Private Debt

CHAPTER 5Comparative Credit Loss Rates

Credit‐oriented fixed income instruments like US middle market direct loans achieve their long‐term returns by capturing high yields without offsetting principal impairments by way of realized losses. Chapter 1 stated an 11.15% income return (yield) for US middle market direct loans and a −1.05% annual realized loss since the start of the Cliffwater Direct Lending Index (CDLI) in September 2004. Chapter 4 showed that levels of direct lending income (yield) were consistently and significantly above yields on more familiar and more liquid high‐yield bonds and leveraged loans, even when differences in fees are accounted for. An important question in this comparison is whether there is a difference in credit losses between the −1.05% found for US middle market loans and credit losses for high‐yield bonds and leveraged loans. In other words, is the roughly 3.5–4.5% after‐fee yield spread partially compensating direct loan investors for higher credit losses?

Exhibit 5.1 reports calendar year default, recovery, and loss statistics for high‐yield bonds, leveraged loans, the CDLI, and US bank commercial and industrial (C&I) loans from 2005 through 2017.

EXHIBIT 5.1 Credit losses from high‐yield bonds, bank loans, and middle market loans, 2005–2017.

High‐Yield Bondsa			Bank Loansa			CDLI Middle Market Debtb	US Bank Commercial and Industrial Loansc
Default ratio (%)	Recovery rate (%)	Credit loss (%)	Default ratio (%)	Recovery rate (%)	Credit ...