The default rate among private credit’s middle-market leveraged borrowers is set to increase in 2026, according to new analysis from ratings agency KBRA.
Although defaults in the private credit market have continued to sit below those seen in the broadly syndicated loan and high-yield bond markets, KBRA said the gap may “begin to close in 2026” as pressure builds across parts of the sector.
In its latest quarterly report, the agency reviewed data on 2,287 global middle-market, sponsor-backed borrowers assessed over the late 12 months.
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KBRA recorded just one payment default in the third quarter of 2025, while bankruptcy filings also declined. According to its middle market default monitor the rate contracted to 3.5 per cent by borrower count and 2.1 per cent of the roughly $1tn in notional debt outstanding.
However, the agency now expects the default rate to rise modestly next year as borrower credit fundamentals deteriorate. It pointed to a combination of weakening revenues, rising leverage, liquidity shortfalls and maturities across certain pockets of the middle market.
Downgrades have outpaced upgrades for seven consecutive quarters, leaving KBRA with an increasing number of borrowers rated CCC over the past year. The trend is “particularly acute” among consumer retail and healthcare roll-up borrowers, where a growing share have migrated into the CCC- band, it said.
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This is “a clear signal that pressure is building in certain segments of the direct lending market,” the agency said.
KBRA added that a softer macroeconomic backdrop or policy shifts that further squeeze margins could leave stressed borrowers facing higher refinancing hurdles and an elevated risk of default, “a force of reckoning for some”.
The challenge is likely to intensify as a sizeable cohort of borrowers approaches maturity walls.
Nearly 30 per cent of companies with debt maturing before the end of 2026 also carry leverage above 10 times or report negative EBITDA. All have been assessed at CCC+ or below, factors KBRA said could drive refinancing difficulties and contribute to a potential rise in defaults next year.
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