(Bloomberg) — The default rate among private-credit borrowers has reached the highest in the roughly three-year history of an index from Kroll Bond Rating Agency LLC, adding to signs of stress in the $1.8 trillion industry.
The trailing 12-month default rate in the KBRA DLD Direct Lending Index rose to 2.3% of issuers as of Monday, matching the highest level since the gauge’s inception, according to data from the ratings and analytics company. The firm expects the rate to keep rising, ending 2026 at 3.5%, or roughly 111 issuers.
The index launched in December 2023 with a default rate also at 2.3% of issuers, a level it hadn’t reached again until now. It contains around 3,000 issuers totaling $300 billion in business-development company holdings.
By volume of loans, KBRA DLD expects 2.5% of the gauge to default in 2026, up from 1.4% in 2025. That would amount to $7.6 billion of loans this year, up from $4.3 billion in 2025.
The uptick comes against a backdrop of elevated borrowing costs as inflation remains hot in the wake of the US-Iran war, which boosted energy costs. Concerns have also been swirling around direct lenders’ underwriting standards and exposure to software businesses at risk of being disrupted by artificial intelligence.
Redemption requests are expected to climb across the industry as investors worried about defaults try to claw back money. Some private-credit funds have limited withdrawals, after investors attempted to take out roughly $13 billion from funds in the first quarter.
That pressure has extended to the current quarter as well, according to Bloomberg Intelligence analyst Michael Kaye. BlackRock Inc. capped redemptions from its flagship private credit fund for the second straight quarter, according to a filing last week.
Beyond default rates, implied recovery rates, which measure how much of a defaulted loan investors expect to recover, “are more worrisome,” said Eric Rosenthal, senior director at KBRA.
KBRA data shows unweighted implied recovery, which measures recoveries on an equal-borrower basis, was 46% in 2025, a figure that’s forecast to drop to 36% in 2026. The decrease implies small- and mid-sized borrowers are defaulting with increasingly poor recovery prospects.
Large borrowers are holding up better. Weighted implied recovery — recoveries based on debt size — was 47% in 2025 and is likely to rise to 50% in 2026, according to KBRA.
(Updates with when index last reached this level in third paragraph)
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