Downgrade activity has increased slightly among middle-market private credit ratings, in the 12 months ending 21 February 2025.
According to a new analysis by Morningstar DBRS, the ratio of downgrades to upgrades is trending higher through the first seven weeks of the first quarter of the year. However, downgrade activity remains skewed toward the “vulnerable” rating categories, B or lower.
The ratings agency said that the data continues to show proportionally fewer trend changes shifting to ‘negative’ with a general upward trend in the mix of ‘positive’ trends since the third quarter of 2023.
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Meanwhile, the number of issuers in default increased from 2.2 per cent at the end of the fourth quarter of 2024, to 2.6 per cent of ratings by 21 February 2025, reflecting two new defaults in the year to date.
Morningstar DBRS said that the trend changes continue to signal a balanced outlook for credit fundamentals.
“We believe this reveals a more balanced mix of positive and negative trend changes, following a much higher negative bias during the interest rate increase cycle from mid-2022 through 2023,” said Morningstar DBRS analysts .
“Over the past few quarters, the mix across trend changes has reverted much closer to the three-year averages for both series.”
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The ratings agency added that while the ratings mix of the portfolio continues to reflect a bias toward higher-risk categories, the mix for the year-to-date period has not meaningfully changed compared with the fourth quarter of 2024.
“Issuers rated B or higher still represent 66 per cent of our portfolio of privately rated middle market borrowers, down from 67.5 per cent at the end of 2024,” the analysts said.
“Meanwhile, the proportion of issuers with ratings B (low) through C has increased to 32 per cent from 30 per cent at year-end 2024.
“Finally, issuers rated D (default) increased to 2.6 per cent of ratings from 0.6 per cent a year ago and 2.2 per cent at the end of the fourth quarter of 2024.”
