Direct Lending: Lower Rates Would Add Cushion to Metrics, but Growth Support More Significant

As potential actions by the FOMC to lower the federal funds target over the coming months and quarters would be a clear positive for private credit borrowers’ credit profiles, a key question is magnitude of the likely effect in context of the credits and the macro environment. Lower rates would be welcome support for the market characterized by limited cash flow cushions and PIK conversions (which if involve amendment of original terms are deemed selective defaults). In this market comment, we estimate the magnitude of the effect on credit metrics and consider broader credit implications for the asset class.

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