Monday Market Minute | Aug 05, 2024

Private credit portfolios hold firm through the rate transition

What Moved

Mid-year performance data from major Canadian private credit managers showed broadly resilient portfolios through the rate transition. Default rates remained below 2% for senior secured strategies, and recovery rates on impaired loans held at historically normal levels. The feared wave of rate-driven defaults had not materialized — a testament to tighter underwriting standards adopted after the 2022 rate shock.

Why It Matters

Portfolio resilience during a rate transition was the strongest validation of private credit's role in alternative portfolios. The asset class had delivered 8–12% net returns through a hiking cycle, maintained credit quality through the transition, and now offered a glide path of still-attractive yields as rates declined. For investors who had waited on the sidelines, the risk-return profile remained compelling.

Signal to Watch

Spread compression in new originations was the key metric to track through the fall. If base rates fell but spreads widened — reflecting increased risk premiums — net yields could remain stable. If spreads compressed alongside rates, the income advantage of private credit over public fixed income would narrow.

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