Private Credit Default-Equivalent Rate Hits 5.8%, Insurer Capital Risks Mount: Moody’s

Moody's Ratings has flagged rising stress in global private credit, reporting that the default-equivalent rate among 607 unrated companies reached 5.8% in the 12 months ended June 2026. The figure includes distressed exchanges such as payment-in-kind (PIK) amendments and maturity extensions. According to the report, the trustee-reported default rate for these borrowers, whose loans sit in 47 rated middle-market collateralised loan obligations (CLOs), stood at 4%. The findings come as private credit expands across regions and investment structures, raising questions about refinancing risk and insurers' exposure to less transparent assets.

Of the 607 companies tracked, 106, or 17%, used PIK interest, which allows borrowers to defer cash interest payments. Moody's noted these companies generally showed weak liquidity, negative free cash flow, high leverage and cash interest coverage below 1.0x. Business services, consumer services and software accounted for around half of default and PIK activity.

Moody's also flagged refinancing concerns. Loans from the 2020–22 vintages approach maturity between 2027 and 2029. More than half of maturities due in 2027–28 among Caa-equivalent issuers fall in that period, and around one-third of their maturities are due in 2029–30. The report said weaker borrowers could struggle to refinance, particularly where complex financing structures and limited transparency add to risk.

For Asia-Pacific, Moody's identified India, Japan and Australia as key growth markets, driven by real estate, restructuring, infrastructure and gaps in bank funding. Although private credit remains relatively small in the region, the report described it as strategically relevant for insurers. It highlighted that risk-based capital frameworks can treat opaque or unrated fund structures as equity, with capital charges approaching 50%. Multicredit fund vehicles, rated-note feeders, special-purpose vehicles and joint ventures can add leverage, opacity, valuation and liquidity risks.

Moody's linked private credit growth to AI financing. It projected capital spending by Meta, Alphabet, Microsoft, Amazon, Oracle and CoreWeave to reach about $785 billion in 2026 and nearly $1 trillion in 2027, with their combined future commitments, including leases yet to commence, purchase commitments and guarantees, growing to nearly $3 trillion. US life insurers held around $85 billion in AI-ecosystem-linked assets in Q2 2026, up 24% from the end of 2025. The default figures relate to global middle-market borrowers and are not India-specific, according to the report. The article was written by Anushka Sengupta for ETBFSI.