Key Takeaways
- • KBRA reports that 56 of 79 re-reviewed borrowers (71%) showed further credit deterioration in 2025, and 25 of the 79 either restructured their capital structures or missed a scheduled debt service payment.
- • KBRA says it identified most realized and imminent 2025 defaults one year in advance from its 2024 screening of 1,903 levered middle-market borrowers, though not all distressed companies were captured.
- • Among borrowers that continued to underperform in 2025, nearly half ultimately defaulted or restructured to reduce cash-pay debt, with lenders often taking control.
- • KBRA expects pressure to persist in Consumer Retail, Chemicals/Containers/Metals/Materials, and Media into 2026, citing largely structural headwinds, and says these sectors represent less than 10% of more than $1 trillion in assessed debt.
- • KBRA expects defaults to rise in 2026 and flags AI-related pressure on content creation, advertising, sales intelligence, and education technology borrowers.
Summary
KBRA Research has released updated analysis of the 5% of 1,903 levered middle-market borrowers assessed in 2024 that were flagged as facing elevated risk of future payment default. Although these borrowers were current at the time of assessment, KBRA continued to monitor them through 2025. Of the 79 borrowers subsequently reviewed, 56 (71%) showed further credit deterioration. Of those, 51 experienced liquidity strain severe enough to require lender or sponsor support to avoid a likely payment default. Ultimately, 25 of the 79 either restructured their capital structures or missed a scheduled debt service payment.
According to KBRA, the majority of realized and imminent 2025 defaults were identified one year in advance using a mix of qualitative and quantitative indicators, though the agency acknowledges that not all distressed companies were captured in the 2024 screening. KBRA notes that defaults often lag underlying deterioration, which can create room for operational recovery but can also allow further credit and enterprise value erosion. When support and liquidity ran out, or debt maturities approached, defaults or loss-inducing restructurings, often involving lenders taking control, became the primary outcome. Nearly half of borrowers that continued to underperform in 2025 ultimately defaulted or restructured to reduce cash-pay debt.
The three sectors identified as most at risk, Consumer Retail, Chemicals, Containers, Metals and Materials, and Media, continued to show acute stress in 2025. KBRA says several of these industries' headwinds appear structural rather than transitory and expects pressure to persist into 2026. The agency notes these three sectors represent less than 10% of the more than $1 trillion in debt it has assessed, which in its view suggests direct lenders remain positioned to manage these exposures. Additionally, 29% of the 79 re-reviewed companies showed stable or improving performance.
KBRA also reports that the three largest private credit sectors, Commercial and Professional Services, Software, and Health Care Services and Technology, were not immune to deterioration or the need for third-party support, though stress there has been more idiosyncratic and less widespread relative to their size. On artificial intelligence, KBRA says it has observed both opportunities and risks for direct lending, with pressure developing among at-risk companies offering content creation, advertising production and targeting, sales intelligence, and education technology. The agency's broader view, stated in the report, is that defaults will rise in 2026.
According to KBRA, the majority of realized and imminent 2025 defaults were identified one year in advance using a mix of qualitative and quantitative indicators, though the agency acknowledges that not all distressed companies were captured in the 2024 screening. KBRA notes that defaults often lag underlying deterioration, which can create room for operational recovery but can also allow further credit and enterprise value erosion. When support and liquidity ran out, or debt maturities approached, defaults or loss-inducing restructurings, often involving lenders taking control, became the primary outcome. Nearly half of borrowers that continued to underperform in 2025 ultimately defaulted or restructured to reduce cash-pay debt.
The three sectors identified as most at risk, Consumer Retail, Chemicals, Containers, Metals and Materials, and Media, continued to show acute stress in 2025. KBRA says several of these industries' headwinds appear structural rather than transitory and expects pressure to persist into 2026. The agency notes these three sectors represent less than 10% of the more than $1 trillion in debt it has assessed, which in its view suggests direct lenders remain positioned to manage these exposures. Additionally, 29% of the 79 re-reviewed companies showed stable or improving performance.
KBRA also reports that the three largest private credit sectors, Commercial and Professional Services, Software, and Health Care Services and Technology, were not immune to deterioration or the need for third-party support, though stress there has been more idiosyncratic and less widespread relative to their size. On artificial intelligence, KBRA says it has observed both opportunities and risks for direct lending, with pressure developing among at-risk companies offering content creation, advertising production and targeting, sales intelligence, and education technology. The agency's broader view, stated in the report, is that defaults will rise in 2026.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.