Private market investors have been warned that the build-up of recent defaults means that underlying pressures have been delayed rather than resolved.
In a new report, David Hamilton, head of asset management research at Moody’s Analytics Asset Management Research, said credit risk headlines are “going in the right direction” and that “on the surface things look calm”.
However, he pointed to the “historically large share of credit events that are distressed swaps rather than severe defaults” as a mechanism that warrants more attention.
Read more: Private debt growth was not ‘reduced’ despite increased volatility and liquidity risks
Moody’s ratings data showed an increase in distressed transactions by 2025, where nearly 65 percent of all corporate defaults were distressed restructurings, including workouts, indenture modifications, debt swaps, and other “soft” credit events.
As a result, the default rate of the private credit representative (direct loan) goes from 1.6 percent, without stressed transactions, to 4.7 percent if they are included, and questions “how much of the stress has been resolved versus how much has been reversed”.
Hamilton, who used Moody’s Default & Recovery database covering 1,173 borrowers since 1979, found that more than one-third of distressed restructurings end in default or a repeat credit event.
He said “the risk is very front-loaded”, given that more than 70 percent of auto failures that occur after a distressed transaction occur within the first two years.
This means borrowers rescheduling in 2023 and 2024 are now entering their high-risk window and deserve “careful consideration,” he added.
Read more: Scrutiny of private debt climate as management rejects crisis narrative
After the pandemic, many distressed exchanges were able to “stick” because of “a small but open recovery window, the patience of lenders encouraged by the expectation of rate reductions, and contract structures flexible enough to handle the exercise without causing a cascade”.
However, Hamilton suggested that several of those conditions are “now less certain”.
“Markets have significantly scaled back expectations for a Federal Reserve rate cut in 2026,” the report said. “Moody’s base GDP growth forecast of 1.5 percent is just above the historical ‘sales velocity,’ when credit events tend to accelerate.
“Recent inflation data, along with the renewed possibility that higher rates may be back on the menu, are disproportionately weighing on floating rate borrowers who are overrepresented in private debt portfolios.”
Hamilton said that, compared to this background, the diligence of the output level will be rewarded more than “top-down trust”.
“Falling auto rates are real and acceptable,” he added. “But the structure of this error, which is heavily weighted towards soft credit events that tend to offset rather than resolve underlying stress, means that the improvement in headline numbers may be slower and more fragile than it appears.”
Read more: Restructuring activity is set to peak in H1 2026 as lending tightens
