Two in Five Private Credit Borrowers Burn Cash. Regulators Say It Isn’t Systemic Yet.

The Number That Should Anchor This

Roughly 40% of private credit borrowers have negative free cash flow, according to the IMF’s Global Financial Stability Report — up from about 25% in 2021.

Sit with that. Two in five companies in a $1.7-trillion-plus asset class are consuming cash rather than generating it. Not defaulting, not distressed in the formal sense — simply not covering themselves from operations. In 2021, when rates were near zero and the same figure was one in four, that was already a lot.

A borrower with negative free cash flow services debt from a balance sheet, a sponsor, or new borrowing. All three are conditional on somebody continuing to say yes.

What the Regulators Actually Said

Three official bodies have now published on this, and the wording repays close reading.

The Financial Stability Board published its Report on Vulnerabilities in Private Credit on 6 May 2026. Its finding is that the sector’s complexity, leverage and interconnectedness could amplify stress in adverse scenarios, posing broader risks to financial stability. It flags two mechanisms specifically: valuation opacity, and reliance on private credit ratings rather than public ones. Private credit borrowers typically carry no public rating at all, which makes market-wide monitoring structurally difficult.

The European Central Bank devoted a special article in its Financial Stability Review to stress in global private credit markets and what it means for euro-area stability — an unusual amount of attention for an asset class that is predominantly American.

And the FSB’s own framing is that borrowers in private credit typically have lower credit quality and higher leverage than comparable public-market borrowers. That is not a slur; it is the product’s purpose. Private credit exists to lend where public markets will not.

What none of them say is that this is systemic today. The consensus across the 2025 and 2026 analyses is that private credit does not currently pose a systemic risk, but warrants monitoring as it grows and becomes more interconnected. That is a genuine conclusion, not a hedge — and it is also exactly what was said about a number of things that later were.

The Two Signals That Are Already Moving

Two developments are worth more than the aggregate statistics, because they are behavioural rather than modelled.

The first is the rising use of payment-in-kind toggles in direct lending. A PIK toggle lets a borrower pay interest in more debt instead of cash. It is a legitimate structural feature and it is also, when its use rises across a portfolio, the clearest available tell that borrowers cannot pay in cash. It converts a liquidity problem into a larger principal balance and defers the reckoning to maturity.

The second is redemptions. Concerns about credit quality and software-sector exposure have produced a wave of redemption requests from semi-liquid private credit vehicles in the United States. Semi-liquid is the operative word: these funds promise periodic liquidity against assets that have none. That mismatch is the oldest failure mode in finance, and it does not require anything to actually default in order to bite.

Why the Marks Are the Hard Part

Here is what makes private credit genuinely different from the leveraged loan market it displaced.

A syndicated loan trades. It has a price, that price is observable, and when the market’s view changes the mark moves whether the manager likes it or not. A private credit position is marked by a model, often informed by a rating the manager commissioned. When conditions deteriorate, the mark moves when the manager decides it moves.

That is why the FSB’s emphasis on valuation opacity matters more than its leverage numbers. Leverage is measurable. In this asset class the denominator itself is an estimate, and estimates are slow to reflect bad news — which means the observable data will look calm for longer than the underlying condition warrants.

What to Watch

• The PIK share of interest income in BDC filings. It is disclosed, it is quarterly, and it moves before defaults do. A rising PIK share alongside a stable default rate is the single most informative combination available.
• Redemption gates on semi-liquid vehicles. Not redemption requests — gates. The moment a fund limits withdrawals, the liquidity promise has failed, and that is a fact rather than a projection.
• Whether the negative-cash-flow share keeps climbing. It went from 25% to 40% across a rate cycle. The next IMF reading tells you whether that was the cycle or the trend.

If you have exposure here, the useful discipline is to stop reading spreads. Spreads in private credit are set by managers against marks that managers control, so they will not warn you. Read the cash-flow disclosures instead — PIK share, interest coverage, and whether the fund has changed its redemption terms. Those are the three things a manager cannot smooth.