Watching for where the credit cracks are forming

With the cost of capital for most American businesses outside of the biggest now ranging about 8-12% and investor money piling into private credit in what has become a craze, I'm on the lookout constantly for where the cracks in the economic foundation are forming as we continuously adjust to this new interest rate reality. I'll highlight a few things of note in what I read over the past few days. 

Over the weekend in the WSJ there was an article titled "Analysts Assessing Risks of Private Credit" and talked about a recent report from S&P Global Ratings that "used the firm's confidential credit assessments for clients to offer a rare view of roughly 2,000 private corporate borrowers with more than $400 billion in debt between them. Without identifying the companies, the firm ran stress tests to see how they might fare in varying economic scenarios."

The article concluded with this from the S&P report, "Just 46% of the companies in the analysis would generate positive cash flow from their business operations under S&P's mildest stress scenario, in which earnings fell by 10% and the Fed's benchmark rates increased by another .5 percentage point...Private credit sponsors would be left facing difficult choices over which companies to keep supporting." While I don't expect any more rate hikes, an earnings shortfall of at least 10% is an easy do in any recession.