Private Credit Market Stress Rises as PIK Usage Hits Four-Year High: Lincoln International

Private credit borrowers' use of payment-in-kind (PIK) interest payments surged to an almost four-year high in Q2, with 11.4% of debt investments deferring cash payments. Lincoln International defines "bad" PIK as borrowers who started deferring interest payments during the loan term, which accounts for half of the total PIK usage. The firm's default rate for private credit rose to 3.4%, and its "shadow default rate" stood at 6%. The data suggests growing stress in the $1.7 trillion private credit market.

The private credit market experienced significant stress in the second quarter of 2025, as evidenced by a surge in payment-in-kind (PIK) interest payments and an increase in default rates. According to Fitch Ratings, the use of PIK interest payments surged to an almost four-year high, with 11.4% of debt investments deferring cash payments [1].

Lincoln International, a firm that tracks PIK usage, defines "bad" PIK as borrowers who started deferring interest payments during the loan term. This category accounts for half of the total PIK usage, indicating a substantial portion of the market is under stress [2].

The firm's default rate for private credit rose to 3.4%, and its "shadow default rate" stood at 6%. These figures suggest growing financial strain in the $1.7 trillion private credit market [1].

The second quarter also witnessed a 16% drop in debt issuance by the U.S. middle market, a cohort of middle-sized businesses that comprise the majority of private credit lending. The volume of new U.S. middle-market debt fell to $11.6 billion in the second quarter from $13.7 billion a year ago, according to Fitch Ratings [1].

Lyle Margolis, head of private credit, corporates at Fitch Ratings, noted that smaller, private issuers remain particularly vulnerable to economic swings, GDP slowdowns, and persistent elevated interest rates, especially given their floating-rate structures [1].

The financial strain is also evident in the performance of individual companies. Network-1 Technologies, for instance, reported a Q2 GAAP EPS of -$0.02, with no revenue for the three months ended June 30, 2025 [3]. The company also reported a net loss of $826,000 for the six months ended June 30, 2025, compared to a net loss of $1,578,000 for the same period in 2024 [3].

Institutional investors have also been active in the market. Cetera Investment Advisers raised its holdings in shares of Lincoln National Corporation by 32.7% during the first quarter [2]. The firm now owns 80,424 shares of the financial services provider's stock worth $2,888,000 as of its most recent SEC filing [2].

The increasing stress in the private credit market suggests that investors should be cautious and closely monitor the financial health of borrowers. The market's vulnerability to economic swings and rising interest rates could lead to further defaults and a potential slowdown in debt issuance.

References:
[1] https://www.reuters.com/business/us-corporate-defaults-private-debt-rose-q2-fitch-says-2025-08-11/
[2] https://www.marketbeat.com/instant-alerts/filing-cetera-investment-advisers-increases-stake-in-lincoln-national-corporation-nyselnc-2025-08-06/
[3] https://www.ainvest.com/news/network-1-technologies-reports-q2-gaap-eps-0-02-revenue-q2-2025-2508/