Is Private Credit Turning Into a Lemon? Bank of England Says So. Default Rate at a Record 6.0%. Banks and Insurers Deep In It.

Published: May 28, 2026

A central banker just called private credit a "market for lemons." A government report calls it a "layered cake"... like the 2008 subprime mess. And banks and insurers are sitting on a ton of it.

Sarah Breeden, who runs financial stability at the Bank of England, reached for Akerlof's Nobel idea... information asymmetry → adverse selection → market collapse.

The default rate just hit a record 6.0%. Most of it is not bankruptcies... it is borrowers deferring interest, swapping to PIK, stretching maturities. Strip those out and it looks calm. Count them and it looks like 2008.

Alleged fraud, double-pledging, BDCs at ~73% of NAV, KKR rescuing its own fund with $300M... and federal prosecutors in New York now scrutinizing how a BlackRock fund valued its loans. The ECB, just yesterday, named US private credit as a spillover risk to Europe.

Same pattern as 2008... layering, leverage on leverage, slack credit. While the standard line stays "no systemic risk... all is well... these are blips, not a trend."

And then Lehman happened... and the bottom fell out.

This time, it has gone deep into the insurers too.

May 2026 dispatch attached.

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Private Credit - The May 2026 Update (Full Deck)

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TIGZIG · Private Credit · The May 2026 Update

Banks and insurers are deep in it.

Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England, warned this April that private credit could tip into a "market for lemons" - George Akerlof's Nobel idea, where information asymmetry and adverse selection drive out the good ones, leave the bad, and the market can collapse.

Same pattern as 2008 - subprime mortgages turned into lemons.

$1.5-2T - market size (FSB).
6.0% - record default rate, April (Fitch).

The Story So Far

This is the fourth dispatch in the series. If you are new, here is the gist of the prior three.

Dispatch 1 · 24 Mar - The $2.7T Shadow Lending Market Is Showing Cracks. Defaults forecast near the Covid peak. Listed managers down 30-50%. Dimon: "when you see one cockroach, there are probably more."
Dispatch 2 · 26 Mar - US Banks & Non-Bank Lending. How Deep is the Exposure? $1.57T of US bank loans sit behind the non-bank lenders.
Dispatch 3 · 8 May - Red Flag in US Life Insurance. Up to $2.4T exposure. PE often owns both sides - the insurer and the credit fund - and decides what the loans are worth.

Across banks, non-banks and insurers - nobody has the exact number, because so much of it is undisclosed and layered. The stress is real and rising fast - and it will be felt across banking and insurance.

What Changed in Eight Weeks

For two years this was a slow drift - in eight weeks it became a cluster.

Apr 2026 - IMF. Global Financial Stability Report flags private credit - selective defaults could run 2-3x higher under stress.
Apr 7 - Moody's. Cuts the US BDC sector outlook to negative from stable.
Apr 2026 - Bank of England. Running industry stress tests. Breeden's "this time is different?" speech.
May 6 - Financial Stability Board. Publishes its Vulnerabilities in Private Credit report - data gaps, valuation, opacity.
May 7 - OCC. Warns PIK and restructurings "may mask underlying credit deterioration."
May 11 - FS KKR (FSK). Breaks in public - banks cut the credit line, KKR steps in days later.
May 17 - DOJ. Probing valuation marks at a BlackRock private credit fund.
May 18 - Fitch. Private credit default rate hits a record 6.0% (April TTM) - the highest since its index began.
May 27 - European Central Bank. Financial Stability Review names US private credit as a spillover risk to the euro area.

The Data Turned

The default rate just hit a record - and it has been climbing every month.

Dec 5.6% → Apr 6.0% - Fitch private credit default rate (trailing 12 months). A record high, climbing every month into April.
4.8% (MCO) - the CLO book (~1,000 issuers).
9.7% (PMR) - the insurer book (~300 issuers).

The two books split sharply: the insurer-facing PMR book runs at nearly double the MCO CLO book - and PMR actually eased a touch, from 10.0%.

A note on the method: all rates are trailing 12 months, and Fitch counts by number of defaulters, not dollars. Nine small defaults and nine large ones read the same here.

