Private credit lenders are charging more to hold the riskiest loans as weaker borrowers turn to PIK

# What happened Private credit lenders are quietly charging more to hold loans that borrowers increasingly can't service in cash. When companies can't pay interest in cash they tack interest onto the loan instead, called payment‑in‑kind (PIK). Lenders charge extra for PIK because borrowers using it are usually the weakest credits.

# Evidence and signals

Software has emerged as a concentration of weakness. The Reuters data showed 81% of software loans were marked down in the period, compared with 40% in other sectors. Several large managers — including Blue Owl, Ares Capital, Golub Capital and FS KKR Capital — reported meaningful unrealised losses tied to software investments.

Reserve has been tracking PIK usage across BDC portfolios and treats rising PIK adoption as an early warning: increased PIK suggests borrowers lack sufficient cash flow to service debt normally. Fitch also reported a rise in private credit defaults in Q2 2026 and noted stressed maturity extensions, where lenders grant more time instead of outright foreclosing.

# Why lenders are charging more Lenders price PIK and other concessions to compensate for several risks: higher probability of eventual default, weaker cash flows that raise refinancing risk, and more complex recovery scenarios. As creditors demand higher yields and protections, weaker borrowers find refinancing costlier or impractical. That dynamic can push borrowers to use more PIK, creating a feedback loop that increases portfolio stress.

# Market implications This shift doesn't require a wave of immediate defaults to matter. If healthy credits trade cheaper while financing for weak credits becomes more expensive, credit markets are internally re‑rating portfolios. That separation can make refinancing harder for the weak cohort, increasing the chance some loans will stop paying. Equity markets can ignore such credit deterioration for a while, but credit problems often surface sooner in lending markets.

Sectors with large private credit exposure to software are especially vulnerable. Given software's sizable weight in many BDC portfolios, markdowns and rising PIK within that niche could materially affect reported valuations and income for managers that hold concentrated positions.

# What to watch next

• PIK incidence across BDC and private credit portfolios. Accelerating PIK use would be a red flag for worsening cash‑flow stress.
• Non‑accruals and fair‑value markdown trends at major managers and BDCs. Continued increases will confirm the stress is broadening.
• Sector concentration shifts, especially additional software markdowns or losses.
• Refinancing activity and spreads for private credit: widening spreads and tougher terms signal tightening liquidity for weaker borrowers.

# Bottom line Private credit is showing signs of internal stress: lenders are charging more to hold loans that borrowers prefer to defer paying, and that stress concentrates in software exposures. Rising PIK, higher non‑accruals and markdowns point to refinancing strain that could widen if conditions persist.