The numbers coming out of business development company filings this spring are worth reading carefully. A Reuters analysis of 51 BDCs found that aggregate unrealized losses hit 2.35 percent of net asset value in Q1 2026, the steepest quarterly markdown since Q2 2022. That’s not just a problem for private credit investors. It’s a signal about the health of the middle-market companies that BDCs lend to, and those are the same companies that trade creditors extend open credit to every day.
What does the BDC data actually show?
Unrealized losses at that level reflect portfolio markdowns, assets being written down because the underlying borrowers are under financial pressure. At the same time, payment-in-kind (PIK) interest income among the 51 BDCs analyzed came in at roughly $477 million in Q1, up slightly from Q4 but down from a peak of around $633 million in early 2025. PIK interest means a borrower is deferring cash interest, rolling it into the principal balance instead of paying it. When a company can’t pay cash interest, it’s drawing down on its financial runway.
The portfolio markdowns are not evenly distributed. U.S. News reported that more than 10 percent of private-credit loans have been marked down by at least 50 percent. In smaller private-debt funds, that figure climbs to 13 percent of loans valued below 50 cents on the dollar.
What is driving the stress in private credit?
The pressure is a familiar combination. Highly leveraged deals originated in 2021 when borrowing costs were near zero and exit multiples were high, now face a different environment. Rates stayed higher for longer than most models assumed, weaker M&A activity has constrained refinancing options, and in sectors like software, AI-driven competition has compressed valuations on deals that assumed stable growth.
Morgan Stanley has warned that direct lending default rates, currently running around 5.6 percent, could climb to 8 percent, well above the historical average of 2 to 2.5 percent. Non-accrual rates at lower-middle-market lenders that chased yield aggressively in 2024 are approaching 5 percent. According to Credit Crunch analysis, upper-middle-market defaults are doubling on a quarterly basis.
Why is the FSB raising the alarm now?
This isn’t only a domestic concern. In May 2026, the Financial Stability Board issued a formal warning on vulnerabilities in the private credit market, which now holds an estimated $1.5 to $2 trillion in global assets. The FSB flagged concentrated sector exposure, opaque multi-layered leverage structures, and data gaps that make it difficult for regulators to assess how stress might transmit across the financial system.
One finding stood out: in early 2026, several private credit funds received redemption requests exceeding their stated withdrawal limits. Cliffwater’s $33 billion private credit fund saw redemptions reach 14 percent of NAV. CNBC’s coverage of the FSB report noted that the FSB’s concern extends beyond the funds themselves, the interconnections between private credit and traditional bank financing ($220 billion in drawn and undrawn bank credit lines, likely much more) mean that stress in private credit can travel.
What does this mean for businesses with trade credit exposure?
Middle-market companies, the core borrowers in private credit, are also customers of trade creditors. When a company is servicing debt with PIK interest and seeing its credit facility marked down, it’s under a kind of financial pressure that eventually shows up in its payment behavior to vendors and suppliers. The sequence isn’t immediate, but it’s consistent: capital structure deterioration precedes late payments, and late payments precede defaults.
For businesses with receivables exposure to middle-market companies particularly in healthcare, software, and services, which are the sectors with the highest private-credit concentration, the BDC data offers an early warning that wouldn’t appear in a traditional credit score or payment history. A customer that is current on trade payables today may be working through a capital structure that is quietly under stress.
For lenders with direct exposure to leveraged borrowers, the picture is more immediate. Nonpayment insurance and lender insurance programs exist for exactly this kind of environment, where credit quality is eroding before a formal default event.
What should trade creditors do with this information?
The right response isn’t to freeze credit across the board. It’s to make sure current exposure decisions reflect current conditions rather than the assumptions that made sense in 2021. That means reviewing open credit limits for customers operating in sectors with concentrated private-credit exposure, and pressure-testing receivables against a scenario where default rates continue rising.
Trade credit insurance provides a mechanism for maintaining commercial relationships while transferring the tail risk of buyer default. In an environment where the private credit data is flashing caution signals about middle-market borrowers, reviewing your current coverage and open limits is a reasonable place to start.
Disclaimer
This blog post is meant to be informative and provide helpful tips and insights into credit insurance policies. It is not meant to supersede any policy requirements. Please consult your credit insurance policy for all requirements including claim filing deadlines and required documentation.
Since 2004, Securitas Global Risk Solutions, LLC has helped clients develop trade credit and political risk transfer solutions. As an independent brokerage, Securitas is focused on developing comprehensive solutions that meet client needs, ensuring a complete understanding of policy wording and delivering excellent responsive service.
Sources
Reuters/MarketScreener – Unrealized losses at U.S. private credit lenders deepen
U.S. News – Private Credit Roundup: Paper Losses Deepen at Lenders
Financial Stability Board – FSB Warns on Private Credit Vulnerabilities (May 2026)
FSB – Report on Vulnerabilities in Private Credit (PDF)
CNBC – Financial Stability Board sounds alarm on private credit stress
Credit Crunch – Upper middle market defaults are doubling every quarter
Prism News – U.S. private credit lenders post worst unrealized losses since 2022
Searles Valley Minerals Bankruptcy: What Suppliers Need to Know
First Brands Liquidation Plan: What It Means for Creditors 
Brightline’s DIP Financing Race for Corporate Creditors