Fed Rate Hikes Won’t Trigger Private Credit Default Wave: PGIM

Private-credit borrowers have already adjusted their debt loads to account for the Federal Reserve’s higher interest rates, according to Dianna Carr-Coletta, managing director for middle-market direct lending at PGIM Credit. "The balance sheets have been right-sized for the amount of interest that they need to carry with their debt," Carr-Coletta said in an interview with Yahoo Finance on Wednesday. 00% on Wednesday. The rate increase, the first since 2023, potentially puts renewed pressure on highly leveraged companies and their lenders.

Read Also: PE's Middle-Market Deal Boom Is Moving Downmarket as $860 Billion 'Zombie' Problem Grows Borrowers Have Adjusted Private credit has faced a more challenging environment since the Fed began aggressively raising rates, with borrowers accustomed to cheap financing suddenly facing substantially higher interest expenses. The pressure has been particularly acute for companies financed during the 2021 and 2022 vintages. "Where you’re seeing the challenged vintages right now are the 21 and 22s when we saw that tightening," Carr-Coletta said.

Still, Carr-Coletta said another round of rate increases may not necessarily trigger a sharp deterioration in credit quality because borrowers and lenders have already adapted to a higher-rate environment. "Over the long-term, the balance sheets are now set and structured to be able to absorb that," she said. The floating-rate structure of much of the private-credit market also means higher rates can benefit lenders by increasing interest income, although the same structure can raise borrowing costs for portfolio companies. Defaults Don’t Mean Losses The question of defaults remains more complicated.

S. 3% for the trailing 12 months ended August 2026. 1% in July 2026. Carr-Coletta acknowledged the trend, but dismissed it as evidence that higher rates alone are driving a new wave of distress.

"I think we have seen an uptick in defaults, and that is because they came from an all-time low," she said. She also highlighted an important distinction for private-credit investors: A default does not automatically translate into a realized loss. "Defaults don’t necessarily mean realized losses. It just means that the company cannot pay its principal and interest with its current debt load," she added.

That distinction could become increasingly important as private-credit managers navigate an environment in which borrowers continue to face elevated financing costs while lenders assess the value and recoverability of troubled loans. For private-equity-backed companies, the ability to absorb higher interest expenses will likely depend on the amount of leverage, cash-flow generation and flexibility built into their capital structures.

Carr-Coletta’s comments suggest that while pockets of stress remain concentrated among older loan vintages, the private-credit market has had time to adjust to a higher-rate regime — potentially limiting the impact of another incremental increase in borrowing costs. Read Also: Private Equity Finds a New Way to Bet on AI: Data Center Services Photo: Shutterstock