Default rates across private credit markets have climbed back to their highest level in the short history of a key industry benchmark from Kroll Bond Rating Agency (KBRA), underscoring growing pressure across the $1.8tn direct lending sector, according to a report by Bloomberg.
Data from the KBRA DLD Direct Lending Index shows the trailing 12-month default rate rose to 2.3% of issuers as of Monday—matching the peak recorded at the index’s inception in late 2023.
The index, which tracks roughly 3,000 issuers and about $300bn in business development company (BDC) holdings, had not previously returned to that level until now. KBRA projects the rate will continue trending higher, reaching around 3.5% by the end of 2026, equivalent to roughly 111 issuers.
On a loan-weighted basis, defaults are also expected to increase, with KBRA forecasting a rise to 2.5% in 2026 from 1.4% in 2025, translating to an estimated $7.6 billion in defaulted loans over the year.
The deterioration comes amid a more challenging financing environment, with elevated interest rates continuing to weigh on borrowers and concerns building around underwriting discipline within direct lending portfolios. Exposure to technology and software companies—some of which face disruption from artificial intelligence—has also contributed to investor caution.
At the same time, liquidity pressure is emerging across private credit funds. Some managers have restricted withdrawals following elevated redemption requests, as investors seek to reduce exposure to potentially stressed assets. Earlier this year, industry estimates suggested withdrawals across private credit strategies reached around $13bn in the first quarter.
Publicly listed asset managers have also begun tightening liquidity terms. BlackRock Inc recently limited redemptions in one of its flagship private credit vehicles for a second consecutive quarter, according to regulatory filings.
KBRA analysts also highlighted weakening recovery expectations as an additional concern. The firm noted that implied recovery rates on defaulted loans are projected to decline further, particularly among smaller and mid-sized borrowers, where recoveries are expected to fall materially compared with larger, more resilient credits.
