Aug 24, 2026 · 8 min · 7 segments
In this episode, we discuss how Direct lending defaults are harder to observe than public market defaults, but analysis suggests financial distress has risen markedly since 2022. The discussion and…
As the credit cycle ages, defaults are likely to remain front and center.
But for investors evaluating private credit alongside public markets, measuring defaults is not as straightforward as it may seem.
The challenges lie in weighing how severely borrowers are becoming distressed and also in determining how that distress is recorded.
Public debt markets rely on standardized, easily observable measures of credit deterioration, such as credit ratings from well-known rating agencies.
Private markets, by contrast, often resolve stress through less visible mechanisms.
Comparing default rates thoughtfully across the two requires deeper analysis of data beneath the headline statistics.
Public defaults are visible.
Private stress is often negotiated.
In public debt markets, measuring default trends appears simple because it is easily observed.
The three major rating agencies look at three events when assessing default: A missed payment beyond the grace period, a bankruptcy, or a distressed exchange in which debt terms, such as maturity, coupon, or principal are restructured.
Moody's counts distressed exchanges directly, though it makes a distinction between distressed exchanges and hard defaults.
S&P's selective default and Fitch's restricted default categories serve much the same purpose.
Each event is anchored in observable contractual terms or publicly disclosed transactions.
Distress, in other words, cannot easily be negotiated outside the empirical record.
Direct lending distress can echo that of public credit, but it's much harder to observe.
With a single lender or small club of lenders, stress can be resolved bilaterally through waivers, amend-and-extend transactions, or cash-to-payment-in-kind, PIK, conversions.
These may be economically equivalent to distressed exchanges, but they are not always classified that way.
Most loans are also unrated, forcing third-party trackers to rely on different methodologies and definitions.
The result is a wide range of headline default estimates that can materially misstate, and usually underestimate, the underlying market stress.
As the credit cycle ages, defaults are likely to remain front and center.
But for investors evaluating private credit alongside public markets, measuring defaults is not as straightforward as it may seem.
The challenges lie in weighing how severely borrowers are becoming distressed and also in determining how that distress is recorded.
Public debt markets rely on standardized, easily observable measures of credit deterioration, such as credit ratings from well-known rating agencies.
Private markets, by contrast, often resolve stress through less visible mechanisms.
Comparing default rates thoughtfully across the two requires deeper analysis of data beneath the headline statistics.
Public defaults are visible.
Private stress is often negotiated.
In public debt markets, measuring default trends appears simple because it is easily observed.
The three major rating agencies look at three events when assessing default: A missed payment beyond the grace period, a bankruptcy, or a distressed exchange in which debt terms, such as maturity, coupon, or principal are restructured.
Moody's counts distressed exchanges directly, though it makes a distinction between distressed exchanges and hard defaults.
S&P's selective default and Fitch's restricted default categories serve much the same purpose.
Each event is anchored in observable contractual terms or publicly disclosed transactions.
Distress, in other words, cannot easily be negotiated outside the empirical record.
Direct lending distress can echo that of public credit, but it's much harder to observe.
With a single lender or small club of lenders, stress can be resolved bilaterally through waivers, amend-and-extend transactions, or cash-to-payment-in-kind, PIK, conversions.
These may be economically equivalent to distressed exchanges, but they are not always classified that way.
Most loans are also unrated, forcing third-party trackers to rely on different methodologies and definitions.
The result is a wide range of headline default estimates that can materially misstate, and usually underestimate, the underlying market stress.
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