Private credit stress is concentrated as the coverage line worsens

The Alternative Credit Council's second quarterly update of the year, built on more than 80,000 loans assembled with Houlihan Lokey, hands its members a line worth repeating—credit stress is concentrated, not market-wide—and backs it with their own marks: 85 per cent of loans sit above 97 of par. Median borrower revenues rose 6.5 per cent year on year and EBITDA 7.4 per cent, extending by another quarter the margin expansion the council has tracked since September 2023. As Jiří Król, the ACC's global head, put it, "Q2 data shows private credit portfolio valuations are supported by continued borrower earnings growth and robust debt serviceability."

The council speaks for 250 asset management firms managing more than $2trn of private credit assets, as an affiliate of the Alternative Investment Management Association, whose membership runs past 2,000 firms across 60 countries. It is a large book, and the marks are its members' own, which makes the reassuring headline accurate and the kind of line a seller would lead with.

The tail is where the update gets interesting, because the ACC is explicit that loans marked below 90 of par sit in identifiable sectors—software first among them—and among smaller borrowers, and that the stress is concentrated there. Software is the only sector the council names, which suggests enough below-90 loans sit in that one sector to stand out inside an 80,000-loan series; that is also the corner of the book where the 0.8 per cent default rate looks like an artifact of size weighting: marks below 90 of par among the smallest borrowers have climbed roughly twelvefold since 2023 while payment data on those same credits has barely moved. A council reporting that its members' stress lives in small software borrowers is corroborating that read from the inside.

Lower in the document sits the figure worth underlining: the share of borrowers with interest coverage below 1.00x rose to 14.1 per cent, close to one borrower in seven, and the ACC flags it as "an indicator that warrants continued attention." Coverage below 1.00x means operating earnings are not clearing the cash coupon, so that 14.1 per cent is a current count rather than a projection.

Across the four measures the update examines—valuations, borrower earnings, debt servicing and portfolio performance—the picture splits: valuations are held up by earnings, earnings are expanding, and debt servicing is deteriorating for a measurable minority of borrowers. The aggregate settles the first two; the coverage line is the only evidence on the third, which is why the ACC placed it in the body of the release rather than the lede.

The series itself is the most useful thing the council publishes, because data is collected at monthly, quarterly and annual intervals across most of a loan's holding period, so the update reads as a time-series of portfolio company performance, credit quality and valuation outcomes rather than a quarter's snapshot. A single quarter's 14.1 per cent would not settle much on its own, but read against the first update of the year, which reached similar conclusions, it establishes a direction.

Set the two lines against each other and the update reads in two directions at once: median EBITDA growth of 7.4 per cent is real, and rising earnings should pull coverage up. That the sub-1.00x share climbed anyway suggests the interest line is consuming earnings growth for the borrowers in that cohort—that for those credits, the business is not, on current earnings, paying for its debt. Król's own framing concedes the terrain, calling the priority to "distinguish those pockets of stress from broader portfolio performance."

For a desk that underwrites the tail rather than the average, the update inverts. The 85 per cent above 97 of par is a portfolio-management figure; the 14.1 per cent below 1.00x coverage is a restructuring figure. Credits in the second group are the ones that reach a lender group, a forbearance or a liability-management exercise, and they usually arrive there after coverage has run below 1.00x for more than a quarter rather than on the day a mark crosses 90. That lag makes the coverage cohort the leading indicator and the below-90 share the lagging one, which is why the council's own numbers describe a pipeline in formation.

The update also touches BDCs, where the council says declines in net asset values moderated and fundamentals held up against challenging market sentiment. This publication has argued that the direct-lending reset is forcing managers to monetize books, and that listed BDC strategic reviews will finally put a public price on what private markets have been negotiating quietly; a moderating NAV decline is the number a seller would cite in that negotiation, while the coverage tail is where a buyer's diligence would start. The two sides are not reading the same page of this update.

Both headline claims—earnings up, stress contained—can hold while the cohort that fills a workout pipeline keeps growing. The council's first quarterly update reached similar conclusions, so the direction on coverage has now held for a second quarter running. Watch software and the small-borrower marks in the next release: if the below-90 share there widens again while the top line holds at 85 per cent, concentrated will still be the right word for the industry, and the coverage cohort rather than the aggregate will be the number the marks follow.