Stress among the smallest private credit borrowers has risen sharply over the past three years, new data shows.

Among borrowers with between $10m (£7.4m) and $20m of EBITDA, 12 per cent of loans are now valued below 90 per cent of par, a significant rise from around 1 per cent in 2023,  according to Houlihan Lokey’s Q2 2026 Private Credit DataBank Market Trends & Insights report.

Pressure is also beginning to spread into the core middle market, with 6 per cent of loans to borrowers with between $20m and $100m of EBITDA now priced below 90 per cent of par – the highest level in three years.

By contrast, just 3 per cent of loans to borrowers with more than $100m of EBITDA are priced below that threshold.

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Houlihan Lokey said default rates among private credit borrowers with less than $100m of EBITDA stood at 3 per cent on a size-weighted basis, and 3.6 per cent by borrower count in the second quarter of 2026.

Across the wider private credit market, however, defaults represented just 0.8 per cent of outstanding loan principal and 2.5 per cent of borrowers by count.

Dr Cindy Ma, managing director and global head of portfolio valuation and fund advisory services at Houlihan Lokey, said: “Default levels have picked up from recent quarters among borrowers with less than $100 million of EBITDA. That is where much of the direct lending market operates.

“But the increase is concentrated, not broad. When one weights the full market by loan size, defaults remain below 1 per cent because the largest borrowers continue to perform. We expect this divide by borrower size to define the market through the balance of the year.”

Healthcare was the only sector showing elevated stress on both measures, with a 4.2 per cent default rate by borrower count and 2.7 per cent on a size-weighted basis.

Houlihan Lokey also found that use of payment-in-kind (PIK) interest remained relatively contained despite PIK options becoming more common.

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In the second quarter, 11.8 per cent of loans on a size-weighted basis elected to pay at least some interest in kind, representing 6.3 per cent of total interest dollars.

Amended PIK, where the feature is added after origination and which Houlihan Lokey considers a closer indicator of borrower stress, accounted for 1.6 per cent of interest dollars.

Timothy Kang, managing director in Houlihan Lokey’s portfolio valuation and fund advisory services practice, said: “A PIK option is a structuring feature, and not necessarily a distress signal, and the two get conflated.

“PIK option availability is at a record high, but election is modest and the interest dollars involved are smaller still. The measure we watch is amended PIK, where the feature was added after origination. At 1.6 per cent of interest dollars, that signal remains contained.”

Borrower fundamentals remained resilient overall, with median revenue up 6.5 per cent year-on-year and median EBITDA rising 7.4 per cent. More than two-thirds of borrowers recorded growth in both revenue and EBITDA.