US private credit defaults hit record high

Defaults in the US private credit market climbed to 6.3 percent over the trailing twelve months, up from 6.0 percent last quarter, the highest reading in the history of Fitch Ratings' private credit default series and its fifth consecutive quarter of deterioration. Fitch counted 27 default events in the third quarter alone, up from 20 in the second, and 91 unique borrowers in default over the past year.

Nearly all of it is being handled quietly. Roughly 88 percent of the defaults were restructurings rather than outright bankruptcies: about half involved interest deferrals or payment-in-kind arrangements, in which unpaid interest is simply converted into more debt, and another 38 percent involved distressed extensions of maturity dates. Lenders are letting borrowers postpone rather than forcing a settlement, which keeps the reported default rate well below the underlying losses.

The stress sits in the ordinary economy. Fitch measured default rates of 9.7 percent in both industrial and manufacturing businesses and consumer products and services, and healthcare providers accounted for sixteen of the year's defaults. Moody's, examining middle-market borrowers, found that a reported 4 percent default rate rises to 5.8 percent once distressed debt exchanges are counted — the same loans, measured without the deferrals.

What distinguishes this market is not the losses but the mechanism for noticing them. The roughly $2 trillion pool of private loans never trades on any exchange; the funds that originate the loans also price them, and management fees accrue on the assets whether or not the borrowers pay. After 2008, securitisation was regulated into transparency, and the risk relocated to the one corner of finance where nothing has a public price and no distressed buyer is waiting.

The remaining schedule is already fixed. The wave of private loans written during the cheap-money years of 2020 through 2022 comes due for refinancing in 2027 and 2028, and Moody's found that more than half the debt maturing in those years within its middle-market CLO sample carries deeply speculative credit profiles. Senior creditors hold structural protections. Fitch notes that some borrowers have already exhausted their easiest options for postponing repayment.