Houlihan Lokey Finds That Stress Among the Smallest Private Credit Borrowers Has Climbed More Than Tenfold Since 2023

Houlihan Lokey, the global investment bank, reported in its Q2 2026 Private Credit DataBank that default stress in private credit is concentrated among smaller borrowers. Default rates for borrowers with less than $100 million of EBITDA, which the firm describes as the bulk of the direct lending market, ran at 3.0% on a size-weighted basis and 3.6% by count. Across the entire private credit market, including lower, core and upper middle market segments, defaults represented 0.8% of outstanding loan principal and 2.5% of borrowers by count. The firm's methodology captures both technical and payment defaults.

Valuation data shows the same divide. Although quarter-over-quarter valuation changes stabilized in Q2 2026, 7% of all loans are priced below 90% of par, more than double the historical average. For borrowers with $10 million to $20 million of EBITDA, that share is 12%, up from roughly 1% in 2023. Stress is also reaching the core middle market, with 6% of loans to borrowers with $20 million to $100 million of EBITDA priced below 90% of par, the highest level in three years. Just 3% of loans to borrowers above $100 million of EBITDA fall below that threshold.

Houlihan Lokey analysts cautioned against equating payment-in-kind (PIK) features with distress. The share of loans carrying a PIK option reached a new high in June 2026, but on a size-weighted basis only 11.8% of loans elected to pay some interest in kind in Q2, representing 6.3% of total interest dollars. Amended PIK, where the feature was added after origination, accounted for 1.6% of interest dollars. Timothy Kang, Managing Director in the firm's Portfolio Valuation and Fund Advisory Services practice, said, "A PIK option is a structuring feature, and not necessarily a distress signal, and the two get conflated."

Borrower fundamentals remained positive. Median revenue rose 6.5% and median EBITDA rose 7.4% year-over-year, with more than two-thirds of borrowers growing both. Leverage remained in line with historical levels. Software, the sector drawing the most investor attention amid the debate over AI disruption, recorded among the lowest default rates in the DataBank, and median EBITDA is 20% higher than at loan origination. Healthcare was the only industry elevated on both default measures, at 4.2% by count and 2.7% size-weighted. Dr. Cindy Ma, Managing Director and Global Head of Portfolio Valuation and Fund Advisory Services, said she expects the divide by borrower size to define the market through the balance of 2026.