The Puck Newsletter
Where Markets, Policy, and the Real Economy Converge
April 2026
 
The Golden Age is Over ~ Now We Find Out What Private Credit is Made Of

Default rates are climbing to levels the modern private-credit era has never seen. Payment-in-kind structures are papering over deteriorating borrowers. Tariffs, slowing growth, and 45% recession odds have arrived at exactly the wrong moment for a market built on enterprise-value collateral, covenant-lite terms, and a decade of cheap money.
The bill is arriving.
BY THE NUMBERS: APRIL 2026

• 5.8%  U.S. private-credit default rate   Fitch, trailing 12 months through January 2026 — the highest in Fitch’s data set
• 13–15%  potential default rate in a severe downside scenario   UBS — driven in part by AI disruption of software-heavy portfolios; not a base-case forecast
• 6.4%  “bad PIK” as a share of private-debt volume   Lincoln International, late 2025 — distressed deferrals, not growth-stage instruments
• 1.5%  OECD U.S. growth forecast for 2026   OECD — revised down as tariffs and policy uncertainty weighed on the outlook
• 45%  recession odds over the next 12 months   Wall Street Journal survey of economic forecasters, April 2026

THE COMFORTABLE STORY
There is a version of the private-credit story that sounds reassuring. Banks pulled back after 2008. Regulation tightened. Private capital stepped in. Credit kept flowing. Companies got funded. Markets adapted. The system worked.

That story is not false. It is incomplete. Over a decade of cheap money and light scrutiny, competition compressed spreads, weakened covenants, and rewarded marks that were harder to challenge than anything trading in public markets. The result wasn’t just a new funding channel. It was a system optimized to delay the recognition of stress.
  THE NUMBER YOU KEEP HEARING IS TOO NARROW
The figure most investors encounter — roughly $1.5 to $2 trillion — refers to direct lending specifically: bilateral loans made by firms like Apollo, Ares, Blackstone Credit, and Blue Owl, primarily to finance leveraged buyouts. It is a useful number for that slice. It is not useful for understanding total exposure.

Add infrastructure debt, real-estate credit, venture lending, mezzanine finance, distressed strategies, and specialty finance and you are already well past that figure. The broader non-bank credit ecosystem sits inside a far larger global non-bank financial universe — the Financial Stability Board puts total non-bank financial intermediation at approximately $63 trillion — where opacity, not any single headline number, is the central risk.

THREE STRUCTURAL FLAWS
This market was engineered for expansion. Three design flaws now converge to test whether it can survive a turn.

1.  The tripwire is gone.  Maintenance covenants once forced an early conversation when a business started deteriorating — giving lenders leverage while something could still be salvaged. By the late 2010s, covenant-lite structures had become dominant across leveraged lending, and in private credit the erosion went further still. Lenders don’t discover problems early anymore. They discover them when the business is already in freefall.

2.  The collateral is softer than it looks.  Traditional secured lending was grounded in hard assets: real estate, equipment, inventory, receivables. When values fell 40 or 50 percent, there was still something to foreclose on and recover. The bulk of modern private credit is underwritten against enterprise value — the going-concern worth of software businesses, healthcare-services platforms, professional-services firms. Assets that walk out the door at five o’clock. When earnings weaken, that collateral can prove far less durable than traditional lenders once assumed. It is not secured lending in any classical sense. It is equity risk wearing a debt label.

3.  The interest is not always real.  Payment-in-kind structures allow borrowers to roll interest into additional principal rather than paying it in cash. PIK can be a legitimate tool in growth-stage financing. It becomes a warning sign when borrowers can’t comfortably service debt in cash — and that is exactly what the Lincoln data is showing. At 6.4 percent of private-debt volume, distressed PIK activity is making reported income look better than underlying repayment quality warrants. Add in adjusted EBITDA figures that frequently include projected synergies and recurring “one-time” charges, and real leverage on many deals is meaningfully higher than what was underwritten.
  WHAT IS HAPPENING NOW
Defaults are rising. Refinancing conditions are harder. Investors are scrutinizing marks, liquidity, and sector concentration in ways they weren’t two years ago.
Fitch’s 5.8 percent default figure reflects actual trailing performance. UBS’s 13 to 15 percent scenario is a downside case, not a base forecast — but the direction both point is the same. The Lincoln data on distressed PIK confirms that a meaningful share of borrowers are not generating sufficient cash to service their obligations and are deferring rather than paying.

The macro backdrop compounds the pressure. The OECD cut its U.S. growth forecast to 1.5 percent for 2026, weighed down by tariff drag and policy uncertainty — a punishing environment for highly leveraged mid-market borrowers. Surveyed forecasters put recession odds at 45 percent. Against a portfolio built on enterprise-value collateral and covenant-lite terms, those numbers are not background noise. They are the test.

The market is also bifurcating. Large, diversified managers with deep borrower relationships and substantial liquidity are better positioned to work through problem credits. Smaller, more concentrated lenders who underwrote aggressively during the expansion years are facing a materially different situation. The era of undifferentiated private-credit outperformance is over.

