The Puck April Newsletter

The Golden Age is Over ~ Now We Find Out What Private Credit is Made Of

Default rates are climbing to levels the modern private-credit era has never seen. Payment-in-kind structures are papering over deteriorating borrowers. Tariffs, slowing growth, and 45% recession odds have arrived at exactly the wrong moment for a market built on enterprise-value collateral, covenant-lite terms, and a decade of cheap money. The bill is arriving. BY THE NUMBERS: APRIL 2026 * 5.8% U.S. private-credit default rate Fitch, trailing 12 months through January 2026 — the highest in Fitch’s data set * 13–15% potential default rate in a severe downside scenario UBS — driven in part by AI disruption of software-heavy portfolios; not a base-case forecast * 6.4% “bad PIK” as a share of private-debt volume Lincoln International, late 2025 — distressed deferrals, not growth-stage instruments * 1.5% OECD U.S. growth forecast for 2026 OECD — revised down as tariffs and policy uncertainty weighed on the outlook * 45% recession odds over the next 12 months Wall Street Journal survey of economic forecasters, April 2026

THE COMFORTABLE STORY There is a version of the private-credit story that sounds reassuring. Banks pulled back after 2008. Regulation tightened. Private capital stepped in. Credit kept flowing. Companies got funded. Markets adapted. The system worked.

That story is not false. It is incomplete. Over a decade of cheap money and light scrutiny, competition compressed spreads, weakened covenants, and rewarded marks that were harder to challenge than anything trading in public markets. The result wasn’t just a new funding channel. It was a system optimized to delay the recognition of stress.

“Private credit didn’t just replace banks. In many corners of the market, it replaced discipline.”

THE NUMBER YOU KEEP HEARING IS TOO NARROW The figure most investors encounter — roughly $1.5 to $2 trillion — refers to direct lending specifically: bilateral loans made by firms like Apollo, Ares, Blackstone Credit, and Blue Owl, primarily to finance leveraged buyouts. It is a useful number for that slice. It is not useful for understanding total exposure.

Add infrastructure debt, real-estate credit, venture lending, mezzanine finance, distressed strategies, and specialty finance and you are already well past that figure. The broader non-bank credit ecosystem sits inside a far larger global non-bank financial universe — the Financial Stability Board puts total non-bank financial intermediation at approximately $63 trillion — where opacity, not any single headline number, is the central risk.

THREE STRUCTURAL FLAWS This market was engineered for expansion. Three design flaws now converge to test whether it can survive a turn.

1. The tripwire is gone. Maintenance covenants once forced an early conversation when a business started deteriorating — giving lenders leverage while something could still be salvaged. By the late 2010s, covenant-lite structures had become dominant across leveraged lending, and in private credit the erosion went further still. Lenders don’t discover problems early anymore. They discover them when the business is already in freefall.

2. The collateral is softer than it looks. Traditional secured lending was grounded in hard assets: real estate, equipment, inventory, receivables. When values fell 40 or 50 percent, there was still something to foreclose on and recover. The bulk of modern private credit is underwritten against enterprise value — the going-concern worth of software businesses, healthcare-services platforms, professional-services firms. Assets that walk out the door at five o’clock. When earnings weaken, that collateral can prove far less durable than traditional lenders once assumed. It is not secured lending in any classical sense. It is equity risk wearing a debt label.

3. The interest is not always real. Payment-in-kind structures allow borrowers to roll interest into additional principal rather than paying it in cash. PIK can be a legitimate tool in growth-stage financing. It becomes a warning sign when borrowers can’t comfortably service debt in cash — and that is exactly what the Lincoln data is showing. At 6.4 percent of private-debt volume, distressed PIK activity is making reported income look better than underlying repayment quality warrants. Add in adjusted EBITDA figures that frequently include projected synergies and recurring “one-time” charges, and real leverage on many deals is meaningfully higher than what was underwritten.

“Traditional collateral falls 40 percent and there’s still something left. Enterprise-value collateral can go from impaired to worthless before the lender has finished reading the borrower’s explanation.”

WHAT IS HAPPENING NOW Defaults are rising. Refinancing conditions are harder. Investors are scrutinizing marks, liquidity, and sector concentration in ways they weren’t two years ago. Fitch’s 5.8 percent default figure reflects actual trailing performance. UBS’s 13 to 15 percent scenario is a downside case, not a base forecast — but the direction both point is the same. The Lincoln data on distressed PIK confirms that a meaningful share of borrowers are not generating sufficient cash to service their obligations and are deferring rather than paying.

The macro backdrop compounds the pressure. The OECD cut its U.S. growth forecast to 1.5 percent for 2026, weighed down by tariff drag and policy uncertainty — a punishing environment for highly leveraged mid-market borrowers. Surveyed forecasters put recession odds at 45 percent. Against a portfolio built on enterprise-value collateral and covenant-lite terms, those numbers are not background noise. They are the test.