Does a slowing economy increase the risk of loan defaults in private debt?

Well-run private debt funds use rigorous scenario testing and real-time monitoring to mitigate risks. Historical net write-offs by banks peaked at just 0.68% during the GFC and were 0.04% in September 2024, demonstrating strong resilience across economic cycles.

Does a loan default always result in a credit loss?

No. Private debt investors are protected by their seniority in the capital structure. Senior debt holders get repaid first, before subordinated debt, preferred equity, and common shareholders. Covenants and controls act as early warning signals allowing lenders to engage with borrowers to mitigate financial loss.

Are all private debt managers the same?

No. Private debt managers differ significantly in scale, credit skills, and experience. Quality managers need sizable assets under management, bank-level credit skills, extensive networks, and the ability to directly originate and diversify loans across borrowers to achieve optimal outcomes.

Does commercial real estate debt put capital at risk in a property downturn?

Property owners face greater risk than lenders. With typical loan-to-value ratios of 60%, owners' equity acts as a buffer. Even if property values fall significantly, lenders can compel borrowers to restore their position or pursue asset sales to maximize recovery without necessarily incurring losses.

Are non-bank lenders lenders of last resort?

No. Competent private debt managers lend to quality companies and often compete with banks or work alongside them in lending syndicates. Post-GFC regulations requiring banks to hold more capital have created financing gaps that private debt fills for established companies with sound fundamentals.

The one red flag in private credit investing

In our previous video, Andrew Lockhart of Metrics Credit Partners provided a short 101 of what private credit investing entails. In this episode, he digs a bit deeper and discusses what it takes to originate a private loan transaction and how he assesses the ability of borrowers to repay debt. Above all else, the one red flag Andrew looks for when deciding to lend company is the quality of management.

“What’s the experience, what’s the skillset of the people involved, do they have the right commercial acumen to deliver growth in earnings and really deliver on their strategic intent?”

Find out more about the inner workings of what drives sustainable private credit returns and the litmus test borrowers go through.

Looking for higher-paying income rates than the major banks?

Metrics Credit Partners is a leading Australian non-bank corporate lender and alternative asset manager. Metrics provides regular and consistent income to investors through its portfolio of corporate loans.

Livewire – February 19, 2020

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