Tip of the Iceberg: Defaults, and how to disguise them
Headlines say private debt defaults are low, but is how they are measured and reported hiding the true number?
To look at the default rates from the various ratings agencies and other data aggregators is to invite confusion.
For private corporate credit, there is no “market-standard sample” for defaults that can be used to draw meaningful conclusions, according to a note last spring from the LSTA, the trade association for the syndicated loan market.
There are no public ratings, and there is quite a bit of variability between ratings agencies, it said.
But there are nuances. One is whether the default count is based on dollar amount or instance count, says Amanda Lynam, head of macro credit research at BlackRock. She notes that instance-weighted metrics could distort the picture of a portfolio if one smaller loan defaults while the others, with greater weight, remain healthy.
All of this begs the question: how reliable are so-called selective or restricted defaults in predicting problems that will impair the value of the overall investment?
“The default rate is the most easily managed statistic in credit,” says Andrew Milgram, managing partner and chief investment officer of Marblegate Asset Management, an alternative manager that focuses on mid-market distress and special situations. “No de- fault rate exists unless the lender calls it a default.”