Private lenders delay reckoning with payment concessions on stressed debt

By Matt Tracy

WASHINGTON, March 31 (Reuters) - Private credit lenders are working with specific borrowers to avoid loan defaults by enabling them to delay cash payments and extend concessions on their debt, in a growing sign of stress and postponement of pain in the sector.

The rise of what is known as "payment in kind" or PIK provision in loans comes at a time when both the business development corporations (BDCs), which extend private credit to smaller enterprises, and the software businesses that form the bulk of their clientele are struggling.

Some of the biggest BDCs, such as Ares Strategic Income Fund ZAEMZX.O, Apollo Debt Solutions and BlackRock's BLK.N HPS Corporate Lending Fund, are facing heavy redemption pressure as investors seek to step back from the lucrative market as concerns mount around opacity and credit quality.

That has arguably meant software companies that raised significant private debt during the 2020-2021 low-rates environment are now not only facing an existential threat from artificial intelligence but also dealing with looming loan maturities, falling stock prices and profitability problems.

Under pressure to maintain a low overall level of non-performing loans, or non-accruals, BDCs are modifying loan agreements to include PIKs.

DEFERRED PAYMENTS GAIN TRACTION

PIKs allow borrowers to defer cash interest payments, and instead add the dues to their loan principal.

Analysts at investment banking firm Houlihan Lokey estimate more than a third of private credit agreements to software borrowers at the end of 2025 included the option to switch to PIK, a three-fold increase in three years.

Oxford Economics estimates PIKs now contribute more than 20% of BDCs' net investment income, with half of those in the technology sector, and will spawn more leverage as BDCs borrow to meet their obligations toward debt and dividends.

Arrangements such as PIKs will rise in frequency if the troubles facing the software sector persist, especially for borrowers in BDC portfolios that have lower credit ratings, said Robert Cohen, director of global developed credit at money management firm DoubleLine Capital.

"These lenders are going to be incentivized to kick the can down the road and give the borrower flexibility, rather than call the borrower in a covenant default and force some sort of remedy," Cohen said.

"Because then that requires them probably to disclose that to investors, to mark the loan down, and I don't think they want to do that."

LENDERS LIMIT INVESTOR WITHDRAWALS

Facing heavy redemption requests, some BDCs have gated their funds, capping the amount that investors can withdraw.

Behind the scenes, they are working to prevent markdowns in their loan portfolios by creating more payment flexibility for borrowers in the software sector.

"Investors in PIKs are likely counting on a hockey-stick growth in cash flows to cover future debt service," said Varkki Chacko, managing principal at New Jersey-based Credit Capital Investments.

Roughly one-fifth of BDC loans were tied to borrowers in the software sector as of the third quarter of 2025, according to an analysis of 167 BDCs by data provider SOLVE Fixed Income. According to their latest filings, this exposure appears to have ticked up in the fourth quarter.

Saumil Annegiri, the co-founder of CredCore, a platform that scrapes loan agreements for covenants on behalf of lenders and borrowers, said software services businesses have also been failing to meet loan obligations, also known as covenants.

In order to reduce default risk, lenders have been working to amend these covenants by avoiding the switch to earnings-based metrics from revenue-based ones.

Analysts at Houlihan Lokey, however, note that while more loans include the PIK option, a relatively low percentage of borrowers with the option have actually switched to payment-in-kind structures, just over 5% at the end of 2025.

Should a large cohort of borrowers experience "constrained liquidity all at once," this figure could jump as they all choose to exercise that PIK option, said Chris Cessna, adviser in Houlihan Lokey's financial and valuation advisory business.