Private credit lenders are increasingly offering debt concessions to borrowers, including delayed cash payments and extended loan terms, as a sign of growing stress within the sector. This rise in “payment in kind” (PIK) provisions in loans coincides with struggles faced by both business development corporations (BDCs) and their software clients. BDCs, such as Ares Strategic Income Fund, Apollo Debt Solutions, and BlackRock’s HPS Corporate Lending Fund, extend private credit to smaller enterprises. These BDCs are now experiencing heavy redemption pressure as investors grow wary of the market’s opacity and credit quality.
Software companies that took on significant private debt during the low-interest-rate environment of 2020-2021 now grapple with looming loan maturities, falling stock prices, and profitability issues, compounded by the disruptive potential of artificial intelligence. To maintain low non-performing loan levels, BDCs are modifying loan agreements to include PIKs, which allow borrowers to defer cash interest payments by adding the dues to their loan principal. Analysts at Houlihan Lokey estimate that over a third of private credit agreements with software borrowers at the end of 2025 included the PIK option, a threefold increase in three years.
Oxford Economics estimates that PIKs now contribute over 20% of BDCs’ net investment income, half of which is in the technology sector. Robert Cohen, director of global developed credit at DoubleLine Capital, suggests these arrangements will become more frequent if the software sector’s difficulties persist. He notes that lenders are incentivised to provide borrowers with flexibility rather than calling in a covenant default, which would necessitate disclosing the loan’s markdown to investors.
Saumil Annegiri, co-founder of CredCore, notes that software businesses are struggling to meet loan obligations, also known as covenants. While more loans include the PIK option, only a small percentage of borrowers have switched to payment-in-kind structures, just over 5% at the end of 2025, according to Houlihan Lokey. However, Chris Cessna from Houlihan Lokey warns that this figure could jump if a large number of borrowers experience constrained liquidity simultaneously.
