Houlihan Lokey Reports Rising Private Credit Stress Among Smaller Borrowers

Houlihan Lokey, Inc. (HLI) reported that private credit stress is intensifying specifically among smaller borrowers, according to data released via GN stocks/earnings-beat. In the second quarter of 2026, companies with earnings before interest, taxes, depreciation, and amortization (EBITDA) under $100 million posted default rates of 3% by loan value and 3.6% by borrower count. The most severe deterioration occurred in the $10 million to $20 million EBITDA segment, where 12% of loans now trade below 90% of par, a sharp increase from roughly 1% in 2023.

Larger borrowers remain fundamentally healthier, creating a bifurcated market. Across the entire private credit market, defaults totaled only 0.8% of outstanding principal, yet 2.5% of borrowers were in default. This discrepancy indicates that large loans distort aggregate metrics, masking the sharper trouble present in the smaller-borrower cohort. HLI expects borrower size to remain the primary dividing line for credit performance through the remainder of 2026.

Sector-Specific Defaults Show Mixed Performance

Healthcare exhibited the clearest signs of distress, with defaults reaching 4.2% by borrower count and 2.7% by loan value. Consumer sector defaults were 3.6% by count but only 0.7% size-weighted, suggesting fewer but larger troubled loans. Conversely, the software sector recorded among the lowest default rates in HLI's dataset. For these software borrowers, median EBITDA is currently 20% above the level at loan origination, indicating strong operational growth despite broader market concerns.

Fundamentals Support Advisory Demand

Despite rising defaults, underlying business fundamentals remain supportive for the broader portfolio. Median revenues for private credit borrowers rose 6.5% year over year, while EBITDA increased 7.4%. HLI anticipates this trend will drive demand for valuation, restructuring, and capital-solutions services as lenders reassess their holdings and weaker borrowers seek professional assistance to manage their debt structures.

Risk Remains Contained Despite Pricing Pressure

Lenders are likely to tighten underwriting standards, demand better pricing, and monitor smaller borrowers more closely in response to these trends. Rising marks below par may pressure fund returns and increase amendment activity. However, risk remains contained, with amended payment-in-kind (PIK) interest representing only 1.6% of total interest dollars. More than two-thirds of borrowers continue to grow revenues and EBITDA, suggesting the core credit quality is not yet broadly impaired.