Software Leads Private Credit PIK Flips Heading Into Q3
Updated: 7 hours ago
What's New
Software borrowers led all sectors in cash-to-PIK switches at private credit BDCs in the second quarter. PRISM Private Markets data shows 28 software and services borrowers moved some or all of their interest to payment-in-kind. Ten of those flips carried PRISM's highest-risk signals. Ten involved several lenders switching in the same quarter. Third-quarter filings arrive in early November. Allocators with software-heavy private credit exposure should check these names first.
Why It Matters
Direct lenders have treated sponsