Rising bad PIK, cov-lite terms, and opaque leverage put long-term benefit capital closer to the stress.
PIK rates are climbing, covenants are thinning and some of the biggest public pensions in North America are buying deeper into the very assets where stress is starting to show.
Big public plans back Blue Owl’s loan sale
According to Bloomberg, Blue Owl Capital Inc. sold a US$1.4bn portfolio of private loans at 99.7 percent of par to four buyers that included three major North American public pension funds and its own insurance platform.
People with knowledge of the deal said the buyers were Chicago-based insurer Kuvare, the California Public Employees’ Retirement System, Ontario Municipal Employees Retirement System and British Columbia Investment Management Corp.
Bloomberg reported that Blue Owl spread the loans evenly across three funds and used the transaction to return cash to investors in Blue Owl Capital Corp II, which faced a wave of redemptions last year.
The firm had initially planned to return capital by merging that fund with one of its publicly traded vehicles, but scrapped the idea amid scrutiny around losses some investors would have taken.
In its announcement, Blue Owl identified the buyers only as North American public pension funds and insurance firms.
A representative for Blue Owl – which acquired Kuvare in a US$750m deal in 2024 – declined to comment, as did representatives for CalPERS and OMERS, while representatives for BCI and Kuvare did not immediately respond to requests for comment.
On an earnings call, Bloomberg reported, Blue Owl co‑founder Craig Packer said bidder interest was strong enough that “they would have bought multiple amounts more.”
He called the size and price of the sale “an extremely strong statement,” even as investors sold the firm’s stock on concerns about rising risks in private credit assets.
Packer also said the buyers had “made an arm’s length economic decision and there’s nothing behind the scenes that would in any way undermine that conclusion.”
Analysts at Barclays warned that the deal could become a template for future transactions in which debt held in business development companies (BDCs), which are among the only publicly visible private credit vehicles, shifts into more opaque and more highly leveraged structures.
They wrote that, “If similar transactions are repeated frequently, it would deepen the ties between these two parts of the non-bank sector, which could make it more difficult to track the risk.”
Citing public disclosures, the Barclays analysts said some of the assets being sold are likely to move into Blue Owl‑managed collateralized loan obligations, a popular vehicle for insurance companies because of their high ratings and beneficial capital treatment, and that Kuvare would likely buy those.
They noted that BDCs typically carry leverage of about 1x their equity, while CLOs are usually leveraged 9 to 10 times.
“It would add additional leverage to private credit assets,” they said.
Bad PIK as a “shadow default rate”
Against that backdrop, payment‑in‑kind usage in private credit has shifted in ways that point to mounting stress.
According to Omnigence Asset Management’s February 2026 paper, based on Lincoln International data, 11 percent of Q4 2025 borrowers in Lincoln’s private market database paid interest in‑kind rather than cash.
Omnigence said more than 58 percent of those loans featured “bad PIK”, where borrowers elect to delay interest payments during the life of the loan instead of at origination, which the firm described as “a clear sign of financial distress rather than strategic planning.”
Omnigence reported that 6.4 percent of all private loans in Lincoln’s database carried bad PIK in Q4 2025, up from 6.1 percent in Q3 2025 and 2.5 percent in Q4 2021.
The paper said Lincoln characterises this near‑tripling as a “shadow default rate”, a proxy for situations where defaults would have occurred without PIK elections.
Leverage has risen sharply in that group.
Omnigence said companies with bad PIK experienced an average increase in loan‑to‑value of 37 percentage points, from a “healthy” 39 percent at inception to 76 percent at the latest measurement, calling this “a fundamental erosion of lender protection and equity cushion.”
The same analysis noted that the US private credit default rate climbed to 5.7 percent by early 2025, up from effectively 0 percent in 2022, and that using bad PIK as a proxy for distress implied a shadow default rate closer to 6 percent versus 2 percent in 2021.
Slowing EBITDA and stretched maturities
Operating performance is still positive but weakening.
Omnigence, citing Lincoln’s Q4 2025 Private Market Index, said annual EBITDA growth in the dataset slowed from 6.5 percent in Q2 2025 to 5.2 percent in Q3 and 4.7 percent in Q4.
Omnigence reported that Lincoln observed leverage increases of about 0.5x from deal inception across vintages, likely driven by lower realisation of synergies and limited free cash flow generation after years of high rates.
Ron Kahn, managing director and global co‑head of Lincoln’s Valuations and Opinions Group, said: “We have seen a steady slowing of EBITDA growth during 2025 and companies not being able to organically deleverage.”
He noted that about “30 to 40 percent of the deals maturing in the next two years have already extended their maturity once,” and said lenders will either need to extend again or “potentially explore a restructuring if these deals cannot otherwise be refinanced.”
Kahn added that “throughout 2024 we have observed lenders affording sponsors and portfolio companies flexibility in the form of PIK interest, covenant waivers, maturity extensions, and other borrower-favorable amendments.
However, private companies can only kick the can down the road for so long.
The slowing growth trends we have observed coupled with the continued use of PIK in distressed situations could spell trouble for some private companies.”
Covenant-lite dominance and weaker recoveries
Covenant protection has weakened alongside rising PIK.
Omnigence said that, as of year‑end 2024, covenant‑lite loans represented 91 percent of outstanding US leveraged loans – approximately US$1.3tn – and that 93 percent of institutional leveraged loans issued in 2024 were covenant‑lite.
In private credit, the firm reported that about 70 percent of loans in 2024 were covenant‑lite.
Omnigence highlighted a bifurcation by deal size.
In the lower‑middle market, about 20 percent of private credit loans cleared without maintenance financial tests in 2023, down from 30 percent in 2022 and a peak of 31 percent in 2021.
In the upper‑middle market, defined as companies with $50m or more in EBITDA, around 30 percent of recent deals are now covenant‑lite, up from about 5 percent a decade ago.
In mega‑deals above $500m, Omnigence said roughly half of new transactions lack financial maintenance covenants, and that fewer than 10 percent of loans above $500m include them, prompting some observers to ask whether the market has moved from “covenant-lite” to “covenant-void.”
The paper noted that the historical 50–75 basis point premium for covenant‑lite loans has disappeared since Q1 2017, so lenders now accept weaker protections without extra yield.
When covenant‑lite loans default, Omnigence said lenders recover an average of 57 percent on first‑lien positions, compared with 66 percent on covenanted loans, a nine‑percentage‑point gap that could translate to about US$117bn in lost recovery value across a full default cycle in the US$1.3tn covenant‑lite market.
“Cracks in the private markets”
Voices in the market are starting to frame these developments as early warning signs rather than noise.
Omnigence quoted Brian Garfield, a managing director at Lincoln, as saying there are “cracks in the private markets” and “a lot more PIKs,” which he described as a crack on their own.
The paper also cited Len Tannenbaum, founder of Tannenbaum Capital Group, who said of PIK levels: “I think 10 percent probably is a low number,” adding that he has heard “12 percent to 15 percent is the number.”
Omnigence said the evidence “strongly suggests” that recent changes in private credit are an early warning sign rather than a temporary blip.
It pointed to three straight quarters of rising PIK usage, the shift in bad PIK from 37 percent to 58 percent of PIK loans, the dominance of covenant‑lite structures, higher leverage for bad PIK borrowers, slowing EBITDA growth and a large share of upcoming maturities that have already been extended once.
