Private credit lenders are becoming increasingly reluctant to allow borrowers to defer interest payments, as growing use of payment-in-kind (PIK) arrangements raises concerns that underlying loan stress may be greater than reported default figures suggest, according to a report by the Wall Street Journal.
PIK provisions allow borrowers to postpone cash interest payments by adding the amount owed to the outstanding principal. The mechanism became increasingly common as private credit managers competed aggressively for deals, giving borrowers greater flexibility over their debt servicing.
That trend now appears to be reversing. Only 13.5% of new private credit loans originated in the second quarter included a PIK provision, according to Lincoln International, down from 25% at the end of 2025.
Lenders are gaining greater negotiating leverage as credit conditions tighten and investors take a closer look at portfolio performance. Private credit managers have also become more cautious about providing leverage to businesses exposed to disruption from artificial intelligence, particularly software companies, while tightening provisions that allow borrowers to raise financing against assets.
PIK remains widespread across existing portfolios, however. Around 11% of outstanding private credit loans had some or all of their interest payments structured as PIK during the second quarter, according to Lincoln, compared with 7% at the end of 2021.
More than half of those arrangements were introduced after the original loan was issued. Such post-origination modifications are sometimes referred to as “bad PIKs” because they can indicate that a borrower is already experiencing financial difficulties.
The concern for lenders is that PIK can mask deterioration in credit quality. While deferred interest is generally recognised as income, the borrower is not making the corresponding cash payment and its debt balance continues to increase.
Some investors and credit analysts therefore view post-origination PIK arrangements as potential “shadow defaults” — situations where a company is receiving concessions from lenders but has not yet been formally classified as being in default or non-accrual.
Fitch Ratings counts PIK arrangements granted after a loan’s origination as defaults, highlighting the difference between formal default statistics and the broader level of restructuring taking place within private credit portfolios.
The restructuring of software company Medallia illustrates the risks. Its creditors, led by Blackstone and including KKR and Apollo, took control of the business this month after efforts by private-equity owner Thoma Bravo to extend a period of deferred interest failed. Medallia’s rising debt burden, including debt associated with acquisitions, ultimately contributed to the collapse of its equity value.
A similar pattern emerged at Pluralsight, the technology training company acquired by Vista Equity Partners in 2021. Following financial difficulties, lenders including Blue Owl, Ares Management, BlackRock and Goldman Sachs agreed to restructuring measures that included interest deferrals. Vista ultimately wrote off its equity investment and transferred ownership of the company to its lenders.
The growing scrutiny of PIK comes as private credit investors face increasing pressure to demonstrate the resilience of their portfolios. Wealthy individual investors, who have become an increasingly important source of capital for the asset class, are reassessing their exposure as concerns about loan performance increase.
Raymond James research has found a correlation between the use of interest deferrals and the likelihood of eventual default. Meanwhile, materially modified loans held by publicly traded business development companies remain close to their highest levels in at least a decade.
Private equity-backed businesses across sectors including healthcare, consumer finance and property services have also used PIK arrangements as lenders and sponsors seek to manage companies under financial pressure.
Private credit executives expect borrowers to face a tougher environment for securing payment deferrals or extending existing arrangements. Increasingly, lenders are demanding significant concessions from private equity sponsors before agreeing to provide additional breathing room.
