Private Credit Stress Rises as Watchlist Loans Increase

Edgen Stock·Mar 19 2026, 01:56

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Key Takeaways

Investor concern is mounting over the health of the private credit market as new data reveals an increase in stressed loans, even as outright defaults remain low. This growing watchlist suggests future risks that have led investors to heavily discount the shares of publicly traded credit funds.

Stressed "watchlist" loans have been increasing since the end of 2024, signaling potential future capital loss risk.
The average non-accrual rate for public funds was 2.4% in December, though large funds like Blackstone Secured Lending Fund (BXSL) reported a much lower 0.6%.
Market skepticism is pushing valuations down, with some public funds like FS KKR Capital trading for 50% of their reported loan portfolio's book value.

Watchlist Loans Grow Despite Low 2.4% Non-Accrual Rate

A new analysis of private credit loan quality reveals a growing disconnect between current default levels and forward-looking risk indicators. According to a Raymond James report on December data, loans that are not making interest payments, known as "non-accruals," constituted 2.4% of the average public fund's portfolio. While this figure remains historically low, a worrying trend has emerged in loans designated as being on a "watchlist." These loans, while still current on payments, are showing signs of financial stress. The number of such loans has been rising since the end of 2024, indicating that future defaults could be building beneath the surface.

Funds Trade Below 80% of Book Value as Investors Price In Risk

Investors are not waiting for defaults to materialize and are actively pricing in the rising risk. Publicly traded private credit funds now trade, on average, below 80% of their stated book value. The divergence in quality is stark. Top-tier funds like Blackstone Secured Lending Fund (BXSL) and Ares Capital (ARCC) reported low non-accrual rates of 0.6% and under 2%, respectively. In contrast, funds with known portfolio issues, such as BlackRock TCP Capital (TCPC) and FS KKR Capital (FSK), have seen their shares fall to just 50% of their loan portfolio's reported value as their non-accrual rates hit the high end of their historical averages.

Loan Modifications Obscure True Default Risk

The market's skepticism is compounded by the opaque nature of private loan accounting. Unlike public markets, private lenders can modify loan terms to avoid classifying a borrower as in default. These modifications can include extending a loan's maturity or allowing non-cash interest payments that are simply added to the principal balance. While firms argue this flexibility is a strength, it fuels investor suspicion about the true quality of the underlying assets. Analyst Robert Dodd of Raymond James highlights the lingering danger from these restructured assets.

There is still a large stock of previously troubled, somewhat recovered assets that have yet to be exited and could represent future default/capital loss risk.

— Robert Dodd, Raymond James.