Private credit defaults are 0.8 percent of the market. Below 100 million dollars of EBITDA they are 3.0 percent.

How much worse are defaults at the smaller end of private credit?

Nearly four times the whole-market rate on loan principal, on our arithmetic. Houlihan Lokey's Private Credit DataBank, in a release of 10 September 2026, puts second-quarter defaults among borrowers with less than 100 million dollars of EBITDA at 3.0 percent size-weighted and 3.6 percent by count, against 0.8 percent and 2.5 percent for the whole market.

The two measures answer different questions. Size-weighted defaults are measured on loan principal outstanding, so the largest borrowers dominate them; the count treats every borrower equally. The wide gap between 0.8 percent and 2.5 percent across the whole market is the size divide showing up in a single pair of numbers: many small loans are in default, and a few very large ones are not.

Houlihan Lokey's definition is broad. Its default measure captures technical defaults as well as payment defaults, which is why it runs above payment-only series. It also describes the less than 100 million dollar band as the bulk of the direct lending market, which is where nearly every founder-owned or sponsor-backed middle market company borrows.

By sector, the release finds stress concentrated rather than general. Healthcare was the only industry elevated on both measures, at 4.2 percent by count and 2.7 percent size-weighted. Consumer defaults ran at 3.6 percent by count but 0.7 percent size-weighted, a gap that again points to smaller borrowers.

Where are lenders marking loans down?

Mostly at the bottom of the size range, and now in the core as well. Houlihan Lokey finds 7 percent of all private loans priced below 90 percent of par in the second quarter, more than double the historical average. Among borrowers with 10 million to 20 million dollars of EBITDA the share is 12 percent, up from roughly 1 percent in 2023.

The newer development is one band up. Six percent of loans to borrowers with 20 million to 100 million dollars of EBITDA are priced below 90 percent of par, the highest level in three years. Above 100 million dollars of EBITDA the share is 3 percent.

This is not a story about deteriorating companies in general. The same release reports median revenue growth of 6.5 percent and median EBITDA growth of 7.4 percent year over year, more than two thirds of borrowers growing both, and leverage in line with historical levels. The average borrower is doing better. The dispersion around it, by size, is wider.

One other index points the other way, and it is worth knowing why. Proskauer's documentation-default index, published on 28 July, had defaults below 25 million dollars of EBITDA falling to 1.9 percent in the second quarter. It uses a different definition, a different loan set and a different size band. Two credible series can move in opposite directions in the same quarter, which is a reason to ask a lender which one it is reading.

Is the rise in PIK a sign of distress?

Mostly not, on Houlihan Lokey's evidence, and the distinction matters to a borrower negotiating one. The share of loans carrying a PIK option reached a new high in June 2026, but in the second quarter only 11.8 percent of loans on a size-weighted basis elected to pay any interest in kind, and those elections were 6.3 percent of total interest dollars.

The figure Houlihan Lokey treats as the closest proxy for borrower stress is amended PIK, where the feature was added after the loan closed. It accounted for 1.6 percent of interest dollars in the quarter. A PIK option written into the original terms is a structuring feature; one negotiated in later is a signal to every party that reads the loan file.

That difference is practical, not academic. A borrower that expects uneven cash flow, from a build-out, a contract ramp or seasonality, is far better placed asking for a PIK option at closing, while options are plentiful, than asking for one as an amendment when the cash is already short. The first costs a spread. The second costs a mark.

What should an owner or a sponsor do with this?

Assume the lender is reading the band before it reads the company. For a business below 100 million dollars of EBITDA, and especially below 20 million, the portfolio a lender is managing has more loans in default and more marked below 90 than it did three years ago. Credit committees respond to that with tighter amendment terms, even for borrowers that are performing.

Refinance from strength, and early. A company that is growing and inside its covenants has something the band as a whole does not, and the time to put that in front of lenders is well before a maturity or a test date, when the conversation is about terms rather than forbearance.

Negotiate the flexibility into the first document. PIK options, covenant headroom, equity cure rights and a sensible definition of EBITDA are cheapest when they are part of the original structure. Each of them requested later reads as stress, and in the smaller bands a lender's appetite to grant them is being set by its other borrowers.

Sponsors should watch the core band. Stress reaching 20 million to 100 million dollar EBITDA borrowers matters to anyone holding a platform there or planning to sell into it, because a buyer's lender will apply the same caution to the next capital structure, and that shows up in the leverage offered and so in the price.