US Private Credit Stress Masked by Growing PIK Use, Moody’s Says

Borrowers in the US private debt market are using delayed interest payments and maturity extensions to avoid default, a practice that may be obscuring the full extent of credit stress, according to Moody's Ratings. In a report cited by Bloomberg, the rating agency said the default rate among the 607 private credit borrowers it assessed was 4% in the 12 months to June.

That figure rises to 5.8% once payment-in-kind (PIK) amendments and maturity extensions granted to distressed issuers are factored in. Moody's views such tools as distressed exchanges and therefore equivalent to defaults, which means the conventional default rate captures only part of the stress in the segment.

For allocators and managers, the gap between the two figures is the key takeaway. PIK arrangements allow borrowers to defer cash interest by adding it to principal, preserving near-term liquidity while increasing the outstanding debt load. Extensions similarly push out maturity walls without resolving underlying credit weakness. Investors relying solely on reported default statistics may therefore underestimate loss risk and the proportion of portfolios exposed to troubled credits.

The Moody's analysis underscores the importance of looking beyond headline default rates when assessing private credit portfolios, particularly the share of borrowers relying on PIK interest and amendments to remain current.