The Financial Stability Board put out a report in May warning that private credit, now an estimated 1.5 to 2 trillion dollar market globally, shows rising use of payment in kind loans among borrowers, a signal the FSB explicitly flagged as consistent with deteriorating credit conditions. Proskauer's Private Credit Default Index recorded a default rate of 2.73 percent in the first quarter of 2026, up from 1.84 percent two quarters earlier.
Private credit losses will be higher than expected.Jamie Dimon, 2026 shareholder letter
A structural choice, not automatically a red flag, tested against my own work
I built PIK notes into an actual capital structure earlier this year, in the LBO I ran for a UK IT services buyout, and I want to be careful about how I use that experience here rather than overstate what it proves about the wider market.
A PIK note isn't inherently a warning sign. It's a structural choice, interest accrues rather than gets paid in cash, which preserves liquidity for a business that needs it during a specific phase, often early in a hold period, rather than a sign the borrower can't pay its bills. In my model, the PIK layer sat deliberately below the senior tranches, sized against a specific cash flow projection, and stress tested against a downside case before the deal closed. I should be clear that this was my own advisory engagement work, not a structure independently rated or audited by a third party the way Fitch rates the ABS pools I've written about elsewhere or Proskauer tracks its default index. It's evidence of how I approach structuring a PIK layer, not an externally verified benchmark for how the practice should be judged industry wide.
With that distinction in place, the question that actually matters isn't whether PIK exists in a capital structure. It's whether the PIK layer was sized deliberately against a modeled cash flow path, the way mine was, or whether it's being used reactively to paper over debt service a borrower can no longer make in cash, which is what Dimon's letter suggests is happening across parts of the market now. The FSB's own report supports drawing that distinction: their core concern isn't PIK usage itself, it's that private credit valuations are opaque, dependent on private ratings from lesser known providers, and largely untested through a full downturn, which means a rising PIK trend could reflect either disciplined structuring or hidden distress, and outside investors currently have no reliable, standardized way to tell which.
Insurers have leaned into this asset class regardless. Barclays found private credit holdings at US life insurers grew more than 20 percent in 2025, reaching roughly 10 percent of total assets and exceeding 15 percent at PE affiliated insurers like Apollo backed Athene, right as insurer stocks became one of the worst performing segments of the investment grade bond index in early 2026.
The fix I'd point regulators and allocators toward isn't a blanket restriction on PIK structures. It's a disclosure requirement that every PIK tranche in a private credit deal come with the same thing my own model was built around, a stated cash flow path the note was actually sized against, and a downside case showing what happens if that path doesn't hold. Right now the market is trying to infer borrower distress from an aggregate PIK usage statistic. The better signal sits one level deeper, in whether each PIK layer was underwritten deliberately or backed into after the fact, and that's a distinction aggregate statistics alone can't currently make visible.