Q4’25 Private Credit Stress and Restructuring Review: Residential Construction, Health Clinic Rollups and Logistics Stand Out in Nonaccrual, FV Decline and Non-PIK to PIK Reports

Editor’s Note: Welcome to Octus’ quarterly review of stress and restructuring activity in private credit. The article provides takeaways and summaries from our three core stressed private credit reports, borne from BDC reporting, offered to subscribers of Octus’ Private Credit and Deal Origination coverage. The reports include summaries from our reviews of nonaccrual activity, sequential fair-value changes and credits changing interest from cash pay to at least partial paid in kind, or PIK. To get access to the full articles, please reach out to [email protected].

Credit Research: Americas BDC Analysts

Relevant Items:
Octus’ BDC Database
Q4’25 Nonaccrual Report
Q4’25 Fair Value Decline Report
Q4’25 Non-PIK to PIK Report

Key Takeaways

• Q4 Nonaccrual Report: Octus identified approximately 325 borrowers whose loans were placed on nonaccrual status by business development company lenders as of the fourth quarter-end. The report also identifies trends by sector including the number of issuers and pricing trends as well as aggregates nonaccruals by BDC lender.
   
• Q4 Fair-Value Change Report: Octus identified 88 borrowers whose loans were written down by more than 15% sequentially by BDC lenders. Sector themes across loans that were written down include construction and building, clinical healthcare, and logistics.
   
• Q4 Non-PIK to PIK Report: Octus identified 27 borrowers whose loans added a PIK element in the fourth quarter to interest that was not present in the third quarter. This report is an early indicator of stress evident by the continued high pricing of loans that added PIK. The median price of the group was 88.4% as measured by fair value divided by principal representing just a 4.5% sequential decline.
   
• Across reports, themes emerged by sector. For instance, residential construction, in particular residential roofing contractors and service companies, appeared across multiple screens. Vertex Service Partners, Roof OpCo, Apple Roofing and Unified Service Partners moved to partial PIK. Premier Roofing was written down sharply and added to nonaccrual status.
   
• Other sectors featured in multiple reports include clinical healthcare rollups, particularly dental practices, and supply and logistics companies.

For samples of each report, please contact [email protected]

Quarterly Nonaccrual Report
In a universe of 171 BDCs, Octus identified a total of $7.12 billion of debt (at cost) in nonaccrual status in the fourth-quarter 2025, up 6% from $6.75 billion in the third-quarter 2025. Aggregate debt nonaccruals represented 1.45% of total reported debt investments at cost, down slightly from 1.47% quarter over quarter. Fair-market value of nonaccrual debt rose to $3.77 billion, or 53% of cost, up from 48% in the prior quarter, pushing the FV nonaccrual rate to 0.77% from 0.71%.

The report, published quarterly, identified approximately 325 loans on nonaccrual status as of Dec. 31, 2025, and includes the borrower name, sponsor, lenders and debt description.

The report also compares BDCs relative nonaccrual exposure as a percent of total cost and fair value.

Quarterly Nonaccrual Report
In a universe of 171 BDCs, Octus identified a total of $7.12 billion of debt (at cost) in nonaccrual status in the fourth-quarter 2025, up 6% from $6.75 billion in the third-quarter 2025. Aggregate debt nonaccruals represented 1.45% of total reported debt investments at cost, down slightly from 1.47% quarter over quarter. Fair-market value of nonaccrual debt rose to $3.77 billion, or 53% of cost, up from 48% in the prior quarter, pushing the FV nonaccrual rate to 0.77% from 0.71%.

The report, published quarterly, identified approximately 325 loans on nonaccrual status as of Dec. 31, 2025, and includes the borrower name, sponsor, lenders and debt description.

The report also compares BDCs relative nonaccrual exposure as a percent of total cost and fair value.

Cash Interest Shifting to PIK
Octus identified 27 borrowers that switched a portion or all of the interest paid to lenders to PIK in the fourth quarter of 2025 after paying all-cash interest in the third quarter of 2025. Most companies that switched also saw reductions in fair value as a percentage of par, although the average fair value reduction was minimal at negative 4.5% quarter over quarter (negative 9.6% year over year). Total principal on the 27 loans is $1.22 billion, with an average fair value of 83.2% of par and a median of 88.4%.

Borrowers paying interest in kind could be an early indication of stress. It is unclear whether borrowers had the contractual right to pay interest in kind or whether the switch was the result of an amendment to the original credit agreement. Either way, the switch to partial PIK is likely a result of stress.

Maturities of loans switched to at least a partial PIK cluster in 2029, with a slight uptick in 2028. This contrasts with the maturity profile of nonaccrual loans, which is spread more evenly from 2026 through 2029. The implication: PIK switchers are generally newer-vintage deals where the runway is longer, but the operating deterioration has already become visible.

Residential Roofing

Octus identified four companies exposed to residential roofing repair switching interest payments from all cash to at least partial PIK in the fourth quarter of 2025. Roofing has long been thought of as a steady, defensible strategy within residential construction – if a roof has a leak, homeowners fix it.

A number of private equity firms built rollup strategies of residential roofing contractors and services. A possible explanation for stress in the roofing market is higher-than-expected prices. After the pandemic, asphalt shingle prices increased dramatically, with large price increases continuing through 2023 and fairly steady, albeit lower, increases thereafter. According to roofing contractor Logams, manufacturers including Owens Corning, GAF and CertainTeed raised prices by 6% to 10% in early 2025.

The national average cost of roof replacement jumped to over $19,800 in 2025 from about $18,000 in 2024. Manufacturers again raised prices in 2026. Owens Corning has talked about continued tariff pressure and the push to pass those costs on to customers.

Roofing companies that moved to at least partial PIK interest include Vertex Service Partners, Roof OpCo, Apple Roofing Administrative Services and Unified Service Partners.

Restructuring Activity
In the fourth quarter, the vast majority of loans that were removed from the nonaccrual list by BDCs, either removed altogether from BDC portfolios or taken off nonaccrual status, were either restructured or the underlying company or assets were sold or liquidated. Many restructurings continued to occur out of court with limited disclosure other than changes in reported holdings.

The cost of or fair value of removed loans, particularly as a percentage of prior-quarter nonaccrual, jumped sequentially, primarily because of two issuers that restructured their balance sheet out of court in the fourth quarter: Notorious TopCo, or Beauty Industry Group, and Production Resource Group. Both situations resulted in debt-for-equity exchanges in which direct lenders became new equity owners in the companies, along with extension of remaining maturities.

As detailed in the table below, 50% of loans analyzed were restructured out of court with average stated recoveries on loan principal of approximately 57% and average debt reduction of 51% from before the restructuring.

For a full list of individual loans that were restructured or engaged ina distressed sale activity analyzed by Octus, please email [email protected]