John Czapla, chairman and head of VRC’s Portfolio Valuation practice group, was quoted in 9fin, a centralized data, analytics, and insights platform focused on the debt capital markets. The article took a look at emerging themes in the BDC space, considering the extent to which defaults will rise:

“The pandemic shutdown was a good test for relationships between private equity and their lenders.

In some instances, lenders agreed to amend terms and sponsors injected struggling companies with extra cash. By the end of 2022, BDC non-accrual rates (the proportion of loans experiencing non-payment of interest or principal past the due date) were averaging 1% at fair value and 2.4% at cost by the end of 2022.

Where the default rate goes from here may hinge partly upon whether sponsors and lenders can maintain cordial relations. Estimates from Moody’s and S&P suggest speculative-grade default rates in 2023 could peak between 4%-5%, below the 2020 level of 5.5%.

“If all that plays out, it’d be pretty good for the funds this year,” John Czapla of Valuation Research Corporation told 9fin. “If things get worse and defaults are way worse and sponsors and private lenders don’t play nice…it could get uglier.”