On March 6, Fitch Ratings quietly published a report that should have made a lot more noise than it did. The default rate among US corporate borrowers in the private credit market hit 9.2% in 2025 — a new record, smashing the previous record of 8.1% set just one year earlier in 2024.
I read the number twice. Then I called my friend Derek, who has been working in credit analysis for about fifteen years, and read it to him. There was a long pause. "Nine point two," he repeated. "That is... not great."
Understatement of the year. And if you have money invested in anything — retirement accounts, index funds, that "diversified portfolio" your advisor built — you should understand what this number means and why it matters to you, even if you have never heard the phrase "private credit" before.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult a qualified financial advisor before making investment decisions. All data cited is from Fitch Ratings, Reuters, and publicly available sources.
What Is Private Credit and Why Should You Care?
Private credit is lending that happens outside traditional banks and public bond markets. Instead of a company going to JPMorgan or issuing bonds that trade on an exchange, it borrows money from private credit funds — think Ares Capital, Blue Owl, Apollo, Golub Capital. These funds pool money from investors (pension funds, endowments, wealthy individuals, and increasingly, retail investors through interval funds) and lend it to mid-sized companies.
The private credit market has exploded. It has grown from roughly $500 billion in 2020 to over $1.7 trillion by the end of 2025, according to Preqin data. That is not a typo. It tripled in five years.
Why does this matter to you? Because the money flowing into private credit increasingly comes from retirement funds and institutional investors who manage your money. The Federal Reserve's Financial Stability Report has flagged private credit as a growing systemic risk precisely because of this interconnectedness.
What Fitch Actually Found
Fitch tracked 302 companies with outstanding private credit debt. In 2025, 38 defaults occurred among 28 different borrowers. The defaults were not concentrated in any single industry — they were spread across sectors. Smaller borrowers, those with $25 million or less in earnings, accounted for the majority.
The Interest Rate Trap
Here is what makes this particularly painful: most private credit loans are floating rate, meaning the interest payments move with the federal funds rate. And the federal funds rate has been elevated for three years straight.
Fitch put it plainly: "Capital structures in the PMR portfolio tend to be predominantly floating rate with minimal interest rate hedges in place. This leaves companies' cash flow highly vulnerable to elevated rates."
Translation: these companies borrowed money at variable rates, did not hedge, and when rates stayed high, they could not make their payments. This is Finance 101 — and somehow, a $1.7 trillion market missed the memo.
My colleague Rachel, who works in fixed income research, had a more colorful take: "It is like watching someone take out an adjustable-rate mortgage in 2005 and then acting surprised when the payment doubles. Except this time it is not homeowners — it is companies with hundreds of employees."
Why Two Record Years in a Row Is a Massive Red Flag
A single record year could be an anomaly. Two consecutive record-breaking years is a trend. And the trajectory — from 8.1% to 9.2% in one year — suggests the problem is accelerating, not stabilizing.
To put 9.2% in context:
- The S&P Global leveraged loan default rate (which covers the public side) was around 3.5% in 2025
- The high-yield bond default rate hovered near 2.8%
- Private credit at 9.2% is roughly 2.5 to 3 times higher than comparable public credit markets
Why the gap? Private credit borrowers tend to be smaller, more leveraged, and less diversified than companies that can access public markets. They also have less transparent financials and fewer covenants (the legal guardrails that protect lenders). When conditions tighten, they are the first to break.
The Software Sector Time Bomb
Here is the plot twist that Fitch flagged but did not fully unpack: despite a market-wide sell-off in software companies — many of which are major private credit borrowers — Fitch recorded zero defaults in the software sector in 2025.
Before you celebrate, consider why. Fitch noted that it categorizes software issuers into their target market sectors when applicable. So a healthcare software company might be classified under healthcare, not software. The actual stress in software-adjacent companies may be masked by this classification approach.
More importantly, the software sell-off accelerated in late 2025 and early 2026. Derek's take: "The software defaults are not in the 2025 data because they have not happened yet. Give it two quarters."
If he is right — and the sell-off in software valuations supports his thesis — the 2026 default rate could make 9.2% look modest.
How This Affects Your Money — Even If You Do Not Own Private Credit
1. Your Pension Fund Probably Owns It
Large pension funds — CalPERS, CalSTRS, New York State Common — have been increasing private credit allocations for years, chasing higher yields in a low-return environment. If you are a teacher, firefighter, state employee, or anyone with a defined benefit pension, your retirement security is partially tied to private credit performance.
The SEC has repeatedly warned about transparency issues in private credit. Unlike public bonds, private credit investments are not marked to market daily. The true extent of losses may not be visible until funds are forced to write down assets — which tends to happen suddenly.
2. Interval Funds Are Bringing Private Credit to Retail
Over the past two years, firms like Blackstone and Apollo have launched interval funds that give retail investors access to private credit. These funds are marketed as "higher yield" alternatives to bonds. They are also illiquid — you cannot sell whenever you want; redemptions are limited to quarterly windows.
If defaults continue to rise, some of these funds may gate redemptions (restrict withdrawals) to avoid forced selling. We saw this playbook with real estate funds in 2022-2023. If you own one of these funds, review the redemption terms carefully.
3. Credit Stress Flows Downhill
When mid-sized companies default on their debt, the effects ripple outward. Suppliers do not get paid. Employees lose jobs. Local economies contract. Banks that co-lend with private credit funds take losses. The interconnectedness of the financial system means that private credit stress does not stay private for long.
What Smart Money Is Doing Right Now
I spoke with three different financial advisors this week (off the record — they did not want to be quoted making market calls). Here is the consensus:
Reviewing Fixed Income Allocations
If your portfolio includes "alternative income" or "private credit" funds, understand what you own. Read the fund's quarterly report. Check the default rate in their portfolio versus the Fitch benchmark. If it is above 9.2%, you are in a worse-than-average fund.
Stress-Testing Floating Rate Exposure
If rates stay elevated through 2026 — and the Fed has signaled they might — floating-rate borrowers will continue to struggle. Funds heavily weighted toward floating-rate private credit are more vulnerable.
Increasing Treasury and Investment-Grade Allocation
With Treasury yields still attractive (4.2-4.5% on 10-year notes as of this writing), the risk-reward of reaching for yield in private credit looks less compelling. Several advisors I spoke with are trimming private credit exposure and adding investment-grade corporate bonds and Treasuries.
What to Watch Next
Three things will determine whether this is a manageable stress event or something worse:
- The Fed's rate path: If rates come down meaningfully in 2026, floating-rate borrowers get relief and defaults could stabilize. If rates stay elevated, expect 2026 to set another record.
- Software sector defaults: The sell-off in software valuations has not yet translated into a wave of private credit defaults. When (not if) it does, the numbers will jump.
- Redemption pressure: If retail investors start pulling money from private credit interval funds, managers may be forced to sell assets at distressed prices, triggering a negative feedback loop.
The Bottom Line
A 9.2% default rate in a $1.7 trillion market is not a headline you should scroll past. This is the highest default rate ever recorded in US private credit, and it follows the previous record set just one year ago. The primary driver — floating-rate loans in a high-rate environment — has not changed.
Check your portfolio. Ask your advisor about private credit exposure. Understand the difference between the yield you are being promised and the risk you are actually taking.
As Derek told me: "In credit, the time to worry is when everyone says there is nothing to worry about. And six months ago, everyone was saying private credit was the safest place to park money."
It was not. The data is in.
Sources: Fitch Ratings Private Credit Default Monitor (March 2026), Reuters, Federal Reserve Financial Stability Report, SEC Investor Bulletins, Preqin Global Private Credit Report 2025.
