Private credit roundup: paper losses deepen at lenders

• Unrealized losses at BDCs reached 2.35% of net asset value in Q1 2026, the highest level in nearly four years, with analysts noting more earnings contraction than growth and rising leverage across portfolios
• Payment-in-kind (PIK) interest income totaled $477 million in the quarter, up 2% from the previous quarter, signaling potential borrower stress as companies defer cash interest payments
• The ECB warned that private credit-backed firms in the euro zone show deteriorating ability to service interest payments from operating cash flows, though no systemic risk currently exists

Summary

Key Developments:

Private credit lenders are experiencing deepening financial stress, with a Reuters analysis of 51 business development companies (BDCs) revealing unrealized losses reached 2.35% of net asset value in Q1 2026—the highest level since Q2 2022.

Critical Findings:

• BofA Global Research confirms "modest but unmistakable credit deterioration" across the BDC sector
• Assets under management showing minimal growth
• Portfolio fundamentals weakening with more earnings contraction than growth and rising leverage
• Payment-in-kind (PIK) interest income totaled approximately $477 million in the quarter, up 2% from the previous quarter, indicating borrower stress as companies defer cash payments

Regulatory Perspective:

The European Central Bank stated that while euro zone faces no systemic risk from private credit turbulence, certain pockets show exposure. The ECB warned that private credit-backed firms' ability to service interest payments from operating cash flows has deteriorated recently.

Market Implications:

Apollo Global Management President Jim Zelter anticipates continued redemption pressures from wealthy investors withdrawing from private credit funds. Despite "solid" underlying performance in March-May, he expects outflows to persist and potentially increase as investors "game the system" within quarterly 5% redemption limits.

Outlook:

BofA analysts caution against investor complacency, warning that "seasoning and slowing AUM growth are likely to expose more underlying stress over time." The combination of deteriorating credit quality, payment deferrals, and ongoing redemption pressure signals continued challenges ahead for the private credit sector.