By Bill Alpert

A big reason investors are ditching private credit is because they're scared its loans are about to go bad. Publicly traded loan funds trade below 80% of their book value, while nontraded funds can't fill all the redemption requests.

The December numbers on loan quality are in for most of the public funds, so Raymond James' Robert Dodd summed them up in a Wednesday report.

Despite the panic, troubled loans in public funds remain at low levels. At nontraded funds -- those reserved for the rich -- defaults ticked up, but are far below the levels of the public funds or most banks.

Loans that aren't making interest payments, known as "non-accruals" in the trade, were 2.4% of the average public company portfolio. Non-accruals were below 2% at the biggest fund, Ares Capital Corp.

Non-accruals were just 0.6% at Blackstone Secured Lending Fund, the public counterpart to that firm's giant nontraded BCRED fund. They were an even lower 0.4% at Blue Owl Technology Finance -- although its stock goes for 70% of book value, because investors fear AI will hurt its software-industry borrowers.

Public funds with known issues in their portfolios showed December quarter nonaccrual rates at the high end of their own historical averages. Those funds included BlackRock TCP Capital Corp. and FS KKR Capital Corp. Shares of each are trading for half of their loan portfolio's reported book value.

Dodd tracks "watchlist" loans, which are still making payments, but show signs of stress. While below the levels seen during the Fed's 2022 interest-rate hike, they have been rising since the end of 2024 -- in part because some loans are re-entering the list after previously exiting it.

"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," Dodd says.

As with private equity, the grading of private loans is more opaque than for their public market counterparts. Some investors view their quality reporting with suspicion.

One reason is that private lenders can prevent loans from showing up as defaults, by modifying a loan's terms. They can to extend the loan's maturity, or allow noncash interest " payments-in-kind" that just get added to the loan balance.

Whether loan modifications are a feature or a bug is a fair question. Private credit firms say it's a strength, because they can work with their borrowers and still get paid in the end.

Write to Bill Alpert at william.alpert@barrons.com

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March 18, 2026 15:01 ET (19:01 GMT)

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