The Measurement Fight

The default number you believe depends on what you choose to count. Fitch is clear about what counts as a default. Of the events in April, here is what they actually were:

55% - PIK / interest deferral. Borrower stops paying cash interest and rolls it into the loan.
35% - Maturity extension under stress.
6% - Bankruptcy or liquidation. The company genuinely goes under.

So roughly 9 in 10 "defaults" are stress restructurings, not companies dying. Fitch labels them defaults anyway - and it is right to.

Moody's reads it the same way: about 65% of 2025 private credit defaults were distressed restructurings, swaps and extensions agreed under duress.

That is the whole fight. Count the restructurings and the rate looks alarming. Strip them out and it looks calm. Same loans - two very different stories.

A KKR Fund Breaks in Public

When even one of KKR's own funds needs rescuing - you read the order of events.

May 8 (Fri): JPMorgan-led banks cut the fund's credit line by $648M, raised rates, and some lenders walked away entirely.
May 11 (Mon): KKR steps in with a $300M rescue of its own fund - fresh equity, plus cash to buy out investors heading for the door.
8.1% of the fund's own loans have stopped paying, up from 5.5% at year-end. A Q1 loss of roughly $560M already.

The tell. FSK is a $12.3B fund co-managed by KKR. Its biggest exposure is software - the sector everyone is worried about. Shares down nearly half this year. Moody's cut it to junk in March.

If a fund run by KKR needs a rescue - you have to wonder what the smaller, less-backed funds look like.

BlackRock TCPC and the DOJ

When there's no market price, the mark is an opinion - and opinions are now under federal scrutiny.

TCPC filed a rare off-cycle disclosure in January - NAV cut 19% in one go ($8.71 to $7.07). Stock fell 13% that day, the most since March 2020 - and is down 24% on the year.

Class-action suits followed, claiming the fund made "materially false" statements and didn't properly value its loans. The Manhattan US Attorney (SDNY) is now seeking information and has questioned executives over valuation practices.

"If people are mismarking in order to generate fees, that's always been a no-no." - Jay Clayton, SDNY.

In a market with no daily price, the NAV is the manager's own number - that is the whole model, and it is now the thing under investigation.

Banks - The Back Door

Banks left the lending - they never left the financing. After 2008, regulators pushed banks out of risky middle-market lending. They came back as the financiers behind it - credit lines, warehouse facilities, leverage. By late 2025 US banks had extended nearly $300B of credit to private credit funds, BDCs and CLOs (Moody's).

$22B - JPMorgan direct exposure.
17% - Wells Fargo share of its $36B corporate book tied to software, the sector under the most pressure.
$22B - Citigroup - no losses reported yet, but flagging "active monitoring."

JPMorgan's Jamie Dimon warned in his 2026 letter that losses will be "higher than expected", hitting the industry's lack of "rigorous valuation marks." The Fed has since formally queried major banks on their exposure.

And it is not just US banks - European disclosures this season ran $20-30B each (Deutsche $30B, BNP $25B, Barclays $20B). Deutsche's disclosure alone dented its share price.

Insurers - The Quiet Channel

The loudest stress is in the funds - the quietest is on insurance balance sheets.

Private credit held by US life insurers grew 20%+ in 2025 - now ~10% of total assets, and over 15% for PE-affiliated insurers like Athene and Global Atlantic.

The FSB warns these PE-insurer structures may "exploit flexibility and opacity in valuations - regulatory arbitrage - and offshore reinsurance jurisdictions." A regulator's words, not mine.

The US Treasury has assembled a team to assess insurer exposure and will meet state regulators on the emerging risk.

Why it's quiet. Insurers mark to model and hold to maturity - losses surface slowly, if at all, in public filings. The IMF warns that insurers holding complex, leveraged private credit, often rated investment grade with thin capital buffers, could face larger-than-expected losses in a stress.

The fund stress makes headlines. The insurer exposure won't - it sits in slow-moving annuity books that only reveal stress years later, by which point retirees are already holding it.

The Layer Cake - What Makes This Hard to Size

The risk isn't one bad loan - it's leverage stacked on leverage, the way 2008 was.

"Leverage is a layer cake - at the borrower, fund and sponsor level - making it hard to measure. Loans are sometimes sliced and diced into CLOs - losses that are already hard to size become even harder to trace."
- Sarah Breeden, Deputy Governor, Bank of England · "This time is different?"

