Private Credit's Quiet Repair Shop: Why Amend-and-Extend Is Masking Real Risk

The share of business development company loans where borrowers pay interest in kind — rather than cash — climbed from roughly 6 percent to nearly 10 percent between early 2022 and early 2026, a 67 percent increase in three years, according to a Federal Reserve Bank of Boston policy paper published August 5, 2026. The researchers analyzed 168 business development companies and nearly 890,000 company-quarter loan observations. Their central finding: at the exact moment borrower cash flow stress is rising, lenders are simultaneously accepting lower compensation for it. That combination of rising PIK alongside compressing spreads is what "amend-and-extend" looks like in aggregate data. If you are an LP allocated to private credit, this is the metric that should be on your due diligence checklist, because headline performance figures in this asset class are not showing you the full picture.

The Mechanics: How a Loan Gets Quietly Restructured

Start with the basic transaction structure. A direct lender originates a floating-rate senior secured term loan to a middle-market company. The borrower pays cash interest quarterly. When business slows, the lender faces a choice: declare a default, put the loan on non-accrual, and take a write-down against the fund's net asset value, or modify the loan to keep the borrower out of technical breach. That modification typically extends the maturity by 12 to 18 months, converts some or all cash interest to PIK (where unpaid interest capitalizes onto the principal balance and is booked as accrued income), and loosens the financial maintenance covenants so the borrower does not trip a trigger. The loan stays on accrual. The fund continues booking income. The NAV shows no visible deterioration. Applied with honest disclosure, this is a legitimate credit management tool. Applied quietly at scale, it defers loss recognition while sustaining the appearance of clean performance.

The market has concrete examples. Real Good Food Company received a $60 million term loan structured entirely as PIK. F45 Training Holdings obtained a $90 million subordinated facility paying 12 percent PIK interest, according to ABF Journal's August 2025 analysis of middle-market lending structures. In both cases, PIK was disclosed upfront and priced into the original transaction. The concern I am raising is different: when modifications happen mid-loan in response to credit deterioration, without mark-downs or LP disclosure, the accounting stays clean while the credit reality does not.

What the Data Actually Shows

The Federal Reserve Bank of Boston paper provides the clearest primary analysis of BDC portfolios in the current cycle. BDCs are an exception in a mostly opaque market: they must file complete investment schedules with the SEC quarterly, giving researchers a window that does not exist for closed-end private credit funds. The findings across 890,000 observations are coherent and unsettling read together.

The PIK increase is broad-based. The Boston Fed researchers find the 67 percent rise spreading across construction (from under 5 percent to nearly 20 percent of loans by early 2026), wholesale trade, and transportation and warehousing, both of which more than doubled their PIK share. The researchers conclude the increase "cannot be attributed largely to BDCs adding more new companies in growth industries to their portfolios." When PIK rises in construction and logistics, it points to borrowers unable to cover debt service from operating cash flows, not companies deliberately reinvesting for growth.

The valuation gap is equally striking. BDC portfolios remain marked near par on a fair-value-to-cost basis, with that ratio staying close to 1.0 throughout the study period, suggesting internal models see loans holding close to face value. Meanwhile, publicly traded BDC equity prices declined roughly 20 percent relative to the S&P 500 from early 2025 to mid-2026. Public investors, who trade freely with full access to the same SEC disclosures, are pricing in risks that internal BDC portfolio models have not yet reflected. That gap between internal marks and market pricing is a classic credit-cycle warning pattern.

On the spread side, ABF Journal's August 2025 analysis cites S&P Global data showing 11.7 percent of all BDC loans were making PIK payments in Q2 2024, up nearly two percentage points year-over-year. A Configure Partners analysis in the same report found 14 percent of private credit loans originated in Q4 2024 already included PIK options from day one, meaning lenders are building payment flexibility into the original deal structure rather than treating it purely as a mid-cycle workout feature. Fitch reported U.S. private credit default rates reaching 5.7 percent in early 2025; the Proskauer Private Credit Default Index then showed an improvement to 1.76 percent in Q2 2025. The divergence between those measures reflects the definitional problem: whether amend-and-extend transactions count as restructurings in a given tracking methodology changes the headline number dramatically.

Covenant architecture adds a further layer of opacity. Capstone Partners research shows the average leverage covenant cushion has expanded to 30 percent or higher above model projections in middle-market deals, with 40 percent headroom common in larger-cap documentation. S&P Global ratings research found only 4 percent of companies met or exceeded earnings projections in the year following deal inception, with management missing leverage projections by a median of 2.3 times in year one. If covenants are set 30 to 40 percent above projections, and almost no company hits its year-one projections, technical defaults almost never happen. Not because companies are performing, but because the documentation was structured to prevent the breach from occurring.

The Mega-Fund Problem

Private credit has absorbed an enormous amount of capital in a short period, and the pipeline of new fund closes has not slowed. Morgan Stanley Investment Management estimates the U.S. direct lending market at over $1 trillion, with semi-liquid wealth channel vehicles commanding nearly a third of that total. The Boston Fed researchers document that the number of active BDCs grew from an average of 105 per quarter in early 2022 to 166 per quarter by the end of 2025, a 58 percent increase in competing lending entities targeting the same middle-market borrower base.

