Adjusted EBITDA masks private credit risks
The speakers argued that the widespread use of highly adjusted EBITDA in private credit underwriting masks severe underlying cash flow constraints and rising default risks among middle-market borrowers.
The argument
The discussion highlighted that middle-market loans are often carried at multiples of adjusted EBITDA, which S&P data shows routinely overestimates actual earnings by 25-30%. As liquidity tightens, these borrowers struggle with real cash needs, leading to redemption pressures at major funds and high rates of borrowers remaining in triple-C or default status.
The thesis, stress-tested
✓ What validates it
- ✓S&P middle-market default rates increasing further
- ✓Additional redemption gates or GP capital injections at major private credit funds
▸ Risks discussed
- ▸A decline in interest rates could ease refinancing pressures for highly leveraged borrowers
- ▸Private equity sponsors may continue to inject equity to support distressed portfolio companies
Hear it yourself
"The the advantages are the same. You know, the opportunities in front of us are are great. And, yeah. And it was yeah. It was I thought it was good. Yeah. I was actually surprised. A little marginally disappointed that we didn't get through even one complete round of shareholder questions. You know, they were they were quite Yeah. Well, it was, like, maybe eight or nine, maybe. Yeah. Yeah. It wasn't it wasn't many. Because the answer was so long? I I don't know if it was that or if it was, like, there was a a more pre prepared at the beginning than than previous years."
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