rates, such as housing, construction, discretionary spending and physician practices. Sectors with over 10% of their companies at risk include chemicals, containers, metals & materials; consumer retail; electrical equipment & construction materials; and media.
• While the median interest coverage ratio declined slightly to 1.4x year-over-year, KBRA anticipates improvement in 2025, even if the pace of revenue growth continues to slow. Lower interest costs for most borrowers, fewer companies with negative EBITDA, and expanding profitability margins across sectors are expected to fuel the improvements. KBRA considers these factors key anchors of credit quality amid potential volatility in the coming year.