Houlihan Lokey found that default rates among private credit borrowers with less than $100 million of EBITDA, the bulk of the direct lending market, ran at 3.0% on a size-weighted basis and 3.6% by count in Q2/26, according to Houlihan Lokey’s Private Credit DataBank. Size-weighted default rates are measured on the loan principal amount outstanding rather than the number of loans. These figures are based on the DataBank’s most fundamental definition of default, which captures technical defaults as well as payment defaults.
Across the entire private credit market, including lower, core, and upper middle market, the picture changes sharply: Defaults represented 0.8% of outstanding loan principal, or 2.5% of borrowers by count. The gap underscores that default risk in private credit remains primarily a function of borrower scale, with the largest companies, for the most part, continuing to perform while smaller and core middle-market borrowers underperform at a meaningfully higher rate.
By sector, stress remains concentrated rather than widespread. Healthcare was the only industry elevated on both measures, at 4.2% by count and 2.7% on a size-weighted basis. Consumer defaults ran at 3.6% by count and 0.7% on a size-weighted basis, concentrated among smaller borrowers.
“Default levels have picked up from recent quarters among borrowers with less than $100 million of EBITDA. That is where much of the direct lending market operates,” said Dr. Cindy Ma, managing director and global head of Portfolio Valuation and Fund Advisory Services at Houlihan Lokey. “But the increase is concentrated, not broad. When one weights the full market by loan size, defaults remain below 1% because the largest borrowers continue to perform. We expect this divide by borrower size to define the market through the balance of the year.”
The same contrast is visible in loan valuations. While quarter-over-quarter valuation changes stabilized in the second quarter of 2026, 7% of all loans are now priced below 90% of par, more than double the historical average. Among borrowers with $10 million to $20 million of EBITDA, that share stands at 12%, up from roughly 1% in 2023. Stress is also beginning to reach the core middle market: 6% of loans to borrowers with $20 million to $100 million of EBITDA are priced below 90% of par, the highest level in the past three years. By contrast, just 3% of loans to borrowers with more than $100 million of EBITDA are priced below that threshold.
A size-weighted lens also reshapes the picture on payment-in-kind (PIK) interest, a frequent focus of market commentary. The share of loans carrying a PIK option reached a new high in June 2026, but actual usage remains modest. In the second quarter, 11.8% of loans on a size-weighted basis elected to pay at least a portion of interest in kind, and those elections represented just 6.3% of total interest dollars. Amended PIK, in which a PIK feature was added after origination and which Houlihan Lokey views as the closest proxy for borrower stress, accounted for only 1.6% of interest dollars.
“A PIK option is a structuring feature, and not necessarily a distress signal, and the two get conflated,” said Timothy Kang, managing director in Houlihan Lokey’s Portfolio Valuation and Fund Advisory Services practice. “PIK option availability is at a record high, but election is modest and the interest dollars involved are smaller still. The measure we watch is amended PIK, where the feature was added after origination. At 1.6% of interest dollars, that signal remains contained.”
Borrower fundamentals continued to grow. Median revenue rose 6.5%, and median EBITDA rose 7.4% year-over-year, with more than two-thirds of borrowers demonstrating both top-line and EBITDA growth. Leverage remained in line with historical levels, pointing to sustained underwriting discipline among issuers.
Software, the sector attracting the most investor attention amid the debate over AI disruption, recorded among the lowest default rates of any industry in the DataBank. Operating performance has continued to build since these loans were originated: Median EBITDA is 20% higher than it was when the loans first closed. Valuations, meanwhile, incorporate more conservative multiple assumptions than at underwriting given observed movement in public comparable company multiples.
“The DataBank lets the market move past anecdotes,” said Chris Cessna, managing director in Houlihan Lokey’s Portfolio Valuation and Fund Advisory Services practice. “As a leading provider of private credit valuation services, we see the market at a scale and depth that lets us look at many different metrics, follow the same loans from inception to exit, and draw proprietary insights.”
The findings are drawn from Houlihan Lokey’s Q2 2026 Private Credit DataBank Market Trends & Insights report, which is available to clients of the firm.
