HLI Flags Rising Stress Among Smaller Private-Credit Borrowers

Houlihan Lokey, Inc. HLI recently announced that private-credit stress is rising, but the problem is more concentrated among smaller borrowers. In second-quarter 2026, borrowers with less than $100 million of EBITDA posted default rates of 3% by loan value and 3.6% by borrower count. The weakest group is companies with $10 million to $20 million of EBITDA, where 12% of loans now trade below 90% of par compared with roughly 1% in 2023.

However, larger borrowers remain healthier overall. As such, HLI expects borrower size to remain a key dividing line for credit performance through the rest of 2026. Private credit can look healthy in aggregate while masking sharper trouble underneath. Across the full market, defaults were only 0.8% of outstanding principal, yet 2.5% of borrowers were in default, showing how larger loans distort the headline picture.

Healthcare showed the clearest stress, with defaults at 4.2% by borrower count and 2.7% by loan value. Consumer defaults were 3.6% by count but only 0.7% size-weighted. Meanwhile, software had among the lowest default rates in HLI's dataset, while median EBITDA for these borrowers is 20% above the level when the loans were originated.

Still, fundamentals remain supportive; median revenues rose 6.5% and EBITDA increased 7.4% year over year. For Houlihan Lokey, the trend could support demand for valuation, restructuring and capital-solutions work as lenders reassess portfolios and weaker borrowers seek help.

For the industry, the message is more important, lenders may tighten underwriting, demand better pricing and monitor smaller borrowers more closely. Rising marks below par can pressure fund returns and increase amendment or restructuring activity. Yet risk remains contained, with amended PIK representing only 1.6% of interest dollars and more than two-thirds of borrowers still growing revenues and EBITDA.

HLI’s Price Performance

Houlihan Lokey’s shares have decreased 22% in the year to date compared with the 10% decline of the industry it belongs to.

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Zacks Rank & Key Picks

Houlihan Lokey currently carries a Zacks Rank #5 (Strong Sell).

Investors interested in the broader Finance space can consider some better-ranked companies like Chime Financial, Inc. CHYM, PJT Partners Inc. PJT and Axos Financial, Inc. AX. While Chime Financial currently sports a Zacks Rank #1 (Strong Buy), PJT Partners and Axos Financial have a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus mark for Chime Financial’s current-year earnings is pegged at 44 cents per share, indicating 110.3% year-over-year improvement. Its earnings beat estimates in each of the past four quarters, with an average surprise of 303.3%. Furthermore, the consensus estimate for CHYM’s current-year revenues suggests 26.1% year-over-year growth.

The Zacks Consensus Estimate for PJT Partners’ current-year earnings is pegged at $8 per share, signaling a 14.6% year-over-year growth. Its earnings beat estimates in each of the past four quarters, with an average surprise of 19.1%. Also, the consensus mark for PJT’s revenues in the current year is pegged at $1.98 billion, suggesting 15.5% year-over-year growth.

The Zacks Consensus Estimate for Axos Financial’s current-year earnings is pegged at $9.59 per share, which indicates a 9.7% year-over-year increase. It has witnessed two upward estimate revisions against none in the opposite direction in the past 60 days. AX’s earnings beat estimates in three of the past four quarters and missed once, with an average surprise of 6.7%.

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Houlihan Lokey, Inc. (HLI): Free Stock Analysis Report

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This article originally published on Zacks Investment Research (zacks.com).

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