What Rising Default Rates Actually Mean for Healthy Borrowers
If you’ve kept up with the financial news cycle lately, the headlines about private credit are alarming. Default rates are at 5.8% — the highest on record according to Fitch Ratings — spurred by an increase in payment-in-kind and “deferred interest schemes” among distressed middle market borrowers.
At first glance, it looks like the private credit market is falling apart. It’s not. But it is revealing which lenders were doing serious underwriting in 2021 — and which weren’t.
Here’s what’s actually happening, and what it means for you as a borrower with a healthy business.
The defaults are concentrated — not widespread.
The most important thing to understand about the current default cycle is where the stress is coming from. Morningstar DBRS’s analysis is clear: the defaults are disproportionately concentrated in 2021 and 2022 vintage deals — the era when capital was cheap, competition among lenders was fierce, and underwriting standards loosened significantly.
These were deals with aggressive leverage, thin covenants, generous EBITDA add-backs, and assumptions that growth would continue indefinitely. When rates stayed elevated and growth slowed, many of these borrowers couldn’t service their debt. The “distressed exchanges” you’re reading about — where lenders renegotiate terms to avoid formal default — are overwhelmingly happening in this cohort.
This is not a broad-based credit crisis. It’s a correction in a specific segment of the market where discipline was lacking.
If your business is healthy, this is actually good news.
Counterintuitive as it sounds, rising default rates in poorly underwritten deals can actually benefit well-run businesses looking for capital. Here’s why:
- Lenders are getting more selective — which means the companies they do fund get better treatment. When defaults rise, lenders tighten their criteria. That sounds like bad news, but for a company with strong fundamentals, it means less competition for capital from weaker borrowers. You’re no longer competing with overleveraged companies that shouldn’t have been vying for attention in the first place.
- Disciplined lenders are being rewarded. The lenders who maintained underwriting standards through 2021–2022 — the ones who said no to covenant-lite structures and aggressive leverage — are the ones with the healthiest portfolios today. Those lenders have capital to deploy and they’re actively looking for quality borrowers. If you’re one of them, you’ll find a receptive audience.
- The flight to quality is real. In stressed markets, capital doesn’t disappear — it migrates. It moves from risky to safe, from speculative to fundamental, from quantity to quality. If your business has predictable cash flows, manageable leverage, and a clear use of proceeds, you are exactly what the market is looking for right now.
What this means practically.
If you’re a founder or CFO reading these headlines and wondering whether now is the wrong time to explore debt — it’s not. But you do need to be thoughtful about who you borrow from.
Look for lenders with strong track records through multiple cycles. The current environment is exposing which lenders built their portfolios on solid underwriting and which built them on volume. A lender who’s performing well through this stress test is a lender you can trust to be a constructive partner.
Expect and welcome a rigorous diligence process. If a lender is moving quickly with minimal questions, that should give you pause, not comfort. The lenders asking tough questions are the ones who understand your business well enough to support you when it matters.
Prepare your financials and tell your story clearly. In a more selective lending environment, the companies that stand out are the ones that make it easy for lenders to say yes. That means clean data, a clear narrative around use of proceeds, and a realistic repayment plan.
At Hum Financial, we underwrite every deal with discipline — not because the market demands it right now, but because that’s how we’ve always operated. Our portfolio reflects that approach. We focus on businesses with real fundamentals, structure deals with appropriate protections, and build relationships designed to last through cycles.
→ Ready to work with a lender that does it right? Speak to Hum.
