Unrealised losses across U.S. private credit lenders deepened in the first quarter of 2026, reaching the most severe quarterly level recorded since the second quarter of 2022, according to filings and data reviewed for this analysis. At the same time, interest earned in kind rather than paid in cash remained sizeable, highlighting areas of strain within the sector.
A review of 51 business development companies, or BDCs, shows aggregate unrealised losses equalled 2.35% of net asset value (NAV) in the first quarter of 2026. Those markdowns came alongside still-elevated payment-in-kind, or PIK, interest income. PIK arrangements permit borrowers to defer cash interest payments by adding the unpaid interest to the outstanding debt balance.
Identifiable PIK interest income for the quarter amounted to about $477 million, up roughly 2% from the prior quarter but below an early-2025 peak near $633 million. Taken together, the rising share of non-cash interest receipts and deeper portfolio markdowns indicate stress manifesting in multiple measures across private credit holdings.
Unrealised losses reduce reported NAV and can reflect expectations of lower recoveries, but they are not the same as defaults. Some markdowns could be reversed if conditions change, while others may become realised losses if borrowers ultimately fail to meet obligations.
SEC filings for individual BDCs show particularly large unrealised markdowns at several firms. Investcorp Credit Management BDC reported unrealised losses amounting to 16.8% of NAV. FS KKR Capital Corp recorded unrealised losses of 6.7% of NAV, and Blue Owl Technology Finance reported unrealised losses equal to 6.5% of NAV.
The same regulatory filings detail PIK receipts at specific managers. Ares Capital Corporation reported $54 million in PIK interest income in the first quarter. FS KKR Capital listed $38 million of PIK income, while Blue Owl Capital Corp recorded $31.5 million.
Ratings firm Fitch has cautioned that growing exposure to loans with deferrable or PIK options could strain BDC liquidity if cash earnings prove insufficient to meet dividend commitments. That warning points to a potential channel by which non-cash interest accruals could create near-term cash flow mismatches for vehicles that distribute income to investors.
Commenting on the broader cycle, Howard Mason, head of financial research at Renaissance Macro Research, said: "Private credit is entering its first real credit cycle since the GFC (Global Financial Crisis)." He added that "higher borrowing costs, weaker exit markets and AI-related pressure on software valuations are straining highly leveraged 2021 deals, especially those using PIK structures to defer cash interest."
Implications for markets and sectors
- Middle-market lending and private credit vehicles are under closer investor scrutiny as higher rates and valuation pressures reveal strains in portfolios.
- Investors in non-traded BDCs may face heightened attention to NAV volatility, PIK exposure and liquidity if cash earnings do not cover distributions.
- Industries with leveraged deals completed in 2021, including certain software assets, are specifically noted as under pressure from valuation changes.