Private Credit Non-Performing Loans Rise to Near Decade-High
Nashnova编辑部
Median problem loans at the 20 largest listed BDCs rose to 2.8% of loan cost in Q2 — the highest since the 2017 oil-price collapse — signaling that the debt hangover from the 2020–2021 buyout boom is now surfacing under high rates.
How bad has the loan deterioration gotten?
The Financial Times' analysis of data from Solve shows median non-accrual loans — loans where the borrower has stopped paying or the fund expects an imminent default — at the 20 largest listed BDCs (business development companies, listed funds that lend to mid-sized firms) hit 2.8% of loan cost in Q2, up from 2% at end-Q1.
This means → problem-loan ratios have reached their highest level since the 2017 oil-price collapse. Credit stress is no longer isolated — it is industry-wide.
Fitch Ratings warned last week that private-credit default rates hit a record high in July. Separately, PitchBook LCD data shows the largest listed BDCs shrank again in Q2 — impairments plus loan sales and repayments outpaced new commitments, steadily shrinking balance sheets.
Where did these bad loans come from?
The root traces to the 2020–2021 private-equity buyout boom: equity valuations were high, rates near zero, and PE firms loaded up on acquisitions financed with heavy debt — most of it supplied by private credit.
In plain terms = borrowing was so cheap that buyers leveraged aggressively. Now that rates have risen sharply, these companies are funneling all their cash into interest payments, leaving nothing for investment or growth.
Bryan High, head of global private finance at Barings, said higher borrowing costs "prevent some companies from investing" — "they're using all the cash they generate to pay interest to lenders." Some PE sponsors have already handed company control directly to lenders.
Which sectors and funds are under the most pressure?
Software is a key pain point. Software companies make up a significant share of BDC portfolios. Revenue has grown recently, but sustainability is uncertain as enterprise spending shifts toward AI.
KKR's listed fund FS KKR Capital Group reported Q2 problem loans at 7.1% of its loan book — slightly improved from the prior quarter but still far above the industry median.
Blue Owl, Apollo's MidCap Financial, and others saw loan repayments exceed new originations. KKR attributed this to limited deal activity and proactive exits from certain loans.
What are industry executives saying?
Several fund executives insisted on earnings calls that most loans are performing well. Blue Owl co-president Craig Packer called credit metrics "healthy," with problems "still idiosyncratic." Ares Management's US direct-lending head Jim Miller described borrower conditions as "solid," with coverage ratios and leverage "broadly in line with five-year averages."
But Oaktree's credit co-CEO Armen Panossian struck a more cautious tone: "We are preserving capital, maintaining a more defensive, risk-averse posture… beneath the surface, there are reasons for concern."
This reflects a clear split inside the industry: the executive layer keeps reassuring investors, while the data — and more cautious managers — are sending a different signal.
Why are some funds willing to take losses just to shrink?
Several funds have begun actively de-risking — pulling back on new loan underwriting, selling software-sector exposure, and accepting losses to reduce risk.
In plain terms = their bigger strategic goal is to package private-credit loans and sell them to insurers, pension funds, and sovereign wealth funds. It is not worth jeopardizing that core franchise for relatively small corporate lending positions.
This means → for these funds, protecting their "asset quality" brand matters more than originating a few extra loans — which itself signals that the industry's consensus on future credit conditions is tilting cautious.
What is the real suspense?
This stress is occurring against a backdrop of still-resilient US economic growth — bad loans have already hit a near-decade high, yet the economy has not truly deteriorated.
This means → the real question for markets is: if growth slows further or rates stay elevated, where does a 2.8% problem-loan ratio go from here?
Golub Capital co-CEO David Golub offered the most direct assessment: "We're in a credit cycle that others denied for a while, but I think there aren't many deniers left now."
Content is for reference only, not financial advice.