Private Credit Strains Under Rising Unrealised Losses

Aggregate unrealised losses at U.S. business development companies climbed to 2.35% of net asset value in the first quarter of 2026, marking the sharpest quarterly decline since 2022. This deterioration highlights growing pressure on middle-market borrowers struggling to navigate sustained high borrowing costs and cooling exit environments.

The financial health of private credit lenders is increasingly under the microscope as portfolios face a dual strain of deepening markdowns and persistent non-cash interest income. Data from 51 business development companies reveals that payment-in-kind interest, which allows borrowers to defer cash payments, reached $477 million in the quarter. While this reflects a slight dip from the $633 million peak seen in early 2025, it remains elevated, signaling that many borrowers are still relying on debt deferrals rather than cash generation.

Individual filings with the Securities and Exchange Commission underscore the variance in exposure across the sector. Investcorp Credit Management BDC reported unrealised losses representing 16.8% of its net asset value, while FS KKR Capital Corp and Blue Owl Technology Finance saw hits of 6.7% and 6.5%, respectively. These figures do not equate to immediate defaults, but they reflect diminished recovery expectations and a direct reduction in reported asset values.

Market observers point to a convergence of factors exacerbating the trend. Renaissance Macro Research highlights that portfolios are entering their first genuine credit cycle since the 2008 financial crisis. Highly leveraged deals struck in 2021 are particularly vulnerable, especially those currently utilizing structures that capitalize interest. With liquidity concerns mounting, Fitch has cautioned that if cash earnings fail to keep pace with dividend requirements, the reliance on deferrable options could force a painful reckoning for BDC balance sheets.