KBRA releases updated research on the 5% of 1,903 levered middle-market borrowers assessed in 2024 that were identified as being at an elevated risk of future payment default.

While these borrowers were current at the time of assessment, KBRA continued to monitor them throughout 2025. Of the 79 subsequently reviewed, 56 (71%) exhibited further credit deterioration. Among those, 51 experienced liquidity strain significant enough to require lender or sponsor support to avoid a likely payment default. Ultimately, 25 of the 79 borrowers either restructured their capital structures or missed a scheduled debt service payment.

This KBRA report details the key characteristics used to identify companies at risk of default, highlights sector-specific trends associated with subsequent credit quality deterioration or improvement, and discusses what these themes may signal for 2026.

Key Takeaways

• KBRA identified the majority of realized and imminent 2025 defaults one year in advance, based on a combination of qualitative and quantitative indicators. However, not all distressed companies were captured in the 2024 screening, demonstrating that not all risks are observable in advance and supporting our belief that defaults will rise in 2026.
• Defaults often take time to materialize. That lag can create an opportunity for operational recovery, but it can also allow for further credit and enterprise value erosion. For struggling companies, that optionality exists only when sponsors or lenders are willing to provide incremental liquidity or other remedies.
• When support and liquidity were exhausted—or when debt maturities approached—defaults or loss-inducing restructurings (often involving lenders taking control) became the primary outcome. Among borrowers that continued to underperform in 2025, nearly one-half ultimately defaulted or restructured their capital structures to reduce cash-pay debt.
• The sectors identified as most at risk (Consumer Retail; Chemicals, Containers, Metals, and Materials; and Media) continued to exhibit acute stress in 2025. As several of the headwinds faced by these industries appear structural rather than transitory, KBRA expects pressure to persist into 2026.
• Notably, these three most-challenged sectors represent less than 10% of the more than $1 trillion in debt assessed by KBRA. In our view, this limited concentration suggests that direct lenders remain positioned to manage and navigate these exposures. Further, 29% of the 79 companies re-reviewed in 2025 demonstrated stable or improving performance, resulting in reduced refinancing risk, stronger balance sheets, and improved long-term credit durability.
• Even the three largest private credit sectors—Commercial and Professional Services; Software; and Health Care Services and Technology—were not immune to credit deterioration or the need for third-party support. However, stress in these sectors has been comparatively more idiosyncratic and less widespread relative to their overall size and debt exposure.
• In regard to artificial intelligence (AI) and its impact on direct lending, KBRA has observed both emerging opportunities and risks. Within the at-risk population, pressure is developing across sectors, particularly among companies offering content creation, advertising production and targeting, sales intelligence, and education technology (see Private Credit: Framing AI and Software Risk).

Click here to view the report.

Recent Publications

• Private Credit: Framing AI and Software Risk
• Private Credit: 2026 Outlook
• Private Credit: Q3 2025 Middle Market Borrower Surveillance Compendium: Defaults Will Rise
• Private Credit: First Brands, Public Credit’s Concern
• Private Credit: Q4 2024 Middle Market Borrower Surveillance Compendium—5% at Risk

About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1013477

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