Private Credit Default Rates Hit 2023 Highs as KBRA Projects Rise to 3.5% by Late 2026
Taylor Wilson
The KBRA direct-lending index's trailing-12-month default rate has climbed to 2.3%, matching its all-time high, and the agency projects 3.5% by year-end 2026 — a simultaneous rise in defaults and fall in recoveries that is forcing a repricing of private credit risk.
How high has the default rate climbed?
The KBRA DLD Direct Lending Index's trailing-12-month default rate (by issuer count) has reached 2.3%, tying its record high since the index launched in December 2023.
The index tracks roughly 3,000 issuers holding a combined $300 billion in business-development-company (BDC) assets — publicly traded vehicles that lend to mid-market firms.
KBRA expects the rate to keep rising, hitting 3.5% by end of 2026 — roughly 111 issuers in default.
How large are the dollar amounts?
By loan volume, the default share is projected to rise from 1.4% in 2025 to 2.5% in 2026.
In dollar terms, that means defaulted loans jump from $4.3 billion to $7.6 billion — nearly doubling in a single year.
This means → it is not just more companies defaulting; each default is getting larger, amplifying actual losses well beyond the headline rate.
What is driving the acceleration?
The core backdrop is persistently high borrowing costs: the US-Iran conflict has pushed up energy prices, keeping inflation elevated and squeezing corporate debt-service capacity.
Markets also question direct lenders' underwriting standards — how rigorously they vetted borrowers — and their exposure to software companies, which face potential disruption from AI.
In plain terms = rates stayed high, borrowers can't keep up, and the loans may not have been stress-tested well enough when they were made.
Why are recovery rates "more concerning"?
KBRA Senior Director Eric Rosenthal said the trend in implied recovery rates — how much lenders get back after a default — is "more concerning" than defaults themselves.
The unweighted implied recovery rate (equal-weight by borrower) is projected to drop from 46% in 2025 to 36% in 2026. This means → for a typical mid-market default, creditors will recover barely a third of principal.
Larger borrowers fare better: the weighted recovery rate (by debt size) is expected to edge up from 47% to 50%. This reflects a scale effect — bigger firms have more assets to liquidate in a workout.
Are investors pulling their money?
In Q1, investors sought to withdraw roughly $13 billion from private credit funds; some funds have already gated redemptions.
BlackRock's flagship private credit fund has capped redemptions for two consecutive quarters, per Bloomberg.
Bloomberg Intelligence analyst Michael Kaye says the pressure has carried into the current quarter. In plain terms = too many investors want out at once, and funds are queuing withdrawals — liquidity stress has moved from fear to fact.
What does this mean for the market?
Rising defaults + falling recoveries = a two-sided squeeze; actual investor losses will exceed what the default rate alone implies.
This means → the market's pricing of private credit assets — especially mid-market loans — faces unavoidable reassessment.
If sustained redemption pressure forces funds to sell assets at a discount, that could push recovery rates even lower, creating a negative feedback loop.
Content is for reference only, not financial advice.