Private Debt News Weekly Issue #63: Stress Signals, Student Loans, and Soccer Finance
PIK usage hits four-year highs while lenders chase football transfers and federal funding gaps
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Private credit is showing stress in unexpected places while expanding into unusual markets. PIK usage surged to 11.4% in Q2, the highest level in nearly four years, with half classified as "bad PIK" from borrowers who started deferring payments mid-loan. Yet the industry is simultaneously chasing $5 billion in European football transfer fees and preparing for a student loan bonanza from Trump's new federal borrowing limits.
Major BDCs saw deployment drop 33-67% year-over-year as tariff volatility froze deal activity. Blue Owl deployed just $1.1 billion compared to $3.3 billion last year, while Blackstone's deployment fell 51%. But family offices increased private market allocations by 524% since 2016, now managing $3.1 trillion and driving continued capital inflows.
The contradictions reveal an industry in transition. Lincoln International's "shadow default rate" hit 6% while Asian art financing expands rapidly and Apollo revives a $2 billion debt sale for ABC Technologies that banks couldn't syndicate. Private credit captured just 8% of current student loans, but new federal limits could dramatically shift that balance starting July 2026.
Market dynamics show both opportunity and pressure as traditional deployment channels contract while alternative sectors offer growth potential.
Key Market Themes
1. PIK Surge Signals Growing Market Stress
Payment-in-kind usage reached 11.4% of private credit investments in Q2, the highest level since Lincoln International began tracking in 2021. Approximately half qualifies as "bad PIK", representing borrowers who started deferring cash interest payments during the loan's life rather than at origination. Loan-to-value ratios for companies using bad PIK averaged 83% versus 45% at origination.
Lincoln's official default rate rose to 3.4% from 2.9% in Q1, while the "shadow default rate" based on bad PIK usage reached 6% compared to 2% in 2021. The firm conducted 6,250 portfolio valuations during Q2, providing broad market visibility.
Key Takeaways
PIK increases reflect borrower cash flow pressure rather than strategic financing choices. The distinction between "good" and "bad" PIK indicates fundamental performance deterioration across portions of the market, suggesting the industry's smooth valuation reporting may not fully capture underlying stress.
2. Deployment Volumes Collapse Amid Deal Drought
Major BDCs experienced significant deployment declines in Q2 as tariff volatility and limited deal flow constrained activity. Blue Owl deployed $1.1 billion, down 67% year-over-year, while Blackstone Secured Lending Fund deployed 51% less than 2024. Ares Capital's origination volumes dropped 33% compared to last year.
"Liberation Day" tariff announcements on April 2 brought deal activity "to a screeching halt" according to Configure Partners' Mark Birkett. Bank refinancing activity increased as borrowers accessed cheaper funding, creating additional competition for private lenders.
What This Means
Deployment pressure creates margin compression and forces lenders to accept higher leverage and lower pricing for quality deals. The industry's fee-based model depends on capital deployment, making prolonged slowdowns particularly challenging for manager economics.
3. Student Loan Market Opens Massive Opportunity
Trump's One Big Beautiful Bill Act caps federal parent loans at $20,000 annually and $65,000 total, down from unlimited borrowing up to attendance costs. Graduate student loans are capped at $100,000 for master's degrees and $200,000 for professional programs. Changes take effect July 1, 2026.
Private lenders currently originate just 8% of all student loans, with federal programs providing the remainder. Average yearly costs reach $15,167 for public universities and $29,703 for private institutions, suggesting federal caps will create substantial funding gaps.
Carlyle and KKR purchased a $10 billion student loan portfolio from Discover Financial, while Waterfall Asset Management actively buys student loan bonds. Carlyle's Akhil Bansal noted that "the void in federal student lending creates an opportunity for private student lenders."
Key Takeaways
Federal loan restrictions could dramatically shift market dynamics, potentially increasing private lending from 8% to much higher percentages. However, student loan default rates of 12.4% and delinquency rates of 23.7% present significant credit risks that require careful underwriting and pricing.
4. Football Finance Attracts Major Private Credit Firms
European football clubs spent over $5 billion on player transfers this summer, with Apollo and Blackstone exploring financing deals backed by transfer fee receivables. Transfer fees often exceed $100 million for key players and are typically paid in installments over several years, creating future cash flows clubs can monetize.
