Fitch Ratings reported a significant worsening of credit quality in the private credit sector, with the U.S. private credit default rate reaching a record high of 6.0% in April 2026. The credit rating agency also estimated that private-credit-backed corporate borrowers faced a 9.2% default rate in 2025. This data highlights growing stress in an asset class that Bank of America's credit strategy team has called "the lowest quality asset class across our leveraged finance universe." Proskauer's Private Credit Default Index, which tracks 697 loans totaling $189.2 billion, also showed an increase, with a 2.73% default rate in Q1 2026, up from 1.84% two quarters prior.
The rising default rates come amidst broader concerns about the health of the private credit market. Moody's estimated that distressed restructurings, including debt exchanges and maturity extensions under duress, accounted for approximately 65% of all private credit defaults in 2025. UBS analysts, including Matthew Mish, have become increasingly pessimistic, predicting that private credit default rates could surge as high as 15% in a worst-case scenario, especially if artificial intelligence aggressively disrupts corporate borrowers. This updated forecast represents a 2 percentage point increase from their previous estimate just weeks earlier.
Several financial institutions are raising alarm bells about the future of private credit. Morgan Stanley anticipates annual private credit defaults of 8% between the second half of 2026 and the first half of 2027, driven particularly by stress in software companies. Barclays analysts note that many private credit funds are highly concentrated in sectors like software, making them vulnerable to AI disruption and increasing the probability of default for these firms. While some analysts believe systemic risks remain low and banks are well-insulated, the industry faces scrutiny over valuation, transparency, and liquidity risks, especially given recent events like Blue Owl limiting investor withdrawals from two of its retail-focused funds. Pimco analysts Lotfi Karoui and Gabriel Cazaubieilh explicitly stated that direct lending, like any mature segment of leveraged finance, should eventually face a "full-blown default cycle" that will test its resilience.
