KBRA DLD Launches Lower Middle Market Index to Provide Transparency on Defaults

Initial Default Rate Stands at 1.3% But Expected to Climb Higher

KBRA DLD, a division of KBRA Analytics, has launched a Lower Middle Market Index (LMM Index), with a trailing 12-month default rate of 1.3% across $13 billion of private loans to lower MM borrowers.

The LMM Index is derived from roughly 600 borrowers across 13 business development corporations (BDC) that target this space. The new benchmark is a subset of the broader KBRA DLD Index, which comprises about 2,500 borrowers with private loans. The default rate for the broader KBRA DLD Index stands at 1.6%.

“We hope to bring some level of transparency to this part of the direct lending market, where interest from investors grows day by day,” said Eric Rosenthal, Head of Default Research at KBRA DLD. “The lower middle market rate is slightly lower than the broader index, but that will likely reverse by the end of the year,” Rosenthal said.

Several barometers indicate an increase ahead:

• Non-accruals account for 3.2% of the LMM Index on a cost basis, compared with 1.6% for the broader KBRA DLD Index.
• About 6.2% of dollar volume for the LMM Index is on Default Radar, compared to 4.7% for the broader KBRA DLD Index.
• The number of borrowers with a payment-in-kind (PIK) component accounts for 15.3% of the LMM Index, compared to 14% for the broader KBRA DLD Index.

Both KBRA DLD indices offer insights into sponsored and non-sponsored borrowers, including implied average recovery rates and loss-given default rates.

Visit dld.kbraanalytics.com for more information on KBRA DLD and its offerings. Members of the media can contact Adam Tempkin, Senior Director of Communications, for access to the report. Subscribers may log in to find the analysis on KBRA DLD’s Research page here.

About KBRA Analytics

KBRA Analytics, LLC (KBRA Analytics) is our premier product platform for high-quality data and advanced analytics. Our seasoned teams of industry specialists across each product provide unparalleled insight creating a foundation of deeper analysis and rapid discovery for users. KBRA Analytics is an affiliate of Kroll Bond Rating Agency, LLC (KBRA). KBRA is a full-service credit rating agency registered in the U.S., designated to provide structured finance ratings in Canada, and with credit rating affiliates registered in the EU and UK. KBRA Analytics is a portfolio company of Parthenon Capital.

About KBRA DLD

KBRA DLD was founded in 2019 and acquired by KBRA Analytics in 2022. The group focuses exclusively on the direct lending market, providing the private equity, lender, financial, and legal advisor communities with real-time news and a searchable database alongside proprietary data and analysis for the U.S. and European markets. KBRA DLD targets sponsored borrowers and specializes in cash flow-based structures including unitranche facilities across the lower middle market, traditional middle market, and larger scale financings over $1 billion. In 2023, the group introduced the KBRA DLD Direct Lending Index, which serves as the foundation for our default rates and forecasts in the U.S. and Europe. KBRA DLD’s team includes market veterans with experience across several credit cycles including the dot-com bubble. Our monthly research reports on deal terms and defaults are cited widely across U.S. and European markets.

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