Private Credit Stress Rises as CCC- Ratings Hit Record High

The Kroll Bond Rating Agency’s latest analysis reveals significant pressure building within the private credit ecosystem. In a report covering more than 2,200 middle-market companies backed by private equity over the 12 months through September, KBRA identified a record 61 borrowers with a rating of CCC-. This label is reserved for companies “facing severe operational or liquidity challenges,” marking a clear deterioration in credit quality. The firms in this distressed cohort collectively hold a record 1.4% of the more than $1 trillion in private debt assessed by the rating agency.

This sharp increase in the number of companies teetering on the brink is a critical indicator for the broader market. “The rising share of firms falling into the CCC- cohort is a clear signal that pressure is building in certain segments of the direct lending market,” KBRA stated in its report. The data suggests that the financial strain on middle-market companies—a core constituency for private credit lenders—is intensifying, which historically precedes a rise in defaults. The concentration of risk, while still a minority of the total debt pool, has reached a new peak, demanding close attention from lenders and investors.

Against this backdrop of rising firm-level stress, the macroeconomic environment presents a contrasting picture. Invesco Chief Global Market Strategist Brian Levitt points to conditions of stable inflation and an easing policy cycle from central banks as reasons why private credit remains an attractive asset class. This perspective highlights a central tension in the market: while underlying credit quality is weakening for a segment of borrowers, the overall financial conditions and yield environment may still support the asset class’s appeal compared to traditional fixed income.

The KBRA report directly addresses this looming risk, stating that “defaults are poised to rise across the $1.7 trillion private credit market next year as a growing number of middle-market firms are experiencing stress.” This forecast sets the stage for a critical period of reckoning. The performance of private credit funds will likely hinge on their specific underwriting standards, industry exposures, and ability to manage troubled credits through workouts or restructurings, rather than a blanket downturn.

The findings underscore the importance of selectivity and rigorous due diligence within the direct lending market. The stress is not uniformly distributed but is concentrated in “certain segments,” as noted by KBRA. For investors and firms like Invesco, the opportunity lies in distinguishing between sectors and companies that are fundamentally resilient and those merely buoyed by easy liquidity. The record CCC- count serves as a stark reminder that the era of ultra-low rates masked underlying vulnerabilities that are now being exposed as financing costs normalize.

Ultimately, the narrative for private credit is bifurcating. On one side, analysts at rating agencies like KBRA are documenting a clear deterioration in credit metrics among a growing subset of borrowers. On the other, strategists including Brian Levitt are focusing on the relative value and income generation potential of private debt in a stabilizing rate environment. The path forward for the massive private credit market will be determined by which of these forces—deteriorating micro-fundamentals or supportive macro conditions—exerts greater influence over the coming year.