US Private Credit Defaults Reach Record 6.3% as Smaller Borrowers Face Pressure

The U.S. private credit default rate climbed to a record 6.3% in August, according to Fitch Ratings data reported Sunday, extending a steady deterioration in borrower credit quality as highly leveraged middle-market companies contend with elevated financing costs.

The trailing 12-month rate rose from 6.1% in July and 6% at the end of the second quarter, pushing further above the records established earlier this year. The increase adds to evidence that stress is accumulating beneath a private credit market that continues to attract large amounts of institutional capital.

Defaults have climbed through 2026

Fitch’s measure has been moving higher for much of the year. The rate reached 6% in the second quarter, up from 5.7% in the first quarter, before increasing to 6.1% in July and now 6.3% in August.

The headline number requires some context, however. Fitch uses a relatively broad definition of default that captures more than bankruptcies and missed payments. Distressed maturity extensions, interest deferrals and switches to payment-in-kind, or PIK, can also qualify as default events.

That helps explain why Fitch’s measure is substantially higher than some competing private credit default indexes.

Proskauer’s Private Credit Default Index, for example, put its second-quarter default rate at 2.51%, based on 716 loans representing $195.6 billion of original principal. The difference partly reflects methodologies and what constitutes a default rather than simply conflicting assessments of the same borrowers.

The latest increase nevertheless matters because restructurings that allow borrowers to defer cash interest or extend maturities can indicate that companies are struggling to service debt under their original terms.

Smaller borrowers show greater stress

Pressure is particularly visible among smaller companies.

Recent Houlihan Lokey data showed that 12% of loans to borrowers with $10 million to $20 million of EBITDA were valued below 90 cents on the dollar in the second quarter, compared with roughly 1% in 2023.

For borrowers with $20 million to $100 million of EBITDA, 6% of loans were below that threshold, while the figure was just 3% for companies generating more than $100 million of EBITDA.

The divergence suggests that private credit stress remains uneven rather than representing a uniform deterioration across direct lending.

That distinction is important for institutional investors. Larger managers have increasingly shifted toward bigger borrowers, while smaller companies generally have fewer refinancing options and less capacity to absorb sustained high interest costs.

PE NEWSWIRE previously reported on record European private credit activity alongside a shift of larger transactions toward public markets, illustrating how borrower size is increasingly influencing financing options.

PIK and restructurings complicate the default picture

Fitch’s July data showed how heavily restructuring activity contributes to its default measure. About half of default events during the trailing 12-month period involved interest deferrals or PIK mechanisms, while 38% involved maturity extensions.

PIK allows borrowers to add interest to outstanding principal rather than paying it immediately in cash. It can preserve liquidity, but increased use can also signal that debt service is becoming difficult.

Other measures provide a more moderate assessment. Houlihan Lokey reported a 3% size-weighted default rate among borrowers with less than $100 million of EBITDA in the second quarter, while more than two-thirds of borrowers in its dataset still recorded growth in both revenue and EBITDA.

For investors, the divergence makes recoveries, non-accruals and portfolio marks as important as the headline default rate.

Investor liquidity adds another pressure point

The credit deterioration is arriving as some large perpetual private credit vehicles face elevated redemption requests.

Blackstone’s $77 billion BCRED received approximately $4.3 billion of third-quarter repurchase requests, equal to roughly 10% of outstanding shares, although the vehicle’s standard quarterly repurchase limit is 5%.

PE NEWSWIRE reported on BCRED’s $4.3 billion redemption requests as an important test of liquidity management in non-traded private credit vehicles.

The pressure is not uniform across managers. BlackRock’s $23.1 billion HPS Corporate Lending Fund received redemption requests equivalent to about 11.5% of shares in the third quarter, down from 13.3% in the preceding quarter, suggesting withdrawal pressure may be stabilizing at some vehicles.

Private credit faces a tougher underwriting cycle

The latest Fitch reading does not by itself signal a broad private credit crisis. Different default methodologies produce substantially different rates, and many events captured by Fitch involve negotiated restructurings rather than bankruptcies.

But the direction is increasingly difficult for investors to ignore.

Smaller borrowers are showing more valuation stress, PIK and maturity extensions remain important components of default activity, and managers are navigating investor liquidity demands at the same time.

Fitch’s progression from 5.7% in the first quarter to 6% in the second quarter, 6.1% in July and 6.3% in August therefore points to a private credit market entering a more demanding phase of the credit cycle.

For limited partners, the key question is increasingly not simply how many borrowers default, but how much capital lenders ultimately recover and whether current portfolio marks adequately reflect the growing number of borrowers whose original debt terms have already proved unsustainable.