Unrealised losses at US private credit lenders deepen

By Patturaja Murugaboopathy

May 29 (Reuters) – Unrealised losses at U.S. private credit lenders deepened in the first quarter to their worst level since 2022, while the amount of interest income they received in kind, rather than cash, stayed high, filings and data reviewed by Reuters showed.

Private credit has faced growing scrutiny as higher borrowing costs strain some middle-market companies and investors focus more closely on valuations, non-accruals and redemption requests at non-traded vehicles.

A Reuters analysis of 51 business development companies, or BDCs, showed aggregate unrealised losses equalled 2.35% of net asset value in the first quarter of 2026, the steepest quarterly hit since the second quarter of 2022.

The markdowns came as payment-in-kind, or PIK, interest income remained elevated despite easing from recent highs.

PIK allows borrowers to defer cash interest by adding it to debt balances. A separate Reuters analysis found identifiable PIK interest income totalled about $477 million in the quarter, up 2% from the previous quarter but below the early-2025 peak of about $633 million.

Together, the figures suggest stress is showing up in two ways: elevated non-cash interest income and deeper portfolio markdowns.

Unrealised losses are not defaults, but they reduce reported net asset value (NAV) and can reflect weaker recovery expectations. Some markdowns may reverse, while others can become realised losses if borrowers default.

Filings with the U.S. Securities and Exchange Commission show Investcorp Credit Management BDC recorded unrealised losses equal to 16.8% of NAV, FS KKR Capital Corp 6.7% and Blue Owl Technology Finance 6.5%.

Ares Capital Corp reported $54 million in PIK interest income in the first quarter, FS KKR Capital reported $38 million, and Blue Owl Capital Corp $31.5 million, the SEC filings also show.

Fitch has warned that rising exposure to loans with deferrable or PIK options could pressure BDC liquidity if cash earnings are insufficient to cover dividend payments.

“Private credit is entering its first real credit cycle since the GFC (Global Financial Crisis),” said Howard Mason, head of financial research at Renaissance Macro Research.

Higher borrowing costs, weaker exit markets and AI-related pressure on software valuations are straining highly leveraged 2021 deals, especially those using PIK structures to defer cash interest, Mason added in a note.

(Reporting by Patturaja Murugaboopathy; Editing by Vidya Ranganathan)