Holidays to Headwinds: Private Credit Stress Signals

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Season 2, Episode 9 

On this episode of LFI Levered Lines, host Kerstin Kubanek is joined by Nick Baldwin, managing director at Lincoln International, for an in-depth analysis of rising stress in Europe’s private credit market. The conversation examines the record 3.9% covenant default rate in Q3 2025, breaking down the distinction between covenant holidays (3.4%) and actual defaults (0.5%), and why this represents the highest level since tracking began in Q3 2023. Nick discusses the alarming doubling of companies with less than 10% covenant headroom, the surge in PIK interest to 17.5%, and the critical difference between “good PIK” structured at origination versus “bad PIK” introduced through amendments to address liquidity challenges. The discussion highlights sector-specific vulnerabilities, particularly in technology—with software and digital media companies from 2021-2022 vintages leading covenant defaults—alongside persistent consumer sector stress.

Nick and Kerstin explore spread compression trends moving down-market, the impact of April 2025’s tariff announcements on pricing discovery, and increasing competition in the lower mid-market as lenders seek higher returns. Looking ahead to 2026, they analyze how growing M&A pipelines could reshape financing competition and market dynamics. This episode delivers essential insights for private credit investors and lenders navigating evolving credit quality and competitive pressures.