Soaring energy costs are creating a fresh pressure point for private credit borrowers already facing higher interest costs and a steep refinancing wall, private market specialists say.
U.S. West Texas Intermediate futures were trading at $99.02 a barrel at 6:35 a.m. E.T. Friday, down 3.4%, while Brent crude, the global price benchmark, was at $103.64, a 3.7% dip. Oil's rise comes amid growing speculation over a Federal Reserve interest rate hike at its Sept. 15-16 meeting as inflation remains above its 2% target.
A rise in borrowing costs is particularly relevant for private credit, where direct lending loans are typically floating-rate debt and are priced at a spread over the Secured Overnight Financing Rate, or SOFR — a benchmark for overnight Treasury-backed borrowing.
For borrowers with floating-rate loans, a Fed hike would generally raise interest expense as benchmark rates reset.
As oil prices moved decisively higher Thursday amid escalating U.S.-Iran hostilities, Anant Kumar, global investment strategist at Benefit Street Partners, suggested energy-driven inflation is a bigger risk to private credit borrowers than interest rate rises alone.