Shadow Defaults, ‘Bad PIK’ Signal Cracks in Private Credit 

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By Dia Gill

As private credit continues to deploy record capital and foray into liability management exercises reminiscent of the broadly syndicated market, signs of strain are emerging beneath the surface.

Data tracked by Lincoln International shows that stress indicators in sponsor-backed private credit portfolios have risen since the pandemic-era lending boom.

“We would say overall, private credit continues to deploy capital, liquidity remains high,” said Jochen Schmitz, a managing director at Lincoln International’s capital advisory group. “The terms continue to tighten and are competitive as far as new money. But certainly, based on the data we have, we’re starting to see some cracks in the system, and they extend beyond the headline themes of software.”

Among the warning signs are rising “shadow defaults” and “bad PIK.” The firm has observed an increase in what it calls bad PIK, or instances where lenders convert originally cash-pay interest into payment-in-kind in order to preserve liquidity after issuance.

Lincoln says that the “bad PIK” percentage can be viewed as a “shadow default rate,” or a proxy for situations wherein there may have otherwise been a default if not for a PIK election, noting that those elections are typically made because of liquidity constraints.

In 2025, those shadow default rates are nearly three times their 2021 levels, a trend that has continued into 2026, Schmitz said.

“The first fallback is, why don’t we convert some cash interest to PIK interest?” Schmitz said of troubled private credit-financed leveraged buyouts. Sponsors may then “dribble in” incremental equity to extend the runway. If those efforts fail, the outcome is often an ownership transition.

“What we typically don’t see is the more liability-management-type playbook,” Schmitz said.

But as stress increases and maturities tied to Covid-era LBOs approach, that could change. Sponsors familiar with broadly syndicated loan-style liability management exercises may seek to apply similar tactics within their private-credit-backed portfolio names in order to extend runway, Schmitz said.

“When we see an increase in stress across the system and an increase in default rates, the natural discussion becomes, what can we do short of a straight ownership transition, and that really does open up the discussion for liability management,” he said.

The evolution of private credit itself could influence how that shift unfolds. Historically defined by single-lender or small club deals, this market has grown into multi-billion-dollar financings backed by five to seven lenders, what Schmitz calls “syndicated private credit.” Still, compared with broadly syndicated loans, private credit continues to boast greater lender unity.

“Given the nature of private credit and the fact that it’s not as broadly syndicated, I do think that it lends itself to more pro-rata style, inclusive transactions,” he said.
Those structural features underpin private credit’s enduring advantages, including ample liquidity, competitive pricing and the ability to act quickly. And once the deal is closed, the importance of the sponsor-creditor relationships endures, and this continues to be a “key differentiator between the two markets.”

“Being proactive for both sponsors and private credit providers is absolutely critical as we approach Covid-era maturities,” Schmitz said. “Keeping all options on the table and trying to solve the problem with the right toolkit is critical.”

Octus will be hosting a webinar discussion on the evolving landscape of private credit restructurings from the perspectives of both lenders and sponsors. You can register for the webinar HERE.
 

Vibrantz Technologies

Vibrantz Technologies’ non-pro-rata liability management exercise, which was launched earlier this month, incorporated various features seen in recent years, including the use of an unrestricted subsidiary to enhance value for new debt, the picking off of minority lenders by offering them individual deals and the withholding of details of the treatment of steerco or majority lenders, according to sources. Read Octus’ Vibrantz Technologies coverage HERE.

Xerox

An ad hoc group of Xerox Holdings lenders represented by Gibson Dunn and Moelis is preparing to sign a cooperation agreement after the company announced a $450 million new-money “deal away” involving TPG Credit and other investors, according to sources.

The recently announced Xerox transaction used a relatively novel “joint venture” structure to effectuate a drop-down of some of the company’s intellectual property. We believe that the transaction structure implies that the company took the view that the new JV was not a “subsidiary” under the company’s indentures and term loan credit agreement and therefore is not subject to the restrictive covenants in those documents. Octus’ coverage of Xerox can be found HERE.

Saks Global Enterprises

Saks’ merger with Neiman Marcus faced significant challenges from the outset, which led to its eventual bankruptcy filing in January 2026. We spoke with industry experts and former employees to get insight into the factors of this transaction that contributed to the downfall of the storied retailer. Our coverage of Saks can be found HERE.

People Moves

David Nemecek, well known for advising distressed companies, is leaving Kirkland & Ellis to join Simpson Thacher. His expertise in liability management exercises, or LMEs, and out-of-court capital solutions has made him a sought-after advisor for private equity sponsors and management teams. This move is expected to enhance Simpson Thacher’s corporate and restructuring practices, leveraging his experience in structuring complex LMEs for a diverse range of industries. Octus’ coverage of People Moves can be found HERE.

