North American private credit managers expect default rates and financial distress to stabilise over the next 12 months, but anticipate increased use of payment-in-kind (PIK) interest.
A new study by US services provider Ocorian found that more than four in five managers (84 per cent) expect levels of financial distress and borrower defaults to improve in the year ahead.
Managers also suggested that current stress levels within the private credit market are manageable and already reflected in underwriting standards, pricing and portfolio monitoring.
However, six per cent of respondents said they expect default rates to deteriorate, while a further 10 per cent believe conditions will remain broadly unchanged.
Read more: US automakers at higher default risk than European counterparts
The survey was conducted among US and Canadian private credit managers overseeing a combined $1tn (£725.8bn) in assets under management.
The study also found that managers expect greater use of PIK interest, with 90 per cent anticipating some increase over the next two years. Respondents said PIK is being used as a cashflow management tool to give borrowers breathing space, while requiring closer scrutiny and more active oversight from lenders.
“While private credit managers are leaning into risk, they are not ignoring it,” said Vincent Calcagno, head of US growth at Ocorian. “The expectation of continued growth sits alongside a clear-eyed assessment of risk, valuations and policy uncertainty. This is a market that is adapting, not retreating.”
Read more: Private credit defaults ‘contained’ as market heads towards $5tn
With the private credit market currently estimated to be worth around $3tn and projected to reach $5tn by 2029, managers are also considering the risks associated with its rapid expansion.
Around 71 per cent of managers said they are very concerned that strong inflows could encourage aggressive lending, with the remainder describing themselves as quite concerned.
All managers surveyed reported heightened vigilance around pockets of financial distress and default risk, with more than half saying they are very concerned, Ocorian said.
Read more: Commercial property distress emerging in mezzanine debt
