Moody’s says deferred interest is masking the real level of private credit stress

Borrowers in the US private debt market are using delayed interest payments and maturity extensions to avoid default, potentially masking the level of stress in the asset class, according to research from Moody’s Ratings reported by Bloomberg¹. Private Equity Wire, summarising the same research, described the mechanism as payment-in-kind amendments that mask US private credit stress and noted the implications for reported default rates².

A second measurement dispute surfaced the same week. Bloomberg reported that daily private credit valuations were blasted as an “illusion” after a move by Apollo, with the new daily marks slammed following the rollout, under the heading of murky default metrics⁴. A separate analysis argued that the data behind the sector’s default picture is missing, describing a default crisis whose scale an earlier instalment had set out⁶.

Why it matters to investors

Private credit is now a principal funding channel for corporate borrowers, and one financial adviser publication called it the market’s favourite source of capital⁵. If the headline default rate understates distress because borrowers are deferring cash interest rather than missing it, then spreads, marks and allocation decisions across the asset class are being set off an understated number^1,2.

The valuation question compounds the credit question. Daily marks that investors do not trust remove the one tool that would otherwise reveal deterioration between reporting periods⁴. Recovery assumptions are also contested: the same adviser publication noted that a good deal can be done after a default to recover a higher value than first appears, which cuts the other way and argues against reading a rising default count as a direct loss estimate⁵.

What to watch

Fund-level liquidity is the nearer-term pressure point. Redemption pressure at nontraded business development companies and other semiliquid private-credit vehicles has added to the anxiety in the sector, ABF Journal reported³. That is the channel through which a credit problem becomes a forced-selling problem³.

Issuance is the counter-signal. KBRA reported that structured credit issuance regained momentum despite macro uncertainty, and publishes a middle market default monitor alongside it⁷. Whether that issuance holds while Moody’s measurement concerns stand is the test^1,7. ABF Journal also cautioned against treating the sector as one thing, arguing that venture debt defies broad labels, so stress may show up unevenly rather than across the whole asset class at once³.