UBS now sees private credit defaults reaching 15% in worst case

This slow shutter speed photograph taken on October 6, 2023, shows a logo sign of Swiss banking giant UBS on a building in Lugano, southern Switzerland. Photo by Fabrice COFFRINI / AFP via Getty ImagesArticle contentA few weeks ago, analysts at UBS Group AG laid out a worst-case scenario for defaults in the private credit sector. Their outlook is even more grim now.Sign In or Create an AccountEmail AddressContinueor View more offersArticle contentStrategists including Matthew Mish now say private credit could see default rates surge as high as 15 per cent, two percentage points more than a forecast the firm published less than a month ago.Article contentWe apologize, but this video has failed to load.Try refreshing your browser, ortap here to see other videos from our team.We apologize, but this video has failed to load.Try refreshing your browser, ortap here to see other videos from our team.Play VideoArticle contentThe initial report had warned that direct lenders could face a 13 per cent default rate if artificial intelligence triggers an “aggressive” disruption among corporate borrowers, but that view became even more bearish in recent weeks as fears about AI upending the U.S. economy deepened.Article contentArticle content“What is new: a clearer catalyst — rapid, severe AI disruption,” said the report published on Tuesday.Article contentPosthasteBreaking business news, incisive views, must-reads and market signals. Weekdays by 9 a.m.There was an error, please provide a valid email address.Sign UpBy signing up you consent to receive the above newsletter from Postmedia Network Inc.Thanks for signing up!A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Posthaste will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Article contentFears of such an event have been building in recent days. Stocks slid to start the week after a report from Citrini Research spooked investors with a scenario where AI advancements led to a double-digit U.S. unemployment rate by 2028. And just days prior, Blue Owl Capital Inc. blocked investors from making withdrawals from one of its private credit funds, raising anxiety about the loans issued by direct lenders, especially to software firms.Article content“The most acute risk is a sector-specific shock triggering cascading defaults,” the UBS strategists wrote. “Technology is especially vulnerable to disruption from AI adoption or rapid retrenchment.”Article contentThey added: “Private credit defaults are reportedly between three per cent and five per cent, and signs of strain —such as interest paid-in-kind — are nearing post-pandemic highs.”Article contentThe strategists also see higher default risk for leveraged loans and high-yield bonds, where they project rates of up to six per cent and 10 per cent in a worst-case scenario. That’s up from estimates of up to four per cent and eight per cent in the previous report.Article contentBloomberg.comArticle contentTrending Canada's housing market suffers largest price decline among major economies, says BIS Real Estate Posthaste: Canadian dollar is facing a big risk that markets seem to be overlooking News B.C. widow worried about retirement income with OAS clawbacks Family Finance Australia ships LNG 25,000 kilometres to Eastern Canada amid Asian slump Oil & Gas New cross-border U.S. pipeline proposal could revive idle Keystone XL assets: analysts Oil & Gas Share this article in your social networkCommentsYou must be logged in to join the discussion or read more comments.Create an AccountSign in Join the Conversation Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information. Canada's housing market suffers largest price decline among major economies, says BIS Real Estate Posthaste: Canadian dollar is facing a big risk that markets seem to be overlooking News B.C. widow worried about retirement income with OAS clawbacks Family Finance Australia ships LNG 25,000 kilometres to Eastern Canada amid Asian slump Oil & Gas New cross-border U.S. pipeline proposal could revive idle Keystone XL assets: analysts Oil & Gas