KBRA DLD, a division of KBRA Analytics, released its latest Monthly Insights & Outlook and Default Reports on the U.S. direct lending market. Highlights from the report are below:

Defaults:

The year-to-date (YTD) direct lending default rate rose to 2.1% from 1.9% for borrowers backed by private equity firms, moving closer to our year-end forecast of 2.5%. The rates are based on number of defaults against more than 1,300 sponsored (PE-backed) companies in this segment of the KBRA DLD Direct Lending Index, which totals roughly 2,400 borrowers including non-sponsored companies. The YTD sponsored rate is based on 28 defaults, with bankruptcies accounting for 64%.

By comparison, the YTD issuer default rate for high yield stands at 4%, and at 5.6% for syndicated loans.

KBRA DLD believes the direct lending default rate remains benign and is forecasting a 2024 sponsored rate of 2.75%. The health care and consumer sectors are expected to produce the most defaults in 2024, with rates across those sectors anticipated at 4% and 7%, respectively.

Default Radar: In the current report, borrowers on our Default Radar rose to 146, reflecting a month-over-month net gain of two. KBRA’s Default Radar is a monthly tracker that identifies worrisome credits for potential defaults in the U.S. direct lending space. Credits are flagged Red or Orange depending on severity of the situation. The most troublesome are flagged Red. Issuers appearing on either list are not guaranteed to default.

U.S. Direct Lending Volume: Momentum continued through November and pushed volume in the KBRA DLD Private Data set to $22 billion, making it the third consecutive month of volume greater than $20 billion. At $127.1 billion through November, YTD volume still falls short of the $131.8 billion in the same period last year. Managers need to put another $17.7 billion on the board this month in order to match last year’s $144.8 billion full-year figure.

U.S. Yields: Unitranche yields shed 12 basis points in November to 11.99%, declining steadily month-over-month from a peak of 12.5% in July.

U.S. Leverage: Unitranche leverage held steady at 5.8x, on average, at the end of November and flat compared to the end of September and October. The average was 5.7x one year ago, having tightened from 6.1x.