US private credit unrealised losses deepen as borrower pressures persist
Synopsis
US private credit lenders reported their largest unrealised losses since 2022 during the first quarter of 2026, highlighting growing pressure on borrowers amid higher financing costs.
Unrealised losses at US private credit lenders widened in the first quarter of 2026, reaching their deepest level since 2022, while payment-in-kind (PIK) interest income remained elevated. The latest figures suggest growing pressure across parts of the private credit market as higher borrowing costs continue to weigh on middle-market companies.
Key highlights
- Unrealised losses at US private credit lenders reached their worst level since 2022
- Aggregate losses equalled 2.35% of net asset value in the first quarter
- Payment-in-kind (PIK) interest income remained elevated despite easing from recent highs
- Reuters analysis covered 51 business development companies (BDCs)
- Analysts say higher borrowing costs and weaker exit markets are increasing pressure on leveraged borrowers
What happened?
A Reuters analysis of 51 business development companies (BDCs) found that aggregate unrealised losses reached 2.35% of net asset value (NAV) during the first quarter of 2026.
That represented the steepest quarterly decline since the second quarter of 2022.
At the same time, PIK interest income remained high across the sector.
Reuters found that identifiable PIK interest income totalled approximately $477 million during the quarter. While this was 2% higher than the previous quarter, it remained below the early-2025 peak of roughly $633 million.
PIK arrangements allow borrowers to defer cash interest payments by adding those amounts to their outstanding debt balances.
Why this matters
The combination of rising unrealised losses and elevated PIK income is attracting increased attention from investors and analysts.
Private credit markets have faced growing scrutiny as higher interest rates put pressure on borrowers and investors monitor valuations, loan performance and redemption activity more closely.
While unrealised losses do not represent actual defaults, they reduce reported net asset values and may indicate weaker expectations for future recoveries.
Some markdowns may eventually reverse, but others could become realised losses if borrowers fail to repay their debt obligations.
Key company figures
According to Securities and Exchange Commission filings reviewed by Reuters:
- Investcorp Credit Management BDC recorded unrealised losses equal to 16.8% of NAV
- FS KKR Capital Corp reported unrealised losses of 6.7% of NAV
- Blue Owl Technology Finance reported unrealised losses of 6.5% of NAV
Several firms also reported major levels of PIK income during the quarter.
Ares Capital Corp recorded $54 million in PIK interest income, while FS KKR Capital reported $38 million and Blue Owl Capital Corp reported $31.5 million.
Official statements
Ratings agency Fitch has previously warned that increasing exposure to loans with payment-in-kind features could create challenges for business development companies.
The agency said liquidity pressures could emerge if cash earnings become insufficient to support dividend payments.
Howard Mason, head of financial research at Renaissance Macro Research, said the sector is facing a major test.
"Private credit is entering its first real credit cycle since the GFC (Global Financial Crisis)."
According to Mason, higher borrowing costs, weaker exit markets and pressure on software company valuations are creating challenges for highly leveraged deals completed in 2021, particularly those using PIK structures.
Background & Context
Private credit has grown rapidly over the past decade as lenders stepped in to provide financing outside traditional banking channels.
Business development companies play a major role in the sector by providing loans to middle-market businesses and generating income for investors.
As interest rates have remained elevated, some borrowers have increasingly relied on payment-in-kind structures to preserve cash flow, allowing interest expenses to accumulate on outstanding debt balances.
Investors have been closely watching whether these arrangements signal temporary financial pressure or more serious credit deterioration.
What happens next?
Market participants will continue monitoring valuation trends, loan performance and levels of payment-in-kind income across private credit portfolios.
Analysts are expected to focus on whether unrealised losses stabilise or continue to increase during the remainder of 2026.
Borrower performance, refinancing conditions and broader economic trends will likely play a key role in determining whether current pressures remain manageable or translate into higher realised losses.
FAQs
Q1: What are unrealised losses in private credit?
Unrealised losses are reductions in the estimated value of loans and investments that have not yet been sold or written off.
Q2: What is payment-in-kind interest?
Payment-in-kind (PIK) interest allows borrowers to defer cash interest payments by adding those amounts to their debt balances.
Q3: Why are investors watching PIK income closely?
Elevated PIK income can indicate that borrowers are facing cash flow pressure and may be relying on deferred interest payments.
Q4: Do unrealised losses mean borrowers have defaulted?
No. Unrealised losses do not represent defaults, although they may reflect weaker expectations about future loan performance.
Q5: Why is the private credit sector under scrutiny?
Investors are assessing how higher borrowing costs, weaker deal markets and economic uncertainty are affecting loan portfolios and borrower health.
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I write about markets, money, and the macro forces that move them. Passionate about turning complex economic trends into sharp, easy-to-understand stories. Off the clock, it’s hip hop, rock, reggae -- and a mix of cricket and basketball.
