Private Credit Defaults Are Rising, But No One Can Agree on How Much

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Private credit is showing signs of stress. The problem is, depending on which measure you use, the default rate could be less than 1%, 6.3%, or as high as 19%.

According to Kat Hidalgo at Bloomberg,

• Fitch Ratings puts the private credit default rate at a record 6.3% last week. Yet Houlihan Lokey puts the default rate at below 1%, when loans were weighted by size, because larger borrowers are generally performing better. Meanwhile, Pimco estimates a 19% “shadow” default rate among business development companies, or BDCs.
• What’s causing the discrepancies? For one, there’s no comprehensive dataset for private credit, and borrowers and lenders disclose less than their public-market counterparts. Different measures cover different slices of the market and weight borrowers differently. And there’s also no universal definition of what counts as a default– some measures count restructurings that let struggling borrowers delay or avoid a conventional default, while others don’t.
• Hidalgo argues that knowing the precise default rate may matter less to investors than knowing the point at which rising distress begins to hurt returns– or worse, threaten the broader financial system. For now, managers may be able to absorb some level of defaults before systemic risk becomes a concern.

Our take? The varying default rates expose a bigger problem in the private credit market: it’s difficult for investors to assess risk when there isn’t a consistent way to measure how much trouble borrowers are in. We recently discussed in our article on private vs public companies, that private credit comes with lighter disclosure than public debt. When information is already limited, wildly different measures of distress make it even harder for investors to gauge just how much risk lurks beneath the surface.