The second-quarter letters from the largest direct-lending funds will land in limited-partner inboxes over the next ten days. They will show, in aggregate, default rates of less than 2.5% — a figure that, taken at face value, would suggest the asset class is having an uneventful year.

It is not having an uneventful year.

What the headline rate hides

Modern private-credit funds book their loans at fair value, not at cost. When a borrower's cash flows deteriorate, the fund's manager has three broad options: mark the loan down, restructure it, or extend it. The third option — what practitioners call "amend and extend" — has become the dominant response across the industry.

"An amend-and-extend is not a default. It also is not a performing loan in the sense a public-market investor would understand the term."

— A senior risk officer at a top-five direct lender

The pipeline

By Pulse Chronicles' count, drawn from public BDC filings and conversations with twelve senior credit officers, roughly 14% of the largest direct-lending portfolios have been restructured in the last twelve months. The figure is not a default rate. It is a leading indicator.

About the author

Clara Montgomery

Business Editor in New York. Covers public markets and the private capital cycle.