KBRA released its Q2/25 Middle Market Borrower Surveillance Compendium. Private credit may well be in a “Waiting for Godot” moment—marked by growing anticipation of some unknown reckoning that continues to be deferred. As the industry continues to adapt to various market uncertainties, KBRA notes signs of improving credit quality for some borrowers, while still observing a subset of borrowers that face maturities over the next two years without the growth their sponsors and borrowers had expected.
In this quarterly report, KBRA reviews the nearly 2,400 KBRA assessments completed for 2,115 unique global middle market (MM)-sponsored borrowers over the last 12 months (LTM) ending June 30, 2025. The report examines key trends shaping credit quality by company size and sector, outlines the shifts that have taken place in our portfolio during 1H 2025 and shares some of our expectations heading to year-end. It also provides new data on 371 surveillance assessments and 251 new assessments conducted in Q2/25.
The companies assessed in the LTM period held over $1 trillion in cumulative borrowings. Over that period, KBRA reviewed over 200 companies with direct loans over $1 billion, which represents a substantial portion of the private loans in the upper MM. KBRA also assessed nearly 200 companies with loans under $50 million. KBRA believes this expansive view offers perspectives on the evolving risks and the effectiveness of direct lenders’ responses amid uncertain times. While pockets of underperformance are inevitable in any investment category—especially leveraged loans—KBRA continues to see little evidence of widespread credit stress despite elevated rates and policy uncertainty.
Key Takeaways
- Revenue and EBITDA performance for this portfolio of obligors, which hold over $1 trillion in debt, broke the trend from prior LTM periods. Instead of both metrics slowing, the revenue-compounded annual growth rate (CAGR) stood firm at 14% while the EBITDA CAGR accelerated 100 basis points to 31%, when compared to Q1/25. All else equal, several other key metrics appear to be setting the scene for a positive finish to what has been a turbulent start to 2025.
- Continued positive performance from the largest sectors coupled with ongoing sector rotation could help explain the shift in performance trajectory seen in Q2/25. Three sectors where private credit has the greatest exposure—commercial and professional services, software, and health care services and technology—continue to drive the performance of the overall portfolio due to their significant growth rates. Other sectors exhibiting strong performance also gained a larger share by count as compared to the underperforming portion of the portfolio.
- KBRA recorded two payment defaults during the Q2/25 surveillance cycle, representing 1.1% of the quarter’s reviewed portfolio—the lowest total observed in recent periods. However, a performance divide appears to be emerging between services-oriented businesses and goods-producing companies, with the former showing comparatively stronger results at the median. Looking ahead, KBRA anticipates greater distress among sectors focused on manufacturing, retail, and distribution during H2/25. Moreover, with 27% of companies that KBRA assessed in the ccc category and the amount of maturities pending between 2025 and 2028, the risk of additional defaults remains elevated in the absence of sponsor or lender intervention.
- For the first time since KBRA began tracking the proportion of companies with improving versus deteriorating interest coverage ratios (ICRs), the share with strengthening metrics has taken a decisive lead. That said, the percentage of companies with an ICR below 1.0x has remained relatively flat, holding at approximately one-quarter of the portfolio over the past few periods.
- The upgrade-to-downgrade ratio for the 371 companies assessed in Q2/25 showed notable improvement compared to the prior three quarters. This coincided with a shift in the composition or surveillance and new assessment scores, which were more heavily weighted toward the b- and higher categories rather than ccc+ and lower, as seen in past quarters. While both developments are credit-positives, they pertain to only one quarter period and a small segment of the portfolio. As such, a few more quarters of data are needed before KBRA can draw any firm conclusions.
- Median leverage for MM borrowers in this higher interest rate environment appears to have reached a floor at 6.1x. Despite continued EBITDA expansion, direct lenders are fueling some of that growth with additional debt for add-on acquisitions and other growth initiatives—keeping median leverage consistently at this level over the past four quarters.
