Key Takeaways
- • Moody's Ratings puts the default rate among 607 assessed US private credit borrowers at 4% for the 12 months to June, rising to 5.8% once PIK amendments and maturity extensions for distressed borrowers are counted as distressed exchanges.
- • Roughly 17% of borrowers in the sample used payment-in-kind (PIK) interest, which preserves near-term cash but adds to outstanding debt.
- • PIK users show weak liquidity, negative free cash flow, high leverage and interest coverage near break-even, with business services showing the most weak liquidity and software the weakest overall credit metrics.
- • Lower-rated issuers account for more than half of debt maturing in 2027 and 2028 in Moody's sample, raising refinancing pressure.
- • Moody's says middle-market CLOs holding much of this debt have not yet seen significant deterioration, as portfolio management, collateral tests and structural protections have so far cushioned investors.
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. Moody's assessed 607 borrowers, which recorded a default rate of 4% in the 12 months to June. That figure rises to 5.8% when payment-in-kind (PIK) amendments and maturity extensions involving distressed borrowers are 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 principal rather than requiring cash payments. While this preserves liquidity 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. Financial strain was similar whether PIK provisions were included when loans were originated or introduced later. 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, costlier 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 this debt. Moody's said portfolio management, collateral tests and structural protections have 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 principal rather than requiring cash payments. While this preserves liquidity 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. Financial strain was similar whether PIK provisions were included when loans were originated or introduced later. 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, costlier 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 this debt. Moody's said portfolio management, collateral tests and structural protections have so far helped shield CLO investors from weakening borrower credit quality.
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