Global private credit default rates are high, experts say: Risks in our country should be controllable | Lianhe Zaobao

The American auto parts manufacturer First Brands and the subprime lender Tricolor, which previously responded to private credit, have both filed for bankruptcy. Coupled with market concerns that the default rate will continue to rise, there is a pervasive sense of unease in the global private credit sector. Nevertheless, interviewed analysts believe that the default situation in China's private credit should be manageable. Private credit refers to loans provided by non-bank financial institutions, such as private equity funds and asset management companies, to enterprises. The most common form of private credit is direct lending, where private equity funds lend directly to businesses for purposes such as business expansion, capital expenditures, or mergers and acquisitions. Market Participants: Concerns About Default Phenomenon A recent series of events reflects that the global private credit sector seems to be facing significant crises. Firstly, First Brands and Tricolor, which had borrowed heavily from private credit funds, have both sought bankruptcy protection, raising market concerns that this could trigger a larger debt crisis in the private credit sector. Subsequently, several market participants have expressed their worries about the default phenomenon in private credit. For example, the international rating agency DBRS Morningstar has released a report indicating that the earnings margins of global private credit borrowers are weakening, and more defaults are expected next year. John Graham, CEO of the Canada Pension Plan Investment Board (CPPIB), has also warned that there are significant risks in the private credit market. According to Fitch Ratings, as of October this year, the default rate in the U.S. private credit sector stands at 5.2%. As for the Asia-Pacific market, S&P Global Ratings noted that the default rate was still zero in September this year, but due to factors such as tariffs and weakening macroeconomic conditions, it is estimated to rise to 2.25% by September next year. Qiu Wen'an, director of management consulting firm Forvis Mazars, pointed out in an interview with Lianhe Zaobao that the prolonged high-interest rate environment globally has increased borrowing costs, and the global default rate may continue to remain high next year. Regarding the Singapore market, Qiu Wen'an believes that due to generally lower leverage among enterprises, better cash management discipline, and relatively conservative growth strategies, the default rate in private credit should remain at a controllable level. Experts: Higher Default Risks in Real Estate and Construction Sectors Further Reading The share of global assets in non-bank financial intermediaries reached 51% last year Financial institutions reducing loans create opportunities: Analysis suggests promising prospects for Singapore's private investment market In the first half of this year, the number of companies in Singapore that were ordered to be liquidated reached 187, the highest level in nearly five years, reflecting that many domestic companies are facing intense competition and financial difficulties. Will this affect the confidence of private credit investors in investing in our country's enterprises? Qiu Wen'an believes that the bankruptcy and exit of many "zombie companies" have instead promoted the phenomenon of good money driving out bad money. "After a round of elimination, most of the remaining companies are financially sound, which has injected a strong dose of confidence into private credit." Which industries have a higher risk of default? Qiu Wen'an believes that sectors such as real estate, construction, traditional retail, logistics, and non-essential consumer goods, which have lower profit margins or face cyclical challenges, are more likely to default. Among them, private enterprises with high customer concentration and reliance on debt for expansion are particularly vulnerable. Globally, according to data from JP Morgan Asset Management, as of October 23 this year, the top three industries with the highest default rates are automotive, dining, and retail, reaching 14%, 9%, and 7% respectively. Chen Zhiquan, CEO of Muzinich & Co in the Asia-Pacific region and head of private credit, stated in an interview that in Asia, most companies with high default risks have complex business models and are in a transitional phase. Analysis: Companies Prefer Banks, Which May Leave Private Credit Unattended Although our country has attracted many private credit players, including Apollo Global Management, Blackstone, and Oaktree Capital, the scope of these funds covers the entire region, and the share available to local companies is quite limited. In response, our country has launched a 1 billion yuan Private Credit Growth Fund to provide more financing options for high-growth local enterprises. In Qiu Wen'an's view, the government's measures help create a magnetic effect, attracting more global capital to support our enterprises. Nevertheless, there are still certain challenges in our private credit sector. "Due to unfamiliarity with the private credit field, many companies choose to borrow from banks, resulting in private credit being neglected."