How much stress is really building in private credit?
With some estimates putting default rates as high as 8%, inflation stubborn and borrowing costs rising, there are reasons for concern. But on closer inspection, the data suggests credit markets are holding up better than many headlines imply, albeit with some important exceptions.
Attached is fresh insight from Anant Kumar, Global Investment Strategist at Benefit Street Partners (BSP), Franklin Templeton’s private credit manager, which examines three important developments:
1. Private credit defaults: the headline numbers can be misleading
- Private credit default rates can vary threefold depending on how they're measured. In September, the same index of direct loans produced a default rate of 2.2% when measured by loan value, but 6.4% when including non-accruals and counting borrowers rather than loan value.
- Defaults may be rising, but losses remain relatively low. Realised losses across the Cliffwater Direct Lending Index were just 0.47% over the year to June 2026, compared with a long-term annual average of 0.98%.
- Rising payment-in-kind (PIK) interest is a warning sign but hasn't yet translated into weaker recoveries. Recoveries on non-accrual loans have averaged 49% since 2023, broadly in line with the long-term average of 48%, despite growing signs of stress among PIK borrowers.
Anant Kumar, Global Investment Strategist: “Published private credit default rates run from about 1% to 8.5%, and stress scenarios go higher. Most of that range comes from what each provider counts as a default and whose loans it tracks, not from different views of the same borrowers.”
2. Inflation: corporate America is proving remarkably resilient, but cracks are emerging
- Inflation is primarily an energy shock. Headline inflation reached 3.7% in September, with energy prices up more than 20% year-on-year. Core inflation remains considerably lower at 2.6%.
- Despite higher rates and rising debt, US companies' interest burden is at its lowest since 1967. Corporate debt has increased by approximately 41% since 2019, yet net interest payments have barely changed, as larger companies benefit from fixed-rate borrowing and interest earned on cash.
- However weaker borrowers are coming under increasing pressure. Spreads on the lowest-rated CCC corporate bonds have widened to 13.3%, from around 8.4% a year ago, even as the broader high-yield market remains relatively calm.
Anant Kumar, Global Investment Strategist: “Energy has pushed headline inflation to 3.7% and the Fed has started raising rates again. Large US companies have so far passed costs on and locked in cheap debt. But the strain is showing up among smaller, floating-rate and lower-rated borrowers.”
3. Lenders are regaining bargaining power, but only selectively
- After three years of tightening, private credit spreads are widening again. Average unitranche spreads fell from 657 basis points in 2023 to 489 in February 2026, before rising to 522. However, only around a fifth of the previous tightening has been reversed.
- Lenders are securing stronger protections against aggressive debt restructurings, with around a third of high-yield bonds now containing provisions designed to prevent borrowers from moving valuable assets beyond lenders' reach.
- Strong borrowers still have the upper hand. A record $12 billion of private loans were refinanced into the syndicated market in Q3 2026, allowing borrowers to reduce their borrowing costs by an average of 182 basis points.
Anant Kumar, Global Investment Strategist: “After three years in which borrowers won ever-tighter pricing and looser terms, lenders are regaining ground in private credit, especially on weaker credits and extensions. Strong borrowers still have options, so the shift is selective, not market-wide.”
So what does this all mean?
Anant's view is that credit markets remain broadly resilient, though the gap between stronger and weaker borrowers is widening. There are three key things to bear in mind:
- Headline default rates differ wildly, so watch for actual losses and use amended PIK as a stress gauge.
- The macro risk is not an economy-wide squeeze. It is a widening gap between the strongest and weakest borrowers.
- Lenders are increasingly being paid for risk again, but only where the risk is most acute.
