US Private Credit Defaults Hit Record 9.2% in 2025, Fitch Reports

The US private credit market experienced its worst year on record in 2025, with defaults surging to 9.2% among corporate borrowers tracked by Fitch Ratings, according to a report released Friday. The rating agency monitored 302 companies with outstanding private credit debt and recorded 38 defaults across 28 different borrowers, marking a significant deterioration from the previous record of 8.1% set in 2024.

The default wave was concentrated among smaller issuers, with companies earning $25 million or less representing the majority of last year's defaults. These businesses spanned multiple sectors, reflecting broad-based stress rather than industry-specific problems. The companies tracked by Fitch were primarily middle-market firms with earnings of $100 million or less and outstanding debt of approximately $500 million or less.

Interestingly, the software sector—which has been a major borrower group for private credit lenders—saw no defaults in 2025 despite a market-wide sell-off in software companies. Fitch explained that it categorizes software issuers into their main target market sectors when applicable, suggesting the stress may have been more pronounced in other industries.

The high default rate comes as floating-rate loans, which dominate the private credit market, remain tied to elevated federal funds rates that have persisted for three years. Fitch identified this interest rate exposure as a primary catalyst for the defaults, noting that most companies in their portfolio had minimal interest rate hedges in place.

"Capital structures in the PMR portfolio tend to be predominantly floating rate with minimal interest rate hedges in place," the report's authors wrote, referring to privately monitored ratings. "This leaves companies' cash flow highly vulnerable to elevated rates."

The default count includes both traditional bankruptcy filings and distressed debt exchanges, where borrowers worked with lenders to restructure their debt obligations. This broader definition captures the full extent of credit stress in the middle-market lending space.

The record default rate highlights the growing risks in the private credit market, which has expanded rapidly as banks retreated from middle-market lending following regulatory changes after the 2008 financial crisis. Private credit now represents a significant portion of corporate borrowing for smaller and middle-market companies, making its performance a key indicator of broader economic health.

Fitch's findings suggest that the combination of floating-rate exposure and minimal hedging left many middle-market borrowers particularly vulnerable to the sustained high-rate environment. As interest rates remain elevated, the private credit market may continue to face pressure, potentially leading to further deterioration in credit quality throughout 2026.