How bad is private credit right now? It depends on who is holding the clipboard. Fitch Ratings says the U.S. private credit default rate hit a record 6.3% in August. KBRA’s middle market default monitor puts the figure at 3.1% by company count and 2.2% by dollar value. Valuation Research Corp. says its internal shadow default rate exceeds 10% for the investments it currently values. Same asset class, same summer, three very different headlines. If you own a private credit fund, or are being pitched one, that gap is the story.
Why one market produces three numbers
Start with what Fitch actually counted. According to its report, covered by Investment Executive and Bloomberg, the trailing twelve month default rate across roughly 1,300 private credit borrowers rose from 6.1% in July to 6.3% at the end of August. August also brought 14 default events, the most in any month of the past year, up from three in July. Eleven were new borrowers and three were companies that had defaulted before.
Here is the part that matters for comparison. Stressed maturity extensions were the most common form of default for the third month running, at 45% of August’s events. And over the prior twelve months, payment deferrals and switches from cash interest to payment in kind interest together made up 47% of the 89 defaults Fitch recorded. In plain English, a lot of these borrowers did not go bankrupt. They asked for more time, or they started paying their lenders with more debt instead of cash. Whether that counts as a default depends on the definition you use, and different rating firms and data providers draw the line in different places and measure different pools of loans.
Neither number is wrong. They answer different questions. A broader count tells you how many borrowers are showing strain. A narrower one tells you how many lenders are actually losing money right now. Valuation Research’s shadow default rate, which also counts borrowers that have recently made or are expected to make a material credit amendment, is a third lens. That one is the firm’s own measure, so treat it as a data point, not a benchmark. The lesson is simple: when someone quotes you a default rate, ask which one.
The sector picture is not what you might guess
Fitch’s breakdown holds a surprise. Health care showed the highest twelve month default rate at 9.9% in August, up from 9.5% in July and 6.9% a year earlier. Industrials and manufacturing also hit 9.9%, up from 5.2% in August 2025. Software, on the other hand, had the lowest default rate among major industries at 0.6%, down from 1.2% in July and 2% a year ago.
Now set that beside what Valuation Research reports on pricing. In its September 30 direct lending data, software and technology credits price 50 to 100 basis points wider than the broader market, and the firm describes software credits among the pockets where stress is concentrated. So lenders are charging more to finance software companies even as the default counts for the sector look clean. Which signal is right? Possibly both. Defaults are a lagging indicator. Pricing is a forward looking one. A low default count today says what has already happened, not what the market expects.
The exit line is still long
Defaults are only half of what a retail holder needs to watch. The other half is how easily you can get your money out. Robert A. Stanger & Co., as reported by AltsWire on October 2, tracked 19 nontraded BDCs that report net asset value and found third quarter redemption requests of $13.8 billion, or 11.5% of tender offer NAV. On a same store basis the second quarter figure was 12.7%. Funds met about 40% of requests, up from 37%, which left an estimated $8.2 billion unfilled, down from $9.8 billion in the prior quarter.
The usual quarterly cap on these funds is about 5%, so even the improved number is more than double the limit. Blackstone’s BCRED received about $4.3 billion in repurchase requests, roughly 10% of shares outstanding, and held repurchases to its 5% cap. Ares Strategic Income Fund saw 13.1% of shares tendered and repurchased 38.2% of the shares requested. Blue Owl Technology Income Corp. reported requests equal to 39% of shares outstanding. Valuation Research, looking at 11 of the 14 largest nontraded BDCs, found average requests of 13.0% in the third quarter versus 13.9% in the second.
Kevin Gannon, chairman and CEO of Stanger, offered a careful read. He said redemption demand “may have peaked in the second quarter,” and added the line every investor should keep taped to a monitor: “One quarter does not establish a trend.” He is right on both counts. A dip from 12.7% to 11.5% is encouraging. It also leaves a queue of unmet requests that sits behind anyone who decides to join the line later.
There’s another signal outside the private funds. Valuation Research notes that publicly traded BDCs often trade 10% to 20% below their stated net asset value, and some trade at discounts of 40% to 50%. That doesn’t prove the private marks are too high. Public prices can swing on sentiment, and a discount can reflect liquidity as much as credit quality. But it does show that when an investor can sell on an open market, the price they get can differ a lot from the number on the statement.
What the calendar says about next year
The pressure may not ease on its own schedule. Valuation Research cites KBRA’s estimate that about 10% of its tracked direct lending index matures by 2027, 17% in 2028 and 16% in 2029, roughly 40% across three years. Fitch connects the extension trend to uncertainty over interest rates and inflation, which has suppressed deal activity and made it harder for private equity sponsors to sell struggling portfolio companies before debt comes due. In other words, a borrower who buys time today still has to refinance tomorrow.
The picture is not uniformly grim. Valuation Research says credit remains stable for high quality borrowers and that it does not view the current challenges as systemic. It also reports that deals underwritten since late 2025 carry interest coverage above the roughly 2x historical standard, while the 2021 and 2022 vintages show median interest coverage of about 1.7x to 1.8x and median net leverage of roughly 6.0x to 7.0x. Dispersion is the theme again. Some lenders will come through this period just fine. Others will not.
Questions worth bringing to any private credit fund
None of this is a verdict on the asset class. It is a reminder to ask better questions. Which default definition does the manager use, and does it include maturity extensions and payment in kind switches? What share of the portfolio is paying interest in cash? How concentrated is the book in sectors under stress? What are the redemption terms, how often have requests exceeded the cap, and how are shareholders treated when they do? How does the fund determine its net asset value, and how does that compare with where similar public BDCs trade?
Private credit grew up fast, and a lot of the money that came in arrived on the strength of one number, a yield. Yield is the easy part to advertise. The hard parts are the ones above, and they tend to show up in quarterly tender results and default tallies before they show up in a marketing deck. Read those first.
This article is written for educational and informational purposes only and does not constitute financial or legal advice. The views and analytical frameworks presented draw on publicly available information and reported commentary from industry participants. Readers are encouraged to consult primary sources and form their own informed views on these complex topics.
