Key Takeaways
- • Moody's Ratings put the default rate among 607 assessed US private credit borrowers at 4% in the 12 months to June, rising to 5.8% once payment-in-kind (PIK) amendments and maturity extensions involving distressed borrowers are counted as distressed exchanges equivalent to defaults.
- • Roughly 17% of borrowers in the sample used PIK interest, which preserves near-term cash but increases debt burden, with weak liquidity, negative free cash flow, high leverage and interest coverage near break-even.
- • Business services borrowers showed the highest concentration of weak liquidity, while software borrowers recorded the weakest credit metrics overall.
- • Lower-rated issuers account for more than half of debt maturities due in 2027 and 2028 in Moody's sample, raising refinancing pressure on weaker borrowers.
- • Middle-market CLOs holding much of this debt have not yet shown significant deterioration, with Moody's crediting portfolio management, collateral tests and structural protections.
Summary
Deferred interest payments and maturity extensions are masking the extent of stress among US private credit borrowers, according to a report by Bloomberg citing research from Moody's Ratings. The default rate among 607 borrowers assessed by Moody's was 4% in the 12 months to June. That figure rose to 5.8% when payment-in-kind (PIK) amendments and maturity extensions involving distressed borrowers were included, since Moody's treats these arrangements as distressed exchanges equivalent to defaults.
Recent financial statements reportedly showed that 17% of borrowers in the sample used PIK interest, which adds interest to outstanding debt instead of requiring cash payments. While this preserves cash in the short term, it increases borrowers' debt burden. Companies using PIK showed weak liquidity, negative free cash flow and high leverage, with interest coverage around break-even levels. According to the research, financial strain was similar whether PIK provisions were included when loans were originated or introduced later.
Sector differences stand out within the sample. Business services companies using PIK had the highest concentration of weak liquidity, while software borrowers recorded the weakest credit metrics overall.
Refinancing pressures could add to the strain. Lower-rated issuers account for more than half of debt maturities due in both 2027 and 2028 within Moody's sample, leaving weaker borrowers reliant on extensions, PIK amendments, costly refinancing or further support from private equity sponsors.
Borrower stress has yet to cause significant deterioration in the middle-market collateralised loan obligations (CLOs) holding much of the debt. Moody's said portfolio management, collateral tests and structural protections had so far helped shield CLO investors from weakening borrower credit quality.
Recent financial statements reportedly showed that 17% of borrowers in the sample used PIK interest, which adds interest to outstanding debt instead of requiring cash payments. While this preserves cash in the short term, it increases borrowers' debt burden. Companies using PIK showed weak liquidity, negative free cash flow and high leverage, with interest coverage around break-even levels. According to the research, financial strain was similar whether PIK provisions were included when loans were originated or introduced later.
Sector differences stand out within the sample. Business services companies using PIK had the highest concentration of weak liquidity, while software borrowers recorded the weakest credit metrics overall.
Refinancing pressures could add to the strain. Lower-rated issuers account for more than half of debt maturities due in both 2027 and 2028 within Moody's sample, leaving weaker borrowers reliant on extensions, PIK amendments, costly refinancing or further support from private equity sponsors.
Borrower stress has yet to cause significant deterioration in the middle-market collateralised loan obligations (CLOs) holding much of the debt. Moody's said portfolio management, collateral tests and structural protections had so far helped shield CLO investors from weakening borrower credit quality.
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