Private credit markets are facing increasing scrutiny as “non-accruals”—loans where borrowers have ceased making interest payments due to financial distress—are on the rise. This trend suggests a more challenging phase for an industry that has seen significant growth in recent years, signaling an inflection point in the credit cycle.
Data highlights this growing stress. Non-accrual debt at the ten largest publicly traded Business Development Companies (BDCs) increased to 3.95% of total debt at cost in the second quarter. Across the broader BDC universe, adjusted non-accrual exposure, which includes all debt from borrowers with at least one non-accrual loan, climbed to 3.3% of total debt at cost in Q1 2026, marking a 116 basis point increase from the previous quarter. Additionally, the proportion of borrowers with at least one non-accrual debt instrument reached 4.69% in the first quarter.
The primary drivers behind this rise are persistent high interest rates, stemming from central bank actions, and a general slowdown in economic growth, which collectively burden companies, especially those that are highly leveraged. Lenders are also becoming less willing to refinance struggling companies, particularly in sectors like software, exacerbating financial pressures on loans originated during the private equity boom of 2020-2021.
Despite these concerns, some market participants remain less alarmed. Certain executives contend that the current worries are overstated and that a majority of loans continue to perform well. Furthermore, data from firms like BlackRock and Cliffwater indicates that non-accrual rates remain below their 10-year averages, suggesting a degree of stability in private credit performance.
However, the increase in non-accruals could lead to weaker earnings and reduced dividend coverage for BDCs. This situation may temper investor enthusiasm for private credit funds, potentially impacting the valuations of companies reliant on private credit financing and fostering broader risk aversion in the credit markets. This heightened caution could also have direct implications for industries, such as supply chain technology, where software companies are often significant private credit borrowers.
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