THE PART PEOPLE ARE NOT SAYING OUT LOUD
If publicly traded vehicles are already showing stress — rising non-accruals, NAV pressure, elevated PIK income — the private portfolios behind them are in all likelihood worse. Public BDCs have to mark their books. Private funds do not. The stress visible in public markets is the floor, not the ceiling.

THE INCENTIVE TO SAY AS LITTLE AS POSSIBLE
The private-credit market has a structural preference for delay. Extend the maturity. Accept the PIK toggle. Waive the covenant. Mark the loan at par. Every one of those decisions defers recognition and preserves the appearance of stability — and the fee stream that comes with it.

This continues until it can’t. Forced selling — triggered by redemption pressure, insurance regulatory requirements, or a creditor unwilling to extend again — is when price discovery actually happens. The system doesn’t panic gradually. It delays, and then it doesn’t.

THE OPACITY IS THE RISK
What makes private credit genuinely difficult to analyze — and genuinely difficult to manage systemic risk around — is not only credit quality but visibility. Portfolio valuations are typically model-based, set quarterly, with limited external validation. Many end investors receive summary-level information rather than loan-level transparency.

The disclosure picture varies significantly by structure. Publicly traded BDCs — Business Development Companies that file with the SEC and trade on exchanges — are required to report regularly and mark their portfolios publicly. That makes them a useful, if partial, stress barometer: watch non-accruals, net asset value pressure, PIK as a share of income, and changes in borrower leverage or interest coverage.

Non-traded BDCs carry some SEC registration requirements but offer far less market transparency than their publicly traded counterparts — less frequent reporting, less scrutiny. And a large share of private credit doesn’t flow through BDCs at all: private funds, separately managed accounts, and CLOs operate with disclosure that ranges from limited to none. The pensions, endowments, and insurance companies at the end of the capital chain often know considerably less about underlying loan quality than the managers who originated and continue to value those loans.

Insurers deserve particular attention. Life and annuity companies have been significant allocators to private credit, with holdings that have grown substantially over the past decade. Their statutory filings are one of the more visible windows into how stress is accumulating in the institutional end of the market.

WHAT TO WATCH OVER THE NEXT 12 MONTHS

• Public BDC filings and earnings calls.  Non-accruals, NAV pressure, PIK as a share of investment income, and shifts in borrower interest coverage are the most reliable public signals of where private-credit stress is accumulating. Publicly traded BDCs are imperfect barometers — they represent a fraction of the market — but they are the most transparent slice available.
• Insurance company statutory filings.  Shifts in watch-list assets or valuation pressure at life and annuity insurers can surface before the broader market focuses on them. These are large holders with long-dated liability matching strategies and limited ability to move quickly.
• Amend-and-extend activity.  More maturity extensions, covenant waivers, and PIK conversions point to credit problems being deferred rather than resolved. Rising volume here is the clearest sign that extend-and-pretend has become the operating model.
• Sector concentration in software.  AI disruption is the specific reason UBS flagged a severe downside scenario. Private credit portfolios with heavy software exposure face a structural headwind that goes beyond the normal credit cycle. The enterprise-value collateral in those deals is particularly vulnerable to earnings compression driven by technology substitution.

Private credit may yet navigate this cycle without a systemic break. Direct lenders do have closer borrower relationships than public markets allow, and faster intervention when things go wrong. That is a genuine structural advantage.

But those same lenders originated the loans, set the valuations, and collect management fees regardless of how the cycle ends. The pension beneficiaries and insurance policyholders at the far end of the capital chain have no equivalent advantage — and considerably less information.

The question was never whether private credit replaced banks. The question is whether the pension funds, endowments, and policyholders at the end of the chain were ever adequately compensated for the opacity, the weakened covenants, and the marks that become impossible to defend exactly when they need to be.

In private credit, the risk was never the loans. It was the illusion of stability.

Is the largest financial bubble in history hiding in plain sight?

In this episode of The Puck, Jim sits down with veteran market analyst Doug Noland, a longtime chronicler of credit cycles and financial bubbles. Noland argues that today’s risks aren’t just about stocks, crypto, or housing—they’re embedded in the very structure of the global financial system. Whether you believe a crisis is imminent or not, this episode offers a deep look at how modern financial systems actually work—and why the next disruption could be very different from the last one.

WE CAN ALWAYS DO MORE

 

This month The Puck is highlighting Citizens for Animal Protection (CAP).

In 1972, a group of concerned Houstonians founded CAP in response to the pervasive problem of thousands of neglected and abused animals in Harris County. CAP is committed to sheltering, rescuing and placing homeless animals in loving homes. 39 years later, after operating in a strip center, CAP has moved into their very own animal shelter facility. CAP advocates respect and compassion for all animal life - speaking for those who cannot speak for themselves. CAP also provides humane education to prevent animal cruelty and raise awareness in the community of the needs of animals.

CAP is a 501(c)(3) organization