New fund closes are accelerating that competition. Private Debt Investor reported that Arini Capital secured $2.3 billion at the second close of its debut direct lending fund, with the raise ongoing. Hercules Capital launched its fourth private credit fund in 2025, recording over $2.2 billion in gross fundings across its platform, which now manages $5.7 billion in total assets. ICG, the London-based alternatives manager, reports $126 billion in assets under management with private debt as a core strategy and an explicit expansion mandate.

The economic logic runs directly counter to optimistic return projections. More capital chasing the same borrower pool means less lender pricing power, looser structural terms, and wider covenant cushions. When those aggressively underwritten loans show credit stress, the same competitive pressure that drove loose origination also creates an incentive to modify terms rather than recognize losses. A fund mid-raise on its third or fourth vehicle needs a clean track record; a fund with a rising PIK percentage and above-average non-accrual rates has a harder conversation with its LPs at the next close.

The Legitimate Counter-Argument

I want to be direct about what this data does not prove. Amend-and-extend applied correctly is often the right answer for everyone in the transaction. If a fundamentally sound company faces a temporary cash flow problem (a slower acquisition integration, a delayed product launch, or a reimbursement rate change in healthcare), forcing a formal default and a distressed sale can destroy value for the borrower, the sponsor, and the LP. Working constructively with a management team to bridge a real but temporary liquidity gap is what private credit capital exists to do. The practice is not inherently problematic.

Private Debt Investor recently published an editorial titled "The Dangers of Being Dogmatic About PIK", a fair corrective. Not every PIK election signals distress. Sponsors frequently treat PIK toggles as standard portfolio management tools during add-on acquisition integration periods. A growth-stage technology company reinvesting operating cash flow deserves a different analytical lens than a mature industrials borrower paying 12 percent PIK because it cannot cover fixed charges from current revenues.

Morgan Stanley Investment Management's 2026 outlook notes that fully loaded default rates, inclusive of restructurings, "have trended lower in recent quarters." That trend is consistent with two explanations: credit quality is genuinely improving, or the definition of "restructuring" now excludes a larger share of modifications than it used to. LPs cannot tell which explanation is driving their fund's reported performance without better disclosure than most private credit managers currently provide. That is the core problem this piece is raising, not a call to abandon the asset class.

Four Questions to Ask Before Your Next Commitment

I am not arguing private credit is a bad allocation. I am arguing the current environment requires more verification than most LPs are doing. Ask these four questions directly and judge the specificity of the answers.

Ask what percentage of the portfolio is currently paying interest in kind and how that figure has changed each quarter over the past two years. The Boston Fed data gives you a benchmark: approximately 10 percent is the industry average by early 2026. Funds running materially above that number owe a specific explanation.

Ask how many borrowers had loan terms modified in the past 12 months, including maturity extensions, covenant resets, and any change in interest payment structure, regardless of whether those modifications triggered the GP's internal definition of a formal restructuring. A GP who cannot answer precisely does not have the monitoring systems you want overseeing your capital.

Ask for the mark methodology applied to loans with modified terms. Loans that received maturity extensions or covenant waivers since origination should carry some price adjustment against original cost. If modified loans still sit near par without a credible rationale, that is a valuation discipline question worth pressing.

Ask about healthcare sector concentration and non-accrual rates within that sleeve. Morgan Stanley Investment Management identifies healthcare as the sector that "led all sectors in loans placed on non-accrual status over the last year." Healthcare remains a large direct lending allocation for many funds, making it a useful first probe. Any GP running a disciplined portfolio should answer all four questions quickly and specifically.

For more on this, see our related coverage:

• Cov-Lite Loans in Private Credit: What the Lack of Covenants Means for Direct Lending Investors
• Cov-Lite Loans and the Covenant Erosion Hiding in Your Private Credit Portfolio

Frequently Asked Questions

Is amend-and-extend counted as a default in private credit statistics?

Not typically, which is one reason headline default rates can appear more benign than underlying credit quality warrants. When a lender modifies a loan to extend maturity, convert cash interest to PIK, or loosen covenants, the borrower is no longer in technical breach, so most tracking methodologies do not register a default event. The divergence between Fitch's 5.7 percent private credit default rate and the Proskauer index's 1.76 percent for roughly the same period shows how much the reported number depends on where definitional lines are drawn.

Why would a lender accept lower spreads when borrower risk appears to be rising?

The Federal Reserve Bank of Boston researchers offer two explanations that are not mutually exclusive. One is competitive pressure: when more capital chases the same borrowers, lenders lose pricing power. The second is what the researchers call "implicit restructuring," meaning lenders cut the interest rate to reduce the probability of a formal default. A borrower paying 400 basis points over SOFR may service its debt more reliably than the same borrower at 500 basis points, creating a perverse incentive for lenders to trim their own spread as an informal workout tool without the disclosure a formal loan modification would require.

Does this data signal that private credit losses are coming?

Not necessarily, and that framing misses the actual concern. Rising PIK usage is partly mechanical: floating-rate borrowers have faced higher debt service burdens since 2022 when SOFR moved from near zero to above 4 percent, so some of the increase reflects arithmetic cash flow pressure rather than fundamental credit deterioration. Morgan Stanley Investment Management expects EBITDA recovery among middle-market borrowers through 2026 as earnings improve and rate reductions flow through. The narrower concern is that current private credit reporting makes it difficult for LPs to distinguish between funds managing genuine stress through transparent workouts and funds using accounting flexibility to defer recognition of real losses. In a 10-year closed-end vehicle, that distinction matters at the point of final reconciliation.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.