Sound Familiar?24 Mar 2026 06:01
From the week's Economist:-
anxiety has been heightened by the opacity of the private-credit market, which has expanded over the past few years and has become a big source of lending to the riskiest borrowers. .........
Consider a company unable to keep up with interest payments on a private loan. “No one wants to end up in bankruptcy court. It’s expensive, and it spooks employees, customers and suppliers,” says Tuck Hardie of Houlihan Lokey, a bank. Instead, the troubled company—often guided by a private-equity owner, since many private-credit borrowers have one—may first seek a “payment in kind”, in which it adds the interest it owes to its loan balance. For listed private-credit funds, such arrangements made up 5-6% of income five years ago, and now make up 8%.
Another option is “liability management”. This can be thought of as yoga for failing firms—repayment timelines are stretched and obligations contorted in ways few thought possible.
Once such manoeuvres are included, the default rate in private credit rises to around 5%. These workarounds can give borrowers time to right their businesses. And if they can’t, bankruptcy may still be dodged. Public losses embarrass private-equity firms; a quiet handover to creditors is often preferred. A recent study by Goldman Sachs, another bank, supports this. Since 2023 around 100 private European companies—including Bonhams, a British auction house; Dainese, an Italian sportswear brand; and Tapì, an Italian bottle-cap maker—have been handed to lenders in debt-for-equity swaps, often called “taking the keys”.
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