KBRA Releases Research – Private Credit: Q3 2025 Middle Market Borrower Surveillance Compendium: Defaults Will Rise

KBRA releases its Q3 2025 Middle Market Borrower Surveillance Compendium, providing insights into credit quality across KBRA’s portfolio of rated direct lending transactions.

While credit quality remains predominantly stable, defaults across the landscape of middle market (MM) leveraged borrowers—whose loans sit inside rated transactions—are starting to rise as expected (see Private Credit: Q4 2024 Middle Market Borrower Surveillance Compendium—5% at Risk). Although the default rate among these borrowers currently remains low relative to the much higher rate observed in the broadly syndicated loan and corporate high-yield bond markets, we believe the gap will begin to close in 2026.

In this quarterly report, we provide data regarding the 2,287 unique global MM-sponsored borrowers assessed over the last 12 months (LTM) ended September 30, 2025. We examine key trends shaping credit quality by company size and sector, detail several undercurrents that warrant close observation, and provide new data on 484 surveillance assessments and 216 new assessments conducted in Q3 2025. Finally, we define new portfolio default monitor to reflect underlying credit conditions if not for the extraordinary level of sponsor and lender interventions or permissible concessions that have delayed some realized defaults. We believe this measure offers a more realistic view of credit conditions across the landscape of leveraged MM borrowers, especially as we expect to see pending maturities or liquidity gaps force a reckoning for some borrowers, or as sponsor patience wanes for others.

Key Takeaways

• KBRA recorded only one payment default in the quarter, while bankruptcy filings and the broader direct lending default rate has contracted. However, we do not believe the low payment default rates reflect the true extent of stress among some MM borrowers. For example, downgrades have outpaced upgrades for seven consecutive quarters, resulting in a record count of obligors that KBRA assessed at ccc- in the LTM. To enhance transparency around stress levels within the private credit landscape, this quarterly issue introduces the KBRA Middle Market Default Monitor (KMDM), which consolidates borrowers identified as being in payment default or likely to be, absent ongoing interventions or concessions. The latter is composed of companies KBRA has assigned a ccc- assessment score. We believe this new consolidated monitor of defaults provides a more comprehensive view of stress among borrowers. In Q3 LTM, the KMDM by count was 3.5%, and 2.1% of the more than $1 trillion in assessed notional debt outstanding.
• We expect the default monitor to rise modestly in 2026, reflecting a forward view of borrowers whose credit fundamentals are weakening. Indicators include a convergence of declining revenues, rising leverage, liquidity shortfalls, and upcoming maturities in certain MM segments. The gradual migration of Consumer Retail and health care roll-up borrowers into the ccc- category is particularly acute. Should macroeconomic conditions soften, or policy shifts further compress margin, these and other borrowers under stress are likely to face increased refinancing difficulties and elevated risk of default that we believe will force a reckoning for some.
• In the broader portfolio, fundamental data remains robust at the median. During the LTM period, revenue and EBITDA compound annual growth rates (CAGR) moderated to 13% and 29%, respectively. Although growth has slowed relative to prior quarters, it remains broadly consistent across most sectors and company sizes. However, the share of companies reporting declining sales has continued to rise.
• Margins expanded across all sectors due to continued cost-cutting, add-on activity, scaling operations, and the use of automation. Early adopters of process automation and artificial intelligence across various sectors are increasingly reporting tangible margin and sales uplift from implementing the technology, though long-term credit implications remain uncertain.
• The median interest coverage ratio (ICR) increased for the first time in over a year, to 1.5x—a minor yet consequential indication of credit quality improvement for the median MM obligor. Concurrently, the share of obligors improving their ICR increased to nearly 60% (from 57% last quarter), highlighting the benefits of rate cuts and continued EBITDA growth.
• Borrowers continue to proactively manage near-term maturities, reducing the proportion of notional debt maturing before year-end 2026 to 10%, down from 13% in Q2. However, nearly 30% of the companies with a maturity before year-end 2026 also had leverage above 10x or negative EBITDA and had received an assessment score of ccc+ or below—factors that will likely intensify refinancing risk, and lead to a potential source of defaults in the portfolio during 2026.

Click here to view the report.

Recent Publications

• Private Credit: Q2 2025 Middle Market Borrower Surveillance Compendium—Waiting for Godot
• Private Credit: First Brands, Public Credit’s Concern
• Private Credit: Illness Spreads in Health Care Practice Roll-Ups
• Private Credit: A Source of Systemic Strength
• Private Credit: Q1 2025 Middle Market Borrower Surveillance Compendium—the Calm Before the Storm

About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

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