Vivid Seats

Vivid Seats and lenders are working with restructuring advisors, as the secondary event ticket platform’s profitability, revenue and cash flow suffer from competition, according to sources. Read Octus’ Vivid Seats coverage HERE.
 

Saks Global Enterprises

Alfredo R. Perez granted final approval of the Saks Global debtors’ $1 billion new-money DIP financing and the SO5 Digital debtors’ cash collateral motions at a largely uncontested hearing today. The judge overruled the sole objection pressed at the hearing, which sought a carve-out to protect prepetition vendor claims.

Yesterday evening, the Saks Global debtors reported a resolution with the official committee of unsecured creditors, leaving only a small number of objecting consignment and concession vendors who did not oppose DIP approval outright. Octus’ Saks coverage is HERE.

Multi-Color Corp.

At a hearing today, Judge Michael Kaplan announced he will adjourn the Multi-Color debtors’ final DIP and confirmation hearings by two weeks to March 17 and March 31, respectively.

Judge Kaplan also said he will extend the indications of interest deadline set by the debtors in the private sale process they began about two weeks ago. The deadline for indications of interest is now March 18, not March 4, he said.

Over the weekend, the Multi-Color ad hoc cross-holder group sued Barclays Bank as collateral agent under the prepetition term loan security agreement. The group alleges Multi-Color falsely stated the term loan agent holds secured liens covering “substantially all” the debtors’ assets and properties, when the liens cover a few limited categories of assets and exclude unencumbered assets comprising “a significant portion of the Term Loan Obligors’ value.”

In a separate motion, the cross-holder group accused Multi-Color of running a “secretive” asset sale process outside bankruptcy court supervision on an unreasonable timeline. In response, the debtors criticized the cross-holder group for committing to bidding but refusing to disclose its potential co-bidders. Today Judge Kaplan directed the cross-holders to share the names of potential co-bidders with the debtors within 48 hours. Octus’ Multi-Color coverage is HERE.

Pine Gate Renewables

On Feb. 18, Judge Christopher Lopez confirmed the Pine Gate Renewables debtors’ liquidation plan but carved out nonvoting classes from the plan’s nondebtor releases in light of a recent district court decision, Container Store. The judge also limited the scope of the plan’s gatekeeping provision to exculpated parties.

Judge Lopez said he would exclude the plan’s two nonvoting classes – Class 6 subordinated claims and Class 8 equity interests – from the nondebtor release because they will receive no recovery under the plan, so they will be “giving up more” by releasing claims. Octus’ Pine Gate coverage is HERE.
 

IEEPA Tariffs

The U.S. Supreme Court today issued a landmark 6-3 opinion ruling striking down President Donald Trump’s global reciprocal tariffs as well as “fentanyl trafficking” tariffs on China, Canada and Mexico imposed under the International Emergency Economic Powers Act, or IEEPA. Trump quickly announced plans to immediately impose a new 10% global baseline tariff under section 122 of the Trade Act of 1974, which could serve as a stopgap while the administration pursues new section 301 and section 232 tariff investigations to replace the IEEPA tariffs. The Supreme Court order does not address the issue of potential tariff refunds, leaving it to the lower courts to address. Speaking on potential IEEPA tariff refunds, Trump said, “I guess it has to get litigated for the next two years” or “the next five years.” Octus’ coverage of tariffs can be found HERE.

Optimum Co-Op Antitrust Suit

At a preliminary hearing, Judge Jeannette Vargas denied Optimum Communications creditors’ request to stay discovery in the company’s novel antitrust suit, alleging that creditors unlawfully colluded by entering into a cooperation agreement in July 2024. The judge said that she will permit only “limited” discovery until she rules on the creditors’ pending motion to dismiss. Judge Vargas requested that the parties meet and confer on Optimum’s discovery requests to determine which can reasonably be fulfilled and ordered them to file a joint letter on the matter by March 5. The judge did not materially opine on the complaint’s allegations, noting only that Optimum’s complaint is not facially “devoid” of merit. Octus’ coverage of Optimum is available HERE.

Bayer Roundup Settlement

Bayer’s Monsanto announced a $7.25 billion proposed class-action settlement that would resolve current and future claims alleging that its Roundup herbicide causes non-Hodgkin lymphoma, or NHL. The company says that the settlement and the U.S. Supreme Court’s pending review of a $1.25 million jury verdict in the Durnell case are “independently necessary and mutually reinforcing steps in the company’s multipronged strategy” to “contain” the Roundup litigation. Bayer said that it has the right to terminate the settlement if there are an “excessive” number of opt-outs, but management refused to disclose the exact threshold. The plaintiffs said the deal includes a $1 billion “security fund” to protect class members, especially future claimants, in the event of a Monsanto bankruptcy, in light of “numerous public reports” speculating about a potential chapter 11 filing. Octus’ coverage of Bayer is HERE.