Companies that have borrowed from private-credit firms are increasingly deferring cash interest, a potential sign of weakness in a corner of the economy that’s drawn warnings of a crunch. The Boston Fed found that over the past four years “pay-in-kind” arrangements — in which interest is paid in additional debt tacked onto the borrowing pile, instead of in cash — rose from 6% to 10% of portfolios at the most common type of private-credit fund, known as a BDC. That “suggests there is growing pressure on borrower cash flows,” Fed researchers wrote.
Among software companies, where fears of a credit crash are sharpest, the use of PIK doubled to 13% between the end of 2022 and March of this year. The researchers also found tighter pricing that indicates lenders are competing more aggressively to win business — never a great sign of prudent risk management.
