Vivek Mathew
We think that private credit is going to be really well positioned in terms of interest rates in 2025. The US economy, we feel like, is in a fairly strong position, which supports the idea that rates will be a bit elevated. Now when we say a bit elevated relative to recent history, and we lend money at a floating rate, and so from a yield or return perspective, obviously that's a positive factor, positive factor there.
Now what we also have to think about is we don't necessarily want rates to climb too high or be significantly elevated from recent highs that we've seen, because obviously that can cause potential debt service difficulties for borrowers, but based on what we know and what we expect, don’t think we're going to go there and we think we're going to be in this nice zone. I think the private credit asset class has a lot of all-weather characteristics. It's low duration. It's got a low correlation to other asset classes, and its floating rate really acts as a natural hedge from inflation.
Antares is positioned incredibly well to capitalize on a pickup in M&A, because we can offer multiple options to a sponsor for execution. So, we've got market leading businesses in both the syndication and direct lending side. And so, I think companies that have more options I think that's going to be successful for them and for us. Now, even if the LBO market doesn't rebound as expected, and it's a little bit disappointing, and we saw that in 2024, we still feel like we're going to be well positioned to deliver for our investors and the reason for that is we have a large existing portfolio - north of $80 billion - where we're the incumbent lender, and so these borrowers continue to want to add on acquisitions and want to receive additional financing and so this allows a lot of opportunities for us to lend to companies that we already know really, really well. So, in 2024, 80% of the time when we made a loan, we were lending to a company that we are already lending to, that we know well, that we can react very quickly to, so we're positioned very, very well. Shannon, you know, does that sort of make sense to you in terms of how we think M&A is going to come back and what it might mean for our business?
Shannon Fritz
Absolutely. You know, I'd also add that the fundamentals for deployment continue to remain positive. Overall, the portfolios continue to perform quite well. The vast bulk of our portfolios are seeing single-to-low double-digit growth and improving trends across both revenue and EBITDA. Liquidity across borrowers was managed very well during the rising rate environment. Interest coverage ratios have stabilized, and we expect them to improve as base rates gradually decline. I would note that, you know, DLD has recently forecasted defaults for US direct lending to tick up slightly in 2025 as certain borrowers continue to manage through this higher for longer rate environment, but we think the higher yields will continue to more than offset the impact of loss given default in the industry.
You know, and as for us, what we're seeing, our watchlist has held really quite steady. It's actually come down even a bit from 2023. We saw pockets of stress in select sub industries in 2024. Some examples being physician practice management and logistics. We do expect to continue to see that in 2025, but these are smaller subsectors within our diverse portfolios and there are no signs of broad stress. Importantly, we continue to see strong sponsor support for underperforming loans to support liquidity, M&A and restructures. In fact, we saw an approximate 50% increase in sponsor support in 2024 relative to the prior few years. Lastly, our PIK as a percentage of interest income, which can be a signal of future defaults, is low, and when we look across our competitors numbers published for BDCs, it compares favorably. So, you know, all really good signs of continued health across the portfolio.
Interesting question. I think a stagflation scenario of high interest rates, inflation, low growth would be increased pressure for borrowers and coverage ratios, but we are watching the new administration's policies on tariffs and immigration, and you know, it's still early to determine precise impacts, but our initial assessment and in line with what we would have expected, is that the impact is expected to be low. Also on the positive side, we believe that private credit borrowers and the resilient US middle market will also benefit from new administration policies.