Private credit facing ‘clear signs’ of rising stress, BofA Says

Signs of elevated stress are emerging within the $1.7 trillion private credit market as default rates are rising and more borrowers are choosing to defer cash interest payments, according to a Bank of America Corp. report.

Private debt default rates remain higher than those in public credit, analysts wrote in the Thursday report, though metrics vary widely depending on datasets. Realized losses across business development companies — a popular vehicle for private credit funds — hit more than $1 billion in the second quarter, the highest dollar value since the pandemic, Bank of America said in its report.

Losses have increased since the Federal Reserve started raising interest rates in 2022, “suggesting portfolio companies continue to struggle with interest costs.”Business development companies are also carrying an additional $1.3 billion in unrealized losses, mostly from loans originated in the low-rate environment of 2021, according to the report.

As rates aren’t expected to drop to 2021 levels, these “problem vintages are likely to trigger further credit losses,” Bank of America said in the report.Bank of America also highlighted so-called “bad” payment-in-kind deals, defining this as borrowers that started deferring interest payments during the life of the loan as opposed to when the debt was first put in place. Bad PIK deals represented 2.5% of BDC holdings in the second quarter, the bank said.

In private credit, debt maturity walls are also at historic highs with 17% of deals coming due in the next two years, meaning that US middle-market issuers will need about $170 billion of capital over that period. That includes around 30% of all PIK loans, which could be a challenge for companies unable to pay interest.

To be sure, with about $160 billion of dry powder earmarked for domestic direct lending strategies, these upcoming maturities shouldn’t pose major threats, the bank said in the report.

© 2025 Bloomberg L.P.