Private Credit Troubled Loans Rise as PE Exits Stall and PIK Grows

Lending stress is now showing up in several data series

Troubled loans in private credit have been building for most of 2026, and by late summer the increase was hard to wave away. Fitch Ratings' U.S. Private Credit Default Rate reached 6.3% for the 12 months ended August 2026. That was up from 6.1% in July and set another record for the series.9 Fitch counted 14 default events in August, its highest monthly total of the past year. Eleven involved companies defaulting for the first time and three involved repeat defaulters.4 The trend has moved in one direction all year. The rate was 5.7% at the end of the first quarter, about 6% in April and May, and has set a new high at almost every reading since.8

The biggest publicly traded lenders show the same pattern. The 15 largest listed business development companies (BDCs) held $6.8 billion of distressed debt, meaning loans marked below 80% of cost. That is a 64% increase from a year earlier, while their total portfolios stayed roughly flat. About 10% of those BDCs' debt investments are now tied to borrowers that have at least one distressed position. That is roughly twice the 5.2% of debt formally classified as distressed. Houlihan Lokey reports that 7% of all private loans were priced below 90% of par in the second quarter, more than double the historical average.3

These numbers do not point to a collapse. They do show credit quality falling across the market at the same time, after years of unusually mild losses.

Defaults are mostly loans being rewritten

For private equity investors, how these defaults happen matters more than the headline rate. Few of them are outright failures. Interest deferrals and switches to payment-in-kind (PIK) interest made up 47% of Fitch's default events through August. Stressed maturity extensions made up another 41%. Uncured payment defaults were only 8%, and bankruptcies, liquidations and debt-for-equity swaps were the remaining 4%.2 Maturity extensions were the most common type of default for the third month running.9

Fitch has explained why. Lyle Margolis, who leads Fitch's North American private credit group, said uncertainty about rates and inflation is holding back deal activity. That makes it hard to sell struggling portfolio companies before their loans come due.4 When a sponsor cannot find a buyer, the lender can push out the maturity or force a reckoning, and so far most lenders are choosing to extend.

The problem is not limited to Fitch's data. Market participants report that as private equity exits slowed, the average life of a private credit loan grew from about two to three years to four to five years.1 At the Milken Asia Summit, Bridgepoint Credit's Andrew Konopelski said creditors have little say over when a private equity owner decides to sell. He asked how lenders get their money back when trillions of dollars of private equity assets are still looking for buyers.13

The maturity wall is real. PitchBook LCD says BDC loans due within 2.5 years reached a record $117 billion in the second quarter, about 22% of total BDC holdings.23 Compared with the pandemic peak, though, less of that wall is already in trouble. Borrowers with at least one facility on non-accrual account for 11% of it, against 20% in mid-2020.23

PIK keeps loans current while debt grows

The main tool behind this year's extend-and-hope approach is PIK, where a borrower pays interest by adding it to the loan balance instead of paying cash. A Boston Fed study of 168 BDCs found the share of BDC loans using PIK rose from about 6% in early 2022 to about 10% by early 2026.21 Over roughly the same period, median BDC lending spreads tightened by about a percentage point. The Boston Fed said that could reflect heavy competition for deals, or quiet restructurings in which lenders accept lower rates to make default less likely.21

Not all PIK is a warning sign, and the stronger analyses separate the two kinds. In Houlihan Lokey's second-quarter data, 11.8% of loans by size elected to pay some interest in kind. PIK added after the loan was made, which the firm treats as the best indicator of stress, accounted for just 1.6% of interest dollars.3 Recoveries are a concern even so. KBRA data show 2025 PIK loans had an average implied recovery of about 41.6 cents on the dollar, compared with 52.6 cents for loans without PIK. KBRA warns that this does not prove PIK causes the lower recoveries.16

The same issue makes BDC filings hard to read. A loan paying PIK is still reported as current, so it does not appear in non-accrual totals even while the borrower's debt grows.22 Morningstar and PitchBook LCD found the 10 largest BDCs reported an aggregate non-accrual rate of 3.95% at cost in the second quarter. On an adjusted basis, which counts all of a borrower's debt once any tranche is impaired, the rate was 5.95%.22 KBRA reported median non-accruals at non-perpetual BDCs jumped to 2.75% from 1.81% in a single quarter.24

