Private-credit defaults hit five-year highs at major listed lenders

Credit deterioration is becoming more visible across some of the largest publicly traded private-credit portfolios, increasing pressure on a market that has spent much of the past few years emphasising low defaults and strong downside protection.

An analysis of recent quarterly disclosures from business development companies managed by Ares, Blackstone, Blue Owl and Golub Capital found that defaults and non-performing loans have reached their highest levels since at least 2021 at the funds examined.

The deterioration is not uniform across the market, but lenders are expanding watchlists and reporting increased stress among borrowers in sectors including healthcare and energy-sensitive industries. Software businesses are also facing greater scrutiny because of their weight in many direct-lending portfolios and uncertainty over the impact of artificial intelligence on some business models.

The shift comes as returns are normalising. The Wall Street Journal said returns across private-credit funds that had previously been around 10% have moved closer to 7%, while slower deal activity and declining base rates are reducing earnings from performing loans.

Managers continue to argue that the pressure should not be confused with a market-wide credit crisis.

Blackstone, for example, said earlier this year that defaults should be expected after historically low levels and argued that private-credit loans are typically senior in borrowers’ capital structures, with meaningful equity cushions beneath them.

The growing number of stressed credits nevertheless matters for the broader working-capital market.

Middle-market businesses funded by direct lenders frequently also depend on revolving bank lines, receivables facilities, supplier credit and equipment finance. Where a term lender marks down a borrower, places it on a watchlist or begins a restructuring, other providers may reassess collateral values, concentration limits and additional advances.

This does not mean problems in one private-credit portfolio automatically translate into losses for a factor or asset-based lender. Receivables and inventory facilities are structured against different collateral and often benefit from tighter controls over current assets.

But the latest data reinforce the importance of looking beyond headline liquidity. A company can remain current on a direct loan while weakening customer collections, supplier terms or inventory conversion show up elsewhere in its cash cycle first.