The FSB says the same: borrower-level debt is driven by PE sponsors buying companies with "a high proportion of debt" - then the credit funds lend on top, the funds borrow on top of that, and reporting captures only "the first layer."

Leverage piled three deep and sliced into CLOs is exactly the shape 2008 took.

Regulators (1 of 2) - International

The data isn't good enough to see the risk. Four bodies, four jurisdictions, one message.

FSB · May 6. Wants national regulators to step up supervision - flags patchy loan-level data, valuation subjectivity, reliance on small private-rating shops, and "circles of risk" where banks fund the funds that buy banks' own risk transfers.
IMF · April. Liquidity mismatch looks contained to semi-liquid structures for now. But under a stressed-rates or stressed-earnings scenario, selective default rates could rise two to three times.
Bank of England · Breeden, April. Running stress tests alongside the industry. "This time is different?" - risk migrates to the opaque, least-regulated corners, and crises hit when several vulnerabilities crystallise at once.
ECB · Financial Stability Review, May 27. Names US private credit as a spillover risk to euro area stability. Flags complex leverage structures, opaque valuations, PIK concentration and AI-disruption risk at US BDCs.

Regulators (2 of 2) - US Supervisors

From watching, to a federal probe. In months, the US regulators went from monitoring to questioning to a prosecutor's probe.

OCC · Semiannual Risk Perspective, May 7. PIK and debt restructurings "may mask underlying credit deterioration" in private credit portfolios. Flags rising bank concentration to these funds as a monitoring priority.
Fed. Has formally queried major banks on their private credit exposure - a clear posture change from passive monitoring to active questioning.
DOJ · Manhattan US Attorney (SDNY). Federal prosecutors are scrutinising the valuation marks at a BlackRock BDC, with executives questioned - the first time prosecutors have leaned on how private credit sets its prices.

The Counterview - The Bulls Have a Case

They're not ignoring the stress - they're reading a different slice of the same data.

S&P Global · March. "Fundamentals remain resilient." Median interest coverage up to 1.84x from 1.74x. Upgrades roughly equal downgrades (65 vs 63). Default rate including selective defaults actually fell to 4.37%.

Goldman panel · Apr-May (Lynam · Arougheti, Ares). Redemption gates are a feature, not a bug - designed to prevent fire sales. The scary retail BDC slice is only ~15% of private credit - the rest is locked-up institutional money. Realized losses below historical average. "No run on the bank."

The industry's line, via the American Investment Council: "The private credit system is working as designed."

The Bear View - Gundlach: "A Little Bit Like 2006"

The DoubleLine founder called the subprime collapse early - now he's pointing the same finger at private credit.

"A little bit like 2006, where everything is overvalued, cracks are starting to form. But everyone's like, it's all contained - it's just software. But it's not just software."

He says private credit has "the same trappings as subprime mortgage repackaging had back in 2006" - and calls it the next big crisis in the markets.

On the valuation problem: private assets really have two prices - 100 or zero. Marked at par one week, near-worthless the next when the borrower files (he points to Renovo).

A warning on timing: being right is not the same as being early. Being negative on mortgages in 2004 took three years to pay off.

My Read - It Always Looks Contained, Until It Doesn't

In 2008 the cracks were already showing - losses creeping up, indicators rolling over. But the line everybody parroted was the same one, over and over: no systemic risk, the system is resilient, these are minor stresses, cycles come and cycles go.

That line held right up until Lehman. Then the tone flipped overnight, and every skeleton fell out of the cupboard at once.

What is different this time is not the rhetoric - that is identical. It is that I can see many indicators cracking at once - labor, consumer delinquencies at or past 2007 levels, the layered credit in this deck, an S&P running on its own exuberance.

Usually one thing cracks at a time. Right now it is several, together, while one corner of the world dances as if it is all fine.

And there is one thing in here that is new - AI displacing labour. Computerisation, the internet, mobile - each played out over a period of time. This one is playing out instantly. So the pattern is similar to 2008 - but it is carrying a force none of the old cycles had.

I am not calling a crash - nobody can time these things.

But this is the part of the movie where everyone says it is contained. Until...

More: my deeper work on fundamentals, macros and markets is at tigzig.com/analysis.