Private credit lenders reported deeper unrealised losses in the first quarter, according to a Reuters review of regulatory filings, a development that highlights ongoing concerns about profitability and durability within the sector.
The Reuters analysis covered 51 business development companies, or BDCs, and found that aggregate unrealised losses amounted to 2.35% of their net asset value in the first quarter of 2026. That represents the steepest quarterly decline in the sample since the second quarter of 2022.
Independent research from Bank of America Global Research reached a comparable assessment. Their analysts concluded there is "a modest but unmistakable credit deterioration across the BDC complex and assets under management are not growing much." They noted that portfolio fundamentals had weakened across the group, citing more instances of earnings contraction than growth, leverage that was either stable or rising, and coverage metrics that varied inconsistently among firms.
"For investors, this argues against complacency: seasoning and slowing AUM growth are likely to expose more underlying stress over time, in our view," the BofA analysts wrote.
The Reuters study also documented a shift in the composition of interest income received by BDCs. A larger share of interest arrived in payment-in-kind, or PIK, form rather than as cash. PIK interest allows borrowers to defer cash payments by adding interest to their debt balances, a structure that can be indicative of borrower stress.
Measured within the filings, identifiable PIK interest income totaled about $477 million in the quarter. That figure was up about 2% from the prior quarter but remained below an early-2025 peak of about $633 million.
Meanwhile, the European Central Bank weighed in on the broader financial implications. In a report issued the same week, the ECB said the euro area is not confronting systemic risk as a result of the recent turbulence in private credit markets. However, it added that a few pockets of the financial system are exposed and that some tension may already be visible. The institution specifically warned about risks relating to interest payments.
The ECB framed this deterioration in interest-serving capacity more narrowly. "The ability of private credit-backed firms in the euro area to service interest payments from operating cash flows has deteriorated in recent years," the bank said. It contrasted that trend with firms financed through bank lending, noting the deterioration is also observable among companies funded via leveraged loans and high-yield bond markets but absent for bank-loaned firms.
Market participants are also watching investor behavior around private credit funds. Apollo Global Management’s President Jim Zelter told attendees at the Bernstein Strategic Decisions Conference in New York that he expects some wealthy investors to continue attempting withdrawals from certain private credit funds after several months of outflows.
"I don’t think it was a one-shot," Zelter said, referring to the redemption activity.
Zelter observed that underlying performance of the funds had been "solid" in March, April and May, but he cautioned against assuming a sharp drop in redemption attempts. Many managers offer to repurchase up to 5% of fund holdings per quarter, a mechanism Zelter said could create incentives for investors to try to time exits. He added that there "may be even a little bit of an increase if people want to game the system," and concluded, "we are not through the turbulence yet."
Collectively, the filings, analyst commentary and the ECB assessment underscore a combination of market and portfolio-level stresses: rising unrealised losses, more PIK interest flows, mixed coverage metrics, and limited growth in assets under management. These signals have prompted scrutiny from both analysts and regulators even as some managers report periods of solid underlying performance.
Context and implications
- Aggregate unrealised losses for the 51-BDC sample reached 2.35% of NAV in Q1 2026, the largest quarterly drop since Q2 2022.
- Identifiable PIK interest income in the quarter was about $477 million, up 2% from the prior quarter but below the early-2025 peak of about $633 million.
- BofA analysts reported modest credit deterioration in the BDC complex, noting weaker fundamentals, stable to rising leverage, uneven coverage metrics, and little AUM growth.
What remains uncertain
- Whether the observed unrealised losses and PIK trends will translate into realized losses over time as portfolios season and assets under management growth remains slow.
- The extent to which investor redemption activity will persist in private credit funds and whether buyback mechanisms will amplify trading behavior among investors.
- How the limited pockets of exposure identified by the ECB might develop, particularly in relation to firms that rely on private credit, leveraged loans, or high-yield bonds for funding.