Rating agency KBRA warns: Private credit default alert sounded, mid-sized companies may become the eye of the storm.

Credit rating agency KBRA stated that as more and more mid-sized companies are facing financial difficulties, the private credit market with a size of $1.7 trillion is expected to see an increase in default rates next year. According to a report released by the agency on Tuesday, in the past 12 months up to September, after analyzing over 2200 mid-sized companies supported by private equity, a total of 61 private debt issuers were rated as CCC-, the highest number in history. This rating is assigned to companies facing "serious operational or liquidity challenges." The report emphasized that the rising proportion of CCC- rated companies "clearly indicates that pressure in certain areas of the direct lending market is accumulating." These companies hold debt totaling 1.4% of the over $1 trillion in debt evaluated by KBRA, reaching a historical peak. In terms of industry distribution, the companies falling into the highest risk rating category are mainly concentrated in the healthcare and technology sectors. KBRA further pointed out that these companies teetering on the edge of junk ratings are also facing pressure from maturing debts. Data shows that among the companies with debts maturing by the end of 2026, nearly 30% have high leverage or negative earnings before interest, tax, depreciation, and amortization (EBITDA), and their ratings have fallen to CCC-. The agency noted that due to the difficulty these companies may face in refinancing in a timely manner, the risk of defaults next year is significantly higher. However, KBRA also mentioned that compared to the syndicated loan market and the corporate high-yield bond market, the default rate for these borrowers in the third quarter remained low. Nevertheless, the agency stressed that "low default rates do not reflect the true extent of the pressure." In the third quarter of this year, KBRA's downgrades of private debt issuers exceeded upgrades for the seventh consecutive quarter.