Private Credit's Next Cycle Will Be Defined By Recovery Rates: KKR Report

Benzinga_recent_news04-07

Recovery rates will define the next private credit cycle, not defaults. Kris Novell and the macro team at KKR have been tracking Fitch's broader definition of default, which goes beyond missing a ...

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Two examples are payment-in-kind (PIK) interest and amend-and-extend transactions, both of which can signal underlying liquidity challenges.\nPIK interest allows a borrower to conserve cash by adding interest payments to the loan balance instead of paying them immediately. While this can provide short-term relief, it often increases overall debt levels and may weaken the company's financial position over time. As a result, it can lead to lower recovery rates if the company ultimately struggles to repay its obligations.\nSimilarly, amend-and-extend transactions delay debt maturities, often in exchange for higher interest rates or additional fees. While these adjustments can reduce near-term default rates by giving companies more time, they may mask deeper issues. If the business fails to improve, these measures can ultimately result in worse outcomes for lenders, including lower recoveries.\nBased on this thesis, the stress rate has remained fairly steady at around 5% to 6% over the past two years. \nThe key to this cycle, KKR argues, will be in recovery rates. This may fall below 50% to 60% seen in previous cycles. \nWhile difficult to forecast, the firm estimates that recoveries could drop to 30–40% in some cases—particularly for smaller companies or in situations where lenders are unwilling to assume control, or where initial terms were overly lenient.\n\"We believe the endgame winners will be defined less by who can chase yield and more by who can originate well, construct portfolios thoughtfully, and actively manage outcomes when credit underperforms expectations,\" KKR said.\n\"In such an environment, the premium on quality within public markets has increased meaningfully, while the role of private markets as a source of return diversification and inflation resilience is becoming more central to portfolio design,\" the firm wrote.\nKKR emphasized that it is focusing more on operational improvements to drive value in private equity, rather than relying heavily on leverage. \nIn private credit, the firm is prioritizing higher initial yields and stronger deal structures to improve resilience.\nIn areas like infrastructure and asset-based finance, KKR is favoring investments with inflation-linked cash flows. These types of assets often have contractual protections that help reduce the impact of broader economic volatility, the firm concluded.\nPhoto: Shutterstock\nThis content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.\nTo add Benzinga News as your preferred source on Google, click here.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"isVideo":false,"video":null,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"tenantId":"TBGLOBAL","deviceId":"web-server-community-laohu8-v3","version":"4.40.0","shortVersion":"4.40.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2625609140","isCrawlerRequest":true}