Private credit deals see a rise in ‘Bad PIKs’ showing ‘cracks’ in the market for corporate debt

Lincoln International reports a rising incidence of payments-in-kind (PIKs) in the $3 trillion private credit market — from 7% of deals in Q4 2021 to 10.6% in Q3 2025 — and a jump in PIKs added after deal signing (so-called “bad PIKs”) from 36.7% to 57.2%, which the firm says are early signs of cracks in private markets. The findings, based on 25,000 company valuations across more than 225 asset managers (mostly private equity-backed borrowers), contrast with indicators of continued underlying portfolio health—68% of companies grew revenue and 62% grew adjusted EBITDA over the prior 12 months—leading Lincoln to call it a concern but not yet a systemic crisis. Market participants say rising distressed borrowings are evident but high private-credit coupons (8–12%) provide some cushion; others warn that widening spreads and hidden layers of leverage could amplify losses, so investors should monitor PIK prevalence, spreads and leverage for potential escalation.

Analysis

Lincoln International reports that payments-in-kind (PIK) provisions in private credit deals rose from 7.0% of deals in Q4 2021 to 10.6% in Q3 2025, while the share of PIKs added after deal signing (so-called "bad PIKs") increased from 36.7% to 57.2% over the same period. The firm’s dataset covers 25,000 company valuations from more than 225 asset managers and is largely weighted to private equity-backed borrowers; a PIK lets borrowers capitalize interest into principal to conserve cash and typically carries higher yields to compensate lenders. Lincoln’s Brian Garfield calls these patterns “cracks” in the $3 trillion private credit market but emphasizes that 68% of companies in the database grew revenue and 62% grew adjusted EBITDA over the prior 12 months, so he does not view the situation as a systemic crisis. Market participants paint a mixed picture: Janney’s Guy LeBas notes a modest rise in distressed borrowings but argues 8–12% coupons provide a cushion, while Len Tannenbaum suggests true PIK prevalence may be higher (12–15%) and flags widening spreads and hidden layers of leverage as escalation risks.

The rise in post-signing PIKs is a direct signal of borrower stress and increases the tail risk for private-credit lenders because these PIKs often reflect negative surprises that required deal adjustment. High coupons can offset some incremental defaults, but the combination of rising bad PIKs, widening spreads over Treasuries, and potential undisclosed leverage raises the probability of materially higher losses in downside scenarios. Investors should therefore monitor PIK prevalence, the proportion of bad PIKs, portfolio revenue and EBITDA trends, stated leverage, and spread levels as early-warning indicators for asset allocation and manager selection decisions.

Key Decisions for Investors

• Reduce or reprice exposure to private-credit strategies that exhibit rising PIK incidence or a high share of post-signing (bad) PIKs, particularly funds that employ significant leverage
• Require managers to disclose PIK prevalence, bad-PIK share, spread exposure versus Treasuries and portfolio revenue/EBITDA trends and place mandates on watchlists if PIKs exceed historical norms or bad-PIKs surpass ~50%
• Consider new commitments only where coupons in the 8–12% range are paired with conservative covenants, low leverage and transparent reporting, otherwise favor redeploying capital or shorter-duration structures
• Increase diversification across managers and maintain liquidity/hedge buffers because widening spreads and hidden leverage can amplify losses if borrower stress escalates