Signs of strain are emerging across the US private credit market, with unrealised losses at business development companies (BDCs) worsening in the first quarter and non-cash interest payments remaining elevated, according to regulatory filings and data reviewed by Reuters.
The trend highlights growing pressure on sponsor-backed lending portfolios as higher interest rates, weaker exit conditions and refinancing challenges continue to weigh on leveraged borrowers—many of which were financed during the 2021 deal cycle.
A Reuters analysis of 51 BDCs showed aggregate unrealised losses reached 2.35% of net asset value in Q1 2026, the steepest quarterly decline since mid-2022. While unrealised losses do not represent defaults, they typically reflect lower recovery expectations and can foreshadow future realised credit impairments.
At the same time, payment-in-kind (PIK) income remained elevated, underscoring liquidity stress among borrowers. PIK structures allow companies to defer cash interest by adding it to outstanding debt balances, effectively increasing leverage over time. Total identifiable PIK income across the sector was estimated at about $477m in the quarter.
The combination of rising markdowns and persistent PIK usage suggests pressure is building across parts of the private lending ecosystem, particularly in sponsor-owned portfolios where valuation sensitivity has increased.
Several major lenders reported notable exposure to credit deterioration. Investcorp Credit Management BDC recorded unrealised losses equal to 16.8% of net asset value, while FS KKR Capital Corp and Blue Owl Technology Finance reported losses of 6.7% and 6.5% respectively. Ares Capital also disclosed $54 million in PIK income during the quarter.
Credit rating agencies have warned that increasing reliance on deferrable interest structures could create liquidity pressure if cash earnings prove insufficient to sustain dividend payments.
Analysts note that the current environment may represent the early stages of a broader credit cycle, as higher borrowing costs, tighter refinancing markets and valuation pressure—particularly in software and AI-exposed sectors—strain highly leveraged deals struck at peak valuations.
