Rising non-accruals signal growing risk in private credit

Rising non-accruals signal growing risk in private credit

Sebastian Kian

Wed, August 19, 2026 at 6:03 PM GMT+3 8 min read

Private credit is entering a more challenging phase as non-accruals and other signs of borrower distress rise.

The industry has enjoyed years of strong growth, supported by expanding assets under management, robust investment activity and attractive returns for investors. But the credit cycle is turning. The latest LCD data suggest that rising borrower distress is becoming a more meaningful feature of the market.

In this report, LCD examines non-accrual exposure (see Footnote 1) across the BDC market, beginning with a quick update on Q2 figures from the ten largest publicly traded BDCs, followed by a comprehensive analysis of non-accrual exposure across all registered US-based BDCs over the past three years, covering 213 distinct BDCs managed by 109 managers, representing an aggregate debt portfolio of $516 billion as of Q1 2026.

Key Takeaways

• Reported non-accrual debt rose to 1.9% of total debt at cost in Q1, up 52 bps from the prior quarter.

• Non-accrual borrowers rose to 4.69% of all borrowers in Q1, up from 4.26% in the year-ago equivalent period.

• Adjusted non-accrual exposure, counting all debt owed by borrowers with at least one non-accrual tranche, rose to 3.3% of total debt at cost in Q1, up 116 bps from the prior quarter.

• Across the ten largest public BDCs, reported non-accrual debt rose to 3.95% of total debt at cost in Q2, up 20 bps from the prior quarter, while adjusted exposure for the period rose 54 bps to 5.95% on the same basis.

Non-accrual levels increase at the top ten public BDCs in Q2
While not all BDCs have reported Q2 results, the ten largest publicly traded BDCs (Footnote 2) have, providing a useful proxy for the broader market. Analysis of the results confirmed that credit risk continued to build during the latest quarter, with non-accrual exposure increasing across every measure.

Debt tranches in non-accrual status at the top ten BDCs rose to 3.95% of total debt at cost in Q2, up 20 bps from the prior quarter. The balance increased slightly, by $89 million, to $3.3 billion in the latest quarter, despite a 2.3% contraction in the overall debt portfolio, which brought total debt at cost down to $83.6 billion.

Counting all debt tranches, performing and non-accrual, owed by borrowers with at least one non-accrual tranche, exposure at cost reached $5.0 billion, or 5.95% of total debt in Q2, an increase of 54 bps from the prior quarter.

The story is also similar by borrower count: The number of distinct borrowers (Footnote 3) with at least one tranche in non-accrual status rose by 11 over the quarter, to 101.

BDC universe — Q1 2023 through Q1 2026
Turning to the wider BDC universe, more borrowers have fallen into non-accrual status. The number of borrowers with at least one debt instrument in non-accrual status reached 356 in Q1 2026, representing 4.69% of all borrowers, up from 4.26% a year earlier. This share has risen steadily over the past three years, increasing from 3.69% in Q1 2023.

Non-accrual debt exposure is on the rise
We compare non-accrual metrics on an as-reported basis with those on an adjusted basis. In the adjusted view, we treat a borrower's entire debt amount, whether it is performing or not, as non-accrual whenever at least one BDC reports at least one of that borrower's debt instruments to be in non-accrual status. This approach highlights the additional credit risk exposure for BDCs, which as-reported figures alone may understate.

As-reported non-accrual basis: While US-registered BDC funds have more than doubled over the past three years to an overall portfolio size of about $516 billion of debt at cost as of Q1 2026, the amount of debt for non-accrual borrowers has more than tripled over the same period.

The non-accrual share remained within a narrow 1.3-1.5% band until Q1 2026, when it increased 52 bps to 1.9% from Q4 2025. In dollar terms, non-accrual debt rose 39%, or nearly $2.8 billion, in Q1 alone, bringing the total to roughly $10 billion. This compares to just a 1% increase in total debt investments held by BDCs in Q1 2026 from Q4 2025 levels.

Adjusted non-accrual basis: The heightened credit risk exposure for BDCs is more pronounced when viewed on an adjusted non-accrual basis.

In BDC reporting, it is not unusual to see a loan facility from a borrower placed on non-accrual status, while another loan in the borrower's debt structure isn't. Also, a BDC holding a pro rata share of the same loan might not have it as non-accrual, while another BDC does. These situations could cause the level of distress in the overall BDC portfolio to be underestimated if only the debt tranche placed on non-accrual is counted. It is the company itself that's in distress, and therefore, if it's unable to maintain the performance of a particular loan, then there is also a likelihood that other debt within its capital structure could be at risk.

As such, a key aspect of this analysis entails adjusting the definition of non-accrual status to extend it to all debt, performing or otherwise, of a borrower with at least one tranche of non-accrual debt. Under this lens, the distress borne by the non-performing loans extends to the borrower and carries through to the whole debt structure.

