Fitch's Record 6.3% Private Credit Default Rate Is "Dominated by Soft Defaults" — and the Measurement Debate Widens
Fitch's US Private Credit Default Rate (PCDR) reached a record 6.3% for the trailing 12 months ended August 2026 (up from 6.1% in July) — the highest in the three years Fitch has tracked the space — with 14 private credit default events in August, the highest monthly tally in the past year, up from three in July. The trigger level this topic watches (PCDR ≥ 6.5) has not been hit, but the composition and the measurement dispute around the number are now the real story.
How Fitch sees private loans at all (per FT Unhedged, Sept 23): it monitors two portfolios — middle-market loans originated by private credit managers and placed with insurance companies (which require ratings for regulatory reasons), plus loans bundled into tradeable CLOs that disclose constituent performance — together representing more than 1,650 borrowers. That sample may not represent the full $2tn market.
The "soft default" mechanics. Randy Schwimmer at Churchill Asset Management: "a default isn't the end of the story, it's often the start of negotiation… Restructurings nearly always happen around a conference table, not in front of a judge... Amend-and-extend agreements, PIK toggles, and equity cures all give companies lifelines to address underlying issues." Fitch explicitly includes soft defaults — PIK equity-for-interest swaps and negotiated extensions — in its index. Fitch's Lyle Margolis: "the bottom line is pressure building in these portfolios and that is manifesting as higher defaults… the default rate is dominated by soft defaults1, but it's still a sign — if everything was fine, you wouldn't be seeing this."
Three drivers per Margolis: a wave of loans reaching maturity, higher rates (many borrowers carry 5–7 turns of floating-rate leverage), and a slowing middle-market M&A market that has closed the traditional "sell yourself out of trouble" exit.
The measurement dispute. While Fitch prints 6.3%, Houlihan Lokey puts the default rate below 1% when weighting loans by size, since the largest borrowers continue to perform — a gap of more than 6 percentage points between methodologies that makes "the" private credit default rate a matter of definition (borrower-count vs exposure-weighted; hard vs soft events).
Systemic read-through: M&G has called the high-yield bond market a "honey badger" that doesn't care about wars or rate hikes — and the FT suggests one reason public credit is so well-behaved is that private credit "may have taken on some of the more, erm, challenging credits and is propping them up when they stumble." Stress is being absorbed and deferred inside bilateral restructurings (see Distressed Restructurings May Have "Deferred" Private Credit Stress and Distressed Exchange Cohorts Face Hard Default Cliff as Private Credit Defaults Hit 5.8%) rather than surfacing as public defaults.
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An instance of Debt restructurings and double-pledged collateral obscure the true scale of private credit defaults. — PIK swaps and negotiated extensions defer rather than resolve borrower distress, so headline default rates obscure the true scale of credit stress. ↩︎