An executive at an investment management firm is raising a red flag suggesting that private credit is overvalued, and complacency is creeping in. With fundamentals deteriorating in the most leveraged portions of the market, a PIMCO managing director recently stated investors are not being compensated enough for the risks – and provided a key stat that caught my eye: 

“… 40% of the companies now have that fixed-charge coverage ratio of less than one, meaning they’re not producing enough cash flow to cover the interest expense.”

I would be interested to see the data subset that was used to come to this broad conclusion. This observation (a fixed-charge coverage below one in nearly half of companies) does not align with my direct experience as a professional who works primarily with private equity portfolio companies as Interim CFO. 

If someone is seeing this cash flow issue broadly (i.e., not concentrated within a specific challenged industry), connect with me, as I would enjoy a discussion on this topic.

What you observe is that 40% of the companies now have that fixed-charge coverage ratio of less than one, meaning they’re not producing enough cash flow to cover the interest expense,” said Mittal. Despite the pessimism, (the firm) still likes private markets, though it prefers asset-based finance. Within that, the Newport Beach, California-based money manager sees value in the consumer sector — including housing — as well as aviation finance, equipment rental and data centers, where there is good asset coverage and strong documentation.

https://www.livemint.com/news/pimco-says-private-credit-is-overvalued-as-complacency-spreads-11729192892969.html