Hidden defaults in private credit: Moody’s warning
Hidden defaults in private credit are loans in difficulty that do not count as official defaults because they have been refinanced, extended or switched to payment-in-kind (PIK) interest. Moody’s has measured this in the US middle market: the reported default rate is 4.0%, but it rises to 5.8% once those cases are added. Here is what the report says, what it means for a private investor in Spain and which questions to ask before lending money.
This text is educational. It is not investment advice.
What Moody’s has published on stress in private credit
On 14 October 2026, Moody’s Ratings published an analysis of US private credit. It reviewed 607 middle-market companies financed with private debt (those with a credit estimate from the agency) over the 12 months to June 2026. Its conclusion is that credit stress is greater than official default figures suggest.
| Measure | Companies | Share |
|---|---|---|
| Reported defaults | 24 | 4.0% |
| Reported defaults + equivalent cases (PIK and extensions at weak borrowers) | 35 | 5.8% |
| Companies paying interest in kind (PIK) | 106 | 17% |
Two other findings deserve attention. First, issuers with a Caa-equivalent rating account for more than half of the 2027 and 2028 maturities in the sample, so many will depend on extensions, costly refinancing or owner support. Second, the vehicles that pool these loans (middle-market CLOs) remain stable thanks to their structural protections.
Why hidden defaults matter to investors
An “official” default is a clear event: the borrower does not pay. But in private debt it is common to renegotiate before reaching that point. The lender grants more time or lets the borrower add interest to the debt. This is a legitimate tool, but it can also delay a loss rather than prevent it.
We looked at why extensions are the next pressure point in our article on the private credit maturity wall.
The lesson is not that private debt is bad, but that a single default figure rarely tells the whole story. It is worth checking how many loans have been modified and on what terms.
Trends: what is happening worldwide and in Spain
- Worldwide (14 October 2026): Moody’s report on US private credit puts stress at 5.8% of the issuers analysed, against 4.0% in reported defaults. The agency itself notes that CLO structures have absorbed the deterioration so far. Other industry voices argue that the market is sounder than the media noise suggests; it is worth reading both views.
- Spain (October 2026): according to the Observatorio de Financiación Alternativa con Colateral Hipotecario en España, with PwC market analysis and Cuatrecasas legal framework, alternative mortgage-backed lending grew from EUR 2,583 million in 2025 to a forecast EUR 3,891 million in 2026. Even so, its share in Spain is around 20%, against 75% in the United States. More volume means more need to monitor the quality of each deal.
For the Spanish context, see our analysis of alternative mortgage lending in Spain in 2026. Moody’s report covers the United States and corporate loans: it cannot simply be extrapolated to the Spanish real estate market, which has different collateral and different terms.
An illustrative example: how risk grows when interest is capitalised
Consider an illustrative and hypothetical example. A EUR 1,000,000 loan is secured on a property valued at EUR 1,800,000. Its initial LTV (loan amount over collateral value) is 55.6%. If for two years the interest, at 10% a year, is not paid but added to the debt, the balance reaches EUR 1,210,000.
| Scenario | Property value | Debt | LTV |
|---|---|---|---|
| Start | EUR 1,800,000 | EUR 1,000,000 | 55.6% |
| 2 years of capitalised interest, stable value | EUR 1,800,000 | EUR 1,210,000 | 67.2% |
| 2 years of capitalised interest, value down 15% | EUR 1,530,000 | EUR 1,210,000 | 79.1% |
The collateral cushion shrinks without any default being declared. That is why LTV should be monitored throughout the life of the loan, not only at the start.
Risks to consider
- Loss of capital: every investment carries risk, including partial or total loss of capital.
- Concealed default risk: extensions and PIK can delay the warning signal.
- Illiquidity and term: capital is locked in until maturity or exit.
- Collateral valuation: real estate collateral mitigates risk but does not eliminate it; a fall in prices or a slow enforcement process reduces recovery.
- Transparency: without regular information on modifications, it is hard to assess the real risk.
What to check before investing in private debt
- How many loans have been extended or refinanced, not only how many have defaulted.
- What share of interest is paid in cash and what share is capitalised.
- The current LTV of each deal and how the collateral is revalued.
- The exit plan and what happens if it fails.
- What direct contact you have with the management team to ask for explanations.
How Ondara works
Ondara Group is an alternative investment manager based in Barcelona since 2018. We structure private debt deals with real assets as collateral. We analyse each deal individually, seek diversification and keep direct contact with the management team. We pursue target double-digit returns, never guaranteed. You can learn more about who we are and the group’s brands.
Frequently asked questions
What is a hidden default in private debt?
It is a loan in difficulty that is not recorded as a default because it has been extended, refinanced or switched to capitalised (PIK) interest. Moody’s treats it as default-equivalent when the borrower is weak.
What does Moody’s say about the private credit default rate?
That it was 4.0% in the 12 months to June 2026 across 607 US middle-market issuers, and 5.8% when equivalent cases are included.
Does this affect real-estate-backed debt in Spain?
The report analyses US companies. In Spain, real estate collateral changes recovery if problems arise, but extensions and capitalised interest also exist and should be monitored.
What is PIK?
Interest that is not paid in cash but added to the principal and paid at the end.
How can I spot warning signs?
Ask about extensions, capitalised interest, LTV trends and the quality of the information you receive from the manager.
In summary
- Moody’s puts stress in US private credit at 5.8%, against 4.0% in reported defaults.
- Extensions and PIK interest can hide problems that are not yet defaults.
- In Spain, alternative real estate lending is growing, but its situation is not that of the US market.
- LTV and regular information are key to monitoring risk.
- Every investment carries risk, and real estate collateral mitigates, but does not eliminate, loss.
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This article is for information purposes only and does not constitute an investment recommendation or financial advice. All investments carry risks, including the possible loss of the capital invested, and past or target returns do not guarantee future returns. Analyse each opportunity with a professional before investing.
