Key Takeaways
- • Moody's Ratings reports the default rate among 607 US private credit borrowers it assesses stood at 4% in the 12 months to June.
- • Including payment-in-kind (PIK) amendments and maturity extensions granted to distressed issuers, the adjusted rate rises to 5.8%.
- • Moody's treats PIK amendments and maturity extensions as distressed exchanges, which it considers equivalent to defaults.
- • The gap between reported and adjusted figures suggests headline private credit default data may understate underlying credit stress.
Summary
Borrowers in the US private debt market are using delayed interest payments and maturity extensions to avoid default, which may be masking the full extent of credit stress in the asset class, according to Moody's Ratings, as reported by Bloomberg.
Moody's assessed 607 private credit borrowers and found a default rate of 4% over the 12 months to June. When payment-in-kind (PIK) amendments and maturity extensions granted to distressed issuers are included, the rate increases to 5.8%. In its report, the rating agency treats such tools as distressed exchanges and therefore equivalent to defaults.
The findings highlight a measurement issue for allocators relying on conventional default statistics. PIK arrangements allow borrowers to defer cash interest by adding it to principal, which can preserve liquidity in the short term while increasing leverage and deferring recognition of credit losses. Moody's methodology places these arrangements within its default framework, producing a materially higher figure than the headline rate.
The Bloomberg article is brief and does not detail sector breakdowns, vintage analysis, or the specific terms of the amendments reviewed. Readers evaluating private credit exposures should consider how PIK usage and extensions are reflected in reported loss and default metrics.
Moody's assessed 607 private credit borrowers and found a default rate of 4% over the 12 months to June. When payment-in-kind (PIK) amendments and maturity extensions granted to distressed issuers are included, the rate increases to 5.8%. In its report, the rating agency treats such tools as distressed exchanges and therefore equivalent to defaults.
The findings highlight a measurement issue for allocators relying on conventional default statistics. PIK arrangements allow borrowers to defer cash interest by adding it to principal, which can preserve liquidity in the short term while increasing leverage and deferring recognition of credit losses. Moody's methodology places these arrangements within its default framework, producing a materially higher figure than the headline rate.
The Bloomberg article is brief and does not detail sector breakdowns, vintage analysis, or the specific terms of the amendments reviewed. Readers evaluating private credit exposures should consider how PIK usage and extensions are reflected in reported loss and default metrics.
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