Microscope on Private Credit as Economic Growth Falters – IMF

(30 April 2025 – Global) Companies that sourced Private Credit are in focus as banks and lenders become exposed to potential losses the International Monetary Fund (IMF) warns.

Many companies drawing direct loans from private lenders are struggling to produce cash according to one key measure. At the end of 2024, over 4 in 10 borrowers had negative free cash flow (FCF) from their business operations the IMF cautioned (40 percent), up from 1 in 4 at the end of 2021 (25 percent).

Borrowers that aren’t generating enough FCF are at greater risk of defaulting, a particular concern as trade wars lead to fears of economic stagnation. Private Credit firms typically lend to smaller companies with higher default risk, making them more exposed to a downturn in the economy. The trade wars that sparked concerns about the outlook for growth come amid growing signs of potential problems emerging among the wider group of non-bank lenders.

Market participants are alarmed that the deterioration in debtors’ credit quality has yet to show up in accounting valuations, while a rise in dividend recapitalisations is further straining borrowers’ debt sustainability the IMF stated.

To help limit the risk of turmoil in shadow banking spreading to the traditional banking system, the Financial Stability Board plans to release policy recommendations in July around their use of leverage.

“The risk of earnings erosion and cash flow problems has increased, with idiosyncratic pockets of risk in some industries or borrowers such as health care and software. Even before the tariffs, nearly half of the borrowers had negative free operating cash flows, prolonging their reliance on payment-in-kind provisions and amend-and-extend restructurings” the IMF wrote of direct lenders.

“While over-geared companies are at risk to big shocks in the economy, if the direct lending was sensible and proportionate in the first place, those borrowers should be able to wear this volatility. Private credit lenders can be supportive partners in times of stress to allow borrowers to fight another day” commented Connection Capital Managing Partner, Claire Madden.

“As financial volatility increases, uncertainty proliferates. It is reasonable to assume that PE exits will be delayed, in some cases meaningfully, therefore sponsor-driven credit might face increased stress and we are concerned about the rise in PIK usage” commented Signal Capital Partners CIO Elad Shraga.