Weekly Market Summary

Extra Credit^*

• Over the past year, the use of payment-in-kind (PIK) and other deferred interest structures among distressed middle-market borrowers has risen meaningfully, contributing to a pickup in default rates, according to Morningstar DBRS (a global credit rating agency). Distressed exchanges now account for the vast majority of default activity, representing 94% of downgrades to D (default) or SD (selective default) in the 12 months through February 2026, per Morningstar.
• For instance, a distressed exchange may involve a borrower restructuring its debt to defer all cash interest until maturity, without offering lenders any offsetting increase in margin or principal repayment. According to DBRS, this type of payment deferral typically occurs in the later stages of financial distress, often after lenders or sponsors have already attempted to support the borrower. In practice, such measures are “rarely effective” in preventing defaults and can result in meaningful economic losses for debtholders.
• Analysts noted that a growing share of defaults is coming from 2021 and 2022 vintages, compared with earlier periods. They are also beginning to see defaults among 2023-vintage borrowers, while defaults tied to pre-2021 vintages appear to be moderating. DBRS expects the recent acceleration in defaults to persist into 2026, following a 78% year-over-year increase in default events in 2025.

Morningstar, as of 3/23/2026. Morningstar DBRS is a top-four global credit rating agency providing independent, forward-looking opinions on credit risk for corporate, sovereign, financial institution, and structured finance entities. Formed by Morningstar Inc.'s 2019 acquisition of DBRS, it offers transparent, rigorous, and market-driven ratings (e.g., AAA to D) to facilitate capital markets with offices across North America and Europe.

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