Apollo's Tristram Leach described transfer financing as "compelling risk reward" and part of the firm's asset-backed business strategy. Traditional specialist lenders are being joined by large financial institutions as the market expands beyond niche players.
Nottingham Forest secured a £28 million loan at 8.2% from Macquarie backed by Brennan Johnson's sale to Tottenham. Fasanara Capital has lent over $300 million to European clubs over three years.
What This Means
Sports financing represents private credit's expansion into specialized asset-backed lending as traditional corporate deals become scarce. Transfer receivables offer government-backed enforcement through FIFA and UEFA, providing strong collateral protection for lenders.
5. Asian Art Finance Accelerates Regional Expansion
Private banks are rapidly expanding art-backed lending services across Asia, with the region now representing 15% of Citi's global art finance portfolio. Deutsche Bank, Goldman Sachs, and HSBC all launched or expanded art financing products in Asia during 2023-2024.
Chinese fine art sales reached $1.9 billion last year, surpassing the UK's $1.4 billion and trailing only the US at $4.3 billion. Hong Kong's Art Basel and new Christie's and Sotheby's headquarters have reinforced the city's position as a regional art hub.
Loan-to-value ratios typically reach 50% of collection value, with minimum artwork values of $200,000 to $1 million depending on the lender. Some banks now allow clients to keep artwork in their homes rather than requiring secure storage.
Key Takeaways
Art financing provides diversification from traditional private credit while serving ultra-high-net-worth clients seeking liquidity without asset sales. The sector benefits from established valuation methodologies and strong collateral characteristics in a volatile market environment.
6. Secondaries Market Shows "Free Money" Accounting Benefits
Secondary market volume surged 51% to $103 billion in H1 2025 as private credit secondaries are expected to grow to $17 billion this year from $10 billion in 2024. Blue Owl's Marc Lipschultz noted investors are "picking up free money" through accounting that allows discount purchases to be revalued at par.
Coller Capital closed a $3 billion continuation fund with TPG Twin Brook, the largest private credit secondaries vehicle to date. Ares raised over $3.5 billion for its debut credit secondaries fund, while Pantheon raised three times its $750 million target.
Key Takeaways
Secondaries growth provides liquidity solutions for investors while potentially creating artificial valuation gains through accounting treatment. The trend reflects fund liquidity pressure and LP portfolio management needs as private markets mature.
Deals of Note
Centerbridge/MeridianLink — $1.4B financing led by Goldman Sachs Asset Management, Blackstone, Ares, Blue Owl, and Antares
Apollo/ABC Technologies — $2B+ debt sale revival with HPS and other private credit firms
Fossil Group — $150M asset-based credit facility with Ares Management
Blackstone/Sapiens — $1B private debt deal with Goldman Sachs for Advent International acquisition
Nottingham Forest — £28M transfer receivables financing from Macquarie
Forward Outlook
PIK usage continues rising as borrower cash flows deteriorate further
Sports financing expands beyond football to other asset-backed opportunities
Family office allocations increase while demanding enhanced service levels
Secondaries market growth continues with liquidity-seeking investors
Deployment challenges persist until M&A activity genuinely recovers
Final Takeaway
Private credit is simultaneously showing stress and discovering new opportunities. PIK usage at four-year highs and deployment volumes down 33-67% reveal pressure in core markets, while football transfer financing, student loan gaps, and Asian art lending demonstrate the industry's expansion into specialized sectors.
Family offices increasing allocations by 524% since 2016 provides stable capital even as traditional deal flow contracts. Trump's student loan limits could shift $100+ billion from federal to private lending starting 2026, creating massive deployment opportunities for firms positioned correctly.
The secondaries boom and "free money" accounting benefits reflect both investor sophistication and liquidity pressure as private markets mature. Apollo's $2 billion debt sale revival shows how tariff-disrupted deals are finding alternative financing paths through private credit rather than bank syndicates.
Market evolution continues as the industry adapts to changing deal flow, borrower stress, and alternative asset classes. Success will depend on maintaining credit discipline while developing expertise in specialized sectors that offer stable returns without traditional private equity dependency.
Private credit's resilience lies in its flexibility and innovation, but rising PIK usage and deployment challenges require careful risk management as the industry pursues growth across diverse market segments.