Different data series give different answers

The coverage disagrees most on how big the problem is. Fitch's 6.3% is a record. Proskauer's Private Credit Default Index fell to 2.51% in the second quarter from 2.73%.7 Houlihan Lokey puts defaults at 2.5% by borrower count but only 0.8% when weighted by loan size.3 Moody's Analytics said the 2025 default rate could reasonably be put anywhere from about 1.6% to 4.7%, depending on whether distressed exchanges are counted.16

These figures do not actually conflict. They measure different things. Fitch counts the number of defaulting issuers, so its 6.3% does not mean 6.3% of private credit principal has been lost.16 Its definition also includes the amendments and PIK switches that many managers do not treat as defaults.7

My reading is that Fitch's count is the more useful early warning, because it records the restructurings that other measures leave out. The low size-weighted numbers are also accurate, and they show where the risk sits. Houlihan Lokey found defaults of 3.0% by size among borrowers with less than $100 million of EBITDA. Among the smallest borrowers, 12% of loans traded below 90 cents on the dollar, up from about 1% in 2023.3 The firm's Cindy Ma said the rise is concentrated rather than broad, because the largest borrowers are still performing.17 Proskauer's figures add a complication: defaults among companies with $50 million or more of EBITDA rose from 0.5% to 3.0% between early 2025 and early 2026.2 Larger borrowers are not entirely safe either.

Software is less of a problem than expected

Earlier this year, the concern was that artificial intelligence would undercut the software companies that private credit lent to heavily. Software is about a fifth of the private credit loan market, and those borrowers have few hard assets to recover if they fail.11 So far the default data have not borne that out. Fitch's software default rate was only 0.6%, the lowest of its large sectors. Healthcare and industrial/manufacturing borrowers each defaulted at 9.9%.4

Valuations show a different picture. PitchBook found software and second-lien loans together accounted for 89% of the year-over-year increase in distressed debt at the largest BDCs. Taken together, these figures suggest that lenders are marking software loans down before those borrowers miss payments, while older, more cyclical healthcare and industrial borrowers are already restructuring.

Smaller lenders and fund investors are under the most pressure

The impact is falling hardest on small lenders. WhiteHorse Finance, a BDC of about $570 million managed by H.I.G. Capital, set up a special committee to consider options including a sale. Almost 7% of its portfolio at cost was on non-accrual and its shares traded more than 35% below net asset value.25 Among larger names, FS KKR Capital reported 7.1% non-accruals at cost, compared with 2.4% at Ares Capital.22

Investors in funds that promise periodic withdrawals are also feeling it. Blackstone said investors asked to redeem about 10% of shares from its $77.2 billion flagship credit fund in the third quarter, and it kept withdrawals capped.17 Requests at Morgan Stanley's North Haven Private Income Fund equaled 11.4% of shares, and the fund repurchased 5%.16 Rates are now adding to the pressure. The Fed's first rate hike in three years increases interest costs for borrowers that already have thin interest coverage.27 Lord Abbett's Steve Kuppenheimer has warned that loans made in 2021 and 2022, underwritten when base rates were close to zero, face the most refinancing risk.13 PGIM argues that borrowers have already adjusted to higher rates, and it notes that a default does not necessarily mean a realized loss.12

What to expect

The evidence does not support a 2008-style collapse. Research cited by analysts finds private credit funds typically finance 65% to 80% of their assets with equity and do little maturity transformation, which makes them much less fragile than banks.16 The more likely risk is a slow decline: marks that hold steady, restricted withdrawals, defaults handled as restructurings, and losses that show up gradually as loans mature.10

For private equity investors, this leaves less room to wait. Lenders that once granted extensions easily are now handling portfolios with more marked-down loans and longer timelines. Sponsors trying to refinance or sell mid-market companies, especially those with less than $100 million of EBITDA, should expect tougher amendment terms and less leverage from buyers' lenders.3 Whether a company can be sold will increasingly decide whether its loan is extended or written down.