Private Credit Default Rates Masked by Payment Shifts

Private credit borrowers face higher actual defaults than reported, forcing firms to re-evaluate their debt transparency.

Updated on Oct. 15, 2026 in Corporate Finance

Bold flat-color editorial illustration of a heavy industrial cable snapping, symbolizing the hidden stress of private credit debt structures. — New Moody’s data shows private credit default rates may be higher than reported due to deferred interest and maturity extensions. AI Illustration. Upload story photo >

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Do you believe deferring loan interest payments is a sign of underlying financial instability?

Moody’s data indicates that the true default rate for private credit borrowers is 5.8% when adjusted for interest-in-kind payments and maturity extensions, significantly higher than the 4% reported figure. This discrepancy highlights how lenders may be masking underlying portfolio stress as interest rates rise.

Why it matters

Business operators and investors relying on private credit must look past headline default numbers to account for deferred interest and maturity management. As borrowers with 1x EBITDA interest coverage lean on payment-in-kind arrangements, the risks of hidden credit deterioration could sharpen for firms dependent on these capital sources.

Moody’s tracked 607 private credit issuers, finding that 17% of them pay interest in kind while maintaining an interest coverage ratio of roughly 1x EBITDA. These 106 issuers are part of a portfolio that shows an adjusted default rate of 5.8% for the 12 months ending in June, compared to an unadjusted rate of 4%.

The players

Ted Koenig

Executive at Monroe Capital, a middle-market lender with $23.6 billion in assets under management.

Moody's Ratings

Financial research and credit agency that tracks debt issuer performance and default risks.

Federal Reserve

The central banking system of the United States responsible for setting national interest rate policy.

The details

Lenders often use payment-in-kind (PIK) to allow borrowers to defer cash interest payments by adding them to the loan principal, effectively avoiding a default event that would trip financial covenants. By extending loan maturities, lenders also delay the need for refinancing in a high-rate environment. However, this practice can obscure the fact that borrowers may lack the cash flow to service debt, as evidenced by current interest coverage of only 1x EBITDA among PIK-reliant issuers.

January 1, 2026: Monroe Capital reported $23.6 billion in assets under management.
June 2026: Conclusion of the 12-month period covered by Moody’s default rate analysis.
September 2026: The Federal Reserve raised interest rates by a quarter percentage point.
October 15, 2026: Ted Koenig spoke at the CAIS Alternative Investment Summit in Los Angeles.

Market Landscape

The current focus on PIK and maturity extensions follows the Federal Reserve interest rate hike cycle, which has tightened liquidity for middle-market borrowers. This trend marks a departure from standard reporting, as analysts now emphasize adjusted default metrics to capture the true health of private credit portfolios.

Owners and managers should verify that their credit providers are not masking portfolio weaknesses through maturity extensions that could jeopardize long-term stability. Operators should also prepare for rising borrowing costs as the Federal Reserve maintains its current trajectory.

The takeaway

The gap between reported and adjusted default rates serves as a key signal of underlying financial strain in the private credit market. Operators should monitor the interest coverage ratios of their debt partners and plan for higher debt service costs through the end of 2026.

What happens next

The Federal Reserve is projected to implement one additional quarter-point interest rate hike before the end of 2026, which may further test the solvency of issuers currently utilizing interest-in-kind payment structures.