David Golub — a finance executive who helped create the modern U.S. private credit market — told securities analysts earlier this week that he thinks private credit default rates are high and probably will stay high.
"We expect a protracted credit cycle to become even more protracted," he warned.
Golub is the president of Golub Capital, a leader in the red-hot private credit market, and CEO of Golub Capital BDC, a publicly traded company that invests in small and midsize businesses.
Life insurance and annuity issuers and reinsurers are working with Golub to add more private credit assets to their investment portfolios.
Golub told the analysts that the default rate for one type of private credit arrangement, broadly syndicated loans, is now about 4.5%, or double historical levels.
Factors such as problems with financing, business plans that never worked out and failed restructuring efforts may keep default rates elevated, he said.
"We also anticipate that there will continue to be very substantial dispersion in credit manager performance," Golub said. "We call these winners and whiners."
Strong firms that have been winning will probably keep winning, but weaker firms may become weaker, Golub predicted.
Golub spoke during a call Golub Capital BDC held to go over earnings for the second quarter, which ended June 30. The company streamed the call live and posted a recording on its website.
What it means: A man who helps create some of the assets supporting life insurance policies and annuity contracts thinks storms could be coming.
Clients may want to copy him and pull in their sails, or they may want to look for ways to profit from taking a more aggressive approach.
Private credit basics: Private credit arrangements are loans or other financing arrangements provided by entities other than banks for companies that are privately held or for publicly traded companies that want to borrow without issuing publicly traded debt.
Borrowers' use of private credit is growing because changes in world banking rules imposed after the end of the 2007-2009 financial crisis have reduced banks' appetite for lending to businesses.
Life and annuity issuers tend to invest mainly in bonds and notes issued by investment-grade companies, with a smattering of other types of investments, such as mortgages, securities backed by mortgages and securities backed by other types of assets.
Insurers have been allocating more cash to private equity and private credit arrangements in recent years because of the growing size of those sectors and the relatively high rates of return available from the assets tied to those arrangements.
David Golub: Golub is the brother of Lawrence Golub, the CEO of Golub Capital.
He has a bachelor's degree from Harvard and a master's degree in business from Stanford.
He's the chairman of the Michael J. Fox Foundation, an organization that funds efforts to find a cure for Parkinson's disease.
The M&A Opportunity: Golub suggested that current economic conditions could create business merger and acquisition opportunities.
Forces that could wake up the M&A market include provisions in the new One Big Beautiful Bill Act, pressure on private equity firms to generate cash for investors and pressure on private equity firms to invest the pots of "dry powder" cash they already have on hand.
But "I'm humble about this prediction," Golub said. "We have all been pretty consistently wrong on this."
Golub Capital BDC is going to be very selective when it makes new loans, look hard for borrower underperformance and address any payment problems quickly, Golub said.
"Our approach is all about minimizing realized credit losses and being ready to play offense when opportunities arise," he said.
Credit: iStock
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