Private credit stress rises among small and middle-market borrowers

Stress within the private credit market is rising, particularly among the smallest borrowers. According to a Houlihan Lokey report, loans to companies with EBITDA between $10 million and $20 million have seen a sharp increase in value degradation, with 12 percent now valued below 90 percent of par, compared to approximately 1 percent in 2023.

Pressure is also extending into the core middle market. For borrowers with EBITDA between $20 million and $100 million, 6 percent of loans are priced below 90 percent of par, marking a three-year high. In contrast, larger borrowers with over $100 million in EBITDA remain more stable, with only 3 percent of loans falling below that threshold.

Default rates for borrowers with less than $100 million in EBITDA reached 3 percent on a size-weighted basis in the second quarter of 2026. The healthcare sector has shown elevated stress, recording a 4.2 percent default rate by borrower count.

While headline default rates in the wider market appear low, some analysts suggest the true level of distress may be higher. This is due to many troubled loans being classified as “distressed restructurings” rather than outright defaults, as lenders and borrowers renegotiate terms to avoid formal default status.