From this adjusted angle, non-accrual rates run higher. Over the three years leading up to Q1 2026 (at amortized cost), non-accruals across the BDC universe averaged 2.1% of total debt and stayed within a 2-2.4% range through year-end 2025. In Q1 2026, however, the rate jumped to 3.3%, an increase of 116 bps from Q4 2025 and 130 bps from the year-ago period. From a dollar perspective, the increase is even more striking. Adjusted non-accrual loans rose $6.1 billion to reach $17.3 billion as of Q1 2026, $7.3 billion more than the $10 billion in reported non-accrual debt. Two borrowers, Medallia and Inovalon, accounted for $4.4 billion of the Q1 2026 non-accrual total.

Interest income at risk is climbing
While borrowers could continue to pay interest on debt that is designated as non-accrual by the lender, more often than not, the investments are non-performing loans and in default or forbearance, with a likelihood of at least a partial loss for lenders. Any amount collected would accrue toward loan loss reserves.

Now, if a borrower is unable to remain current on one loan, there is a high likelihood that it cannot do so on its other debt. As such, if we consider the interest at risk on other debt held by BDCs, BDCs in the aggregate carry a risk of $772 million in interest that could imminently be in default.

As of Q1 2026, about $522 million in cash interest income is directly attributable to non-accrual loans, representing about 138 bps of $38 billion total cash interest income (Footnote 4) across all BDCs. Together with the additional $249 million in at-risk interest income from the adjusted method, the total interest exposure amounts to the aforementioned $772 million, or about 204 bps of the total cash interest income. This means the total cash yield would fall to 8.1% for Q1, from 8.3%.

Of note, this interest income calculation takes into account only tranches that report interest income. Of the $9.1 billion of debt (at principal) belonging to non-accrual borrowers, only $7.6 billion reports interest rates; the rest are reported with no interest rate.

The cash income at risk is small, at about 2% of total cash interest income, which seems low mainly because much of the debt owed by non-accrual borrowers (those with at least one tranche on non-accrual) is PIK (payment-in-kind) and, as such, does not show in the cash interest income figure. Counting both cash and non-cash income, the amount at risk is much higher.

The more relevant point is the trend: non-accrual exposure has been climbing, so while the current interest income impact could be considered manageable, the direction is a clear signal of rising credit risk.

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Non-accrual valuations are holding up
Once a loan converts to non-accrual, the question shifts from whether it pays interest to how much of the debt is recoverable, which brings us to valuations.

Valuations of non-accrual debt tranches (those directly tagged as non-accrual), measured by a fair-value-to-cost ratio, fell 144 bps to 55.8% in Q1 2026 from Q4 2025 levels, though the calculation is 370 bps higher than a year ago. At 55.8%, non-accrual tranches are marked roughly 43 percentage points below performing (ex-non-accrual) tranches, which currently sit at 98.8% of cost. These figures cover only loans that report both a cost and a fair value, so the gap is not skewed either way.

Notably, the gap between the two categories is near its narrowest measurement in at least three years (only Q4 2025 was lower, at 42.4 percentage points), reflecting that non-accrual marks have actually improved over the past year even as the balance has grown. However, the improvement should take into account debt paydowns as well as loan write-offs and exits as portfolio managers restructure these loans through workout strategies, determine recovery prospects and take proper actions to write off losses and build loan loss reserves.

Looking ahead
For the rest of 2026, will we see heightened credit risks for BDCs? And with the top ten BDCs already surpassing 5% in non-accruals on an adjusted basis, will the remaining BDCs that have yet to file follow suit? We do note that any change in the status of a few large non-accrual borrowers, especially in light of Medallia's recent restructuring and ownership handover to the lender, might impact non-accrual rates by amount, although by count, the impact is minimal. We will answer these questions in our next report, once all the data is in.

Footnotes:
1. A loan is placed on non-accrual when the lender has a reasonable doubt that the principal or interest will be collected in full. Because each BDC makes this determination itself, the designation reflects management's judgment rather than a mechanical test. However, it is one of the clearest signals that a lender gives that a borrower is in distress.

2. The ten largest publicly traded BDCs by amortized cost of investments are Ares Capital Corp. (Nasdaq: ARCC), Blackstone Secured Lending Fund (NYSE: BXSL), FS KKR Capital Corp. (NYSE: FSK), Golub Capital BDC Corp. (Nasdaq: GBDC), Goldman Sachs BDC Inc. (NYSE: GSBD), Main Street Capital Corp. (NYSE: MAIN), MidCap Financial Investment Corp. (Nasdaq: MFIC), Morgan Stanley Direct Lending Fund (NYSE: MSDL), Blue Owl Capital Corp. (NYSE: OBDC), and Sixth Street Specialty Lending Inc. (NYSE: TSLX).

3. Borrowers include operating companies as well as funds, joint ventures, CLOs and other investment vehicles, which individual BDCs may classify differently.

4. The yield has been noted as BDCs report quarterly results. For those not reporting all-in yield, it is calculated by adding the base rate to the stated spread.

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This article originally appeared on PitchBook News