Private credit has grown into a $2 trillion industry over the past decade, financing software companies, healthcare rollups, and industrial firms. Fueled by ultra-low interest rates, post-2008 banking regulations, and yield-hungry investors, it became one of the most powerful forces in global finance. Now the environment that created it has reversed: rates are elevated, refinancing has become harder, and the first real signs of stress are emerging across the asset class.
The Big Concern: Defaults Are Rising — And May Understate True Stress
Recently, key rating agencies and financial institutions have been publishing important data that shows that the credit quality in private credit is worsening. In May 2026, Fitch Ratings reported that the U.S. private credit default rate hit a record high of 6.0% in April. The credit rating agency also estimated that private-credit-backed corporate borrowers experienced a 9.2% default rate in 2025.
Moody’s estimates that distressed restructurings — debt exchanges and maturity extensions agreed under duress — accounted for roughly 65% of all 2025 private credit defaults. Excluding them produces headline rates of 1.6%–4.7%; including them reveals a materially worse picture. Rising payment-in-kind income at business development companies is an additional early-warning signal.
Proskauer’s Private Credit Default Index, tracking 697 loans totaling $189.2 billion, recorded a 2.73% default rate in Q1 2026 — up from 1.84% just two quarters earlier. Bank of America’s credit strategy team has called private credit “the lowest quality asset class across our leveraged finance universe.”
Why Banks Are Exposed Even After Pulling Back From Lending
After 2008, regulators pushed banks out of risky middle-market lending — but banks never truly left the ecosystem. Instead they became behind-the-scenes financiers, providing subscription credit lines, warehouse financing, leverage facilities, and securitization support to private credit funds. By October 2025, Moody’s estimated that U.S. banks had extended nearly $300 billion in credit to private credit funds, Business Development Company (BDCs), and Collateralized Loan Obligations (CLOs).
The Financial Stability Board recently warned that global banks hold at least hundreds of billions of dollars in direct and indirect exposure to private credit funds. Several specific institutions have now disclosed or acknowledged losses. UBS disclosed more than $500 million in exposure to First Brands, whose late-2025 bankruptcy raised early alarms about underwriting standards. Jefferies Group revealed $715 million in what analysts called “questionable receivables” related to First Brands, after allegations that the company had borrowed against the same assets more than once. An additional $170 million in losses was tied to Tricolor, another distressed private-credit-backed borrower.
Larger banks have disclosed aggregate exposures with varying degrees of concern. JPMorgan Chase reportedly marked down some private credit loans; Moody’s put JPMorgan’s direct exposure at $22.2 billion by mid-2025. Deutsche Bank disclosed $30 billion in private credit exposure in March 2026, warning of “potential indirect credit risks through interconnected portfolios and counterparties” — a disclosure that contributed to a sharp decline in its share price. Wells Fargo noted that 17% of its $36 billion corporate debt portfolio carries software exposure. Citigroup reported no losses on its $22 billion corporate private credit book but flagged active monitoring. JPMorgan CEO Jamie Dimon warned in his 2026 shareholder letter that private credit losses will be “higher than expected” and criticized the industry’s lack of “rigorous valuation marks.” The Federal Reserve has since formally queried major banks about their private credit exposure.
The primary fear is not immediate bank failures, but contagion: if defaults accelerate, pressure could spread simultaneously through leveraged finance markets, regional banks, insurers, and pension funds.
Insurance Companies Quietly Became Major Players
Large insurers — particularly life insurers seeking long-duration yield — have become major allocators to direct lending, private asset-backed finance, structured credit, infrastructure lending, and middle-market loans. Several large alternative asset managers now operate closely tied insurance platforms, including Apollo Global Management and Athene, KKR’s insurance partnerships, and Blackstone’s growing insurance relationships.
The insurance industry’s private credit exposure has grown substantially and is now drawing regulatory scrutiny. Barclays analysis found that private credit assets held by U.S. life insurers grew more than 20% in 2025, reaching approximately 10% of total assets — and exceeding 15% for PE-affiliated insurers like Apollo-backed Athene and KKR-backed Global Atlantic. The insurance sector became one of the worst-performing segments of the U.S. investment-grade bond index in early 2026, with major insurer stocks trailing the S&P 500 materially through Q1. The Treasury Department has assembled a dedicated team to assess insurer exposure and plans to convene meetings with state insurance regulators on emerging risks. The IMF has separately warned that insurers holding complex, leveraged private credit instruments — often rated investment grade with reduced capital buffers — could face larger-than-expected losses in a stress scenario.
Concluding Thoughts
Private credit is not collapsing — but it is entering its first real stress test since becoming a core pillar of modern finance. The industry was built on cheap money: covenant-lite lending, aggressive EBITDA assumptions, and refinancing-dependent business models that looked viable at 1% rates look far weaker at 6%–7% financing costs. Unlike public loans, private credit is marked using internal models rather than market prices, potentially delaying recognition of losses. For banks, the risk is contagion through leveraged financing relationships. For insurers, it is illiquid investments, cash-flow uncertainty, and capital pressure. For all investors, the central question is whether private credit’s apparent stability reflects genuine resilience — or merely delayed recognition of losses. That distinction will determine whether the current cycle resolves as a manageable credit correction or becomes the first true crisis of the private credit era.
