Moody’s Finds Private Credit Stress Is Worse than Default Rates Suggest, Warns of Maturity Wall

U.S. private credit borrowers are showing more signs of financial distress than reported defaults indicate, as struggling companies increasingly turn to interest-payment deferrals and loan extensions to manage their debt, according to a new Moody’s Ratings report.

Moody’s analyzed 607 borrowers held by 47 middle-market collateralized loan obligations (CLOs) over the 12 months ended June 2026. While 4% of borrowers had reported defaults, the rate rose to 5.8% when the analysis included certain payment-in-kind (PIK) amendments and maturity extensions involving financially distressed companies.

The findings highlight how traditional default figures may understate credit deterioration across the private lending market, where elevated borrowing costs and refinancing challenges continue to pressure middle-market businesses.

PIK Interest, Loan Extensions Mask Underlying Stress

Moody’s identified 24 reported defaults during the period. Including six borrowers that amended their loans to begin paying interest in kind and five that extended maturities while exhibiting weak credit quality brought the total to 35 default or default-equivalent events.

PIK arrangements allow borrowers to defer cash interest payments by adding them to outstanding debt. While the structure can provide short-term liquidity relief, it also increases debt burdens and can make it harder for companies to reduce leverage over time.

Of the 607 borrowers analyzed, 106, or 17%, were using PIK interest. Those companies generally exhibited weak liquidity, negative free cash flow and high leverage, with interest coverage ratios around 1.0 times — meaning earnings before interest, taxes, depreciation and amortization were barely sufficient to cover interest expenses.

Credit quality has also deteriorated among borrowers that had PIK provisions included in their original loan agreements and those that added the option through subsequent amendments. More than 60% of both groups had migrated to Caa1-equivalent ratings or lower, which Moody’s associates with very high credit risk.

Software and Services Account for Major Share of Distress

Business services, consumer services and software accounted for roughly half of the distressed borrowers identified in the report.

Business services represented 23% of defaulters and 29% of borrowers using PIK interest. Consumer services had the highest incidence of PIK usage relative to its size, with nearly one-quarter of borrowers in the sector using the arrangements.

Software borrowers had the weakest overall credit metrics among the three sectors, with high leverage and negative free cash flow limiting their financial flexibility.

The concentration of distress across these industries suggests refinancing challenges and future defaults could remain focused on borrowers already facing financial pressure.

Debt Maturities Could Add to Default Pressure

Upcoming debt maturities could deepen the strain. Moody’s found that companies with Caa-equivalent credit quality account for more than half of maturities due in 2027 and 2028, as well as roughly one-third of those scheduled for 2029 and 2030.

Many of these borrowers may have limited refinancing options, leaving them reliant on maturity extensions, PIK amendments, sponsor support or more expensive refinancing arrangements.

Despite the deterioration in underlying credit quality, middle-market CLO performance has remained stable. Portfolio managers can sell or replace troubled loans, while collateral tests and structural protections help shield investors from individual borrower problems.

However, Moody’s cautioned that these safeguards do not eliminate risk. A sustained increase in defaults, failed refinancings or further downgrades could weaken collateral quality and eventually affect CLO performance.

Image via Shutterstock/ Piotr Swat