“There’s essentially a slowing of growth that’s occurring, and that’s just a takeaway of what might come,” Garfield said. It’s not clear why profit growth is slowing, Garfield said, but tariffs could be one factor.
The portion of companies utilizing “PIK” — a term describing riskier debt — rose to 11%, up from 10.5% the year before and up from 7% in 2021. “PIK” stands for “payments in kind.” A PIK provision means a company has agreed to make extra payments if it cannot pay the interest on the debts initially agreed to.
The “shadow default rate” in Lincoln’s index — meaning the percentage of companies carrying bad PIK — more than doubled from Q4 2021 when it was 2.5% of all deals to 6.4% in Q4 2025.
The rise in shadow defaults isn’t inherently alarming, Garfield says. Private credit is a risky market and lenders know in advance that a percentage of all their bets will end in some kind of default.
Rather, the decline in yield for investors will be more of a concern, he says.
Interest rates on private credit are based on the Fed’s Secured Overnight Financing Rate (SOFR) plus an additional “spread” to reward investors for taking the risk.
At the peak of the market, SOFR was around 5.4% and investors were demanding a further 6% on top of that, for yields totalling 11% or more. Today, SOFR is priced at 3.73% and a typical all-in yield is only 8.5%, Garfield said.
The spread above SOFR has declined because more investors have entered the market chasing private credit deals, allowing companies to insist on more favorable terms.
“The real input that’s going to be impacting your returns is going to be the pricing, not a 6% default,” Garfield said.
“There’s a lot of capital in the market, all chasing high-quality deals, so the competition is causing the compression [of yields] to occur.”
