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Examiner in Hughes

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Who Could Have Seen This Coming?

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What's next for Thames Water?

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Yield on CCC Bonds at Highest Level Since YE2023(%)

Bessent's Nightmare

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Don't Worry, It's Fine

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Our take:

Over $40 billion in insurance investments are rated by Egan-Jones alone - a firm accused of inflating its ratings on credits that often get just one rating instead of the multi-firm standard public markets require.

It's clear why people are starting to talk with fear about the growing incestuous relationship between insurance and private credit. With insurance regulators now sounding the alarm, is it too little, too late, or much ado about nothing.

State of Distressed: Burian & Stark on the Preordained Bankruptcy

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Shoppin'

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Strong Economy, Record Earnings, Yet Credit Stress is Growing at Leading BDCs as Non-Accruals Surge

The economy remains strong, with continued tailwinds: corporate earnings are on their strongest growth trajectory in years, equity markets are at all-time highs, and the Fed is holding rates steady.

That is an attractive backdrop for credit. As companies grow earnings relative to their outstanding debt, credit fundamentals can improve meaningfully.

Yet stress is building as the Top-10 BDCs have seen non-accrual debt climb to an alarming 5.95%, according to PitchBook and LCD data.

The rise in PIK and non-accruals does not yet fully capture the problem brewing in software as BDCs have high exposure to this sector. The bigger issue for software is valuation: leverage levels are increasingly out of proportion to current enterprise values. That disconnect will ultimately need to be resolved, particularly as the maturity wall comes into focus over the next three years.
For capital allocators, now is the time to ask the hard questions to understand how clean the portfolio is.

Questions to ask:

How many companies have no covenants?

What percentage and which specific issuers have/will require extensions or amendments to avoid default?

What percentage are now PIK? What percentage are non-accruals?

The current vintage should generate strong returns, in my view. However, legacy issues from the prior vintage will take time to work through. Buying into a fully seasoned portfolio can often be an attractive way to invest, but my strong preference is for a pristine portfolio - one where all loans are performing on plan or ahead of plan, with no underlying issues that need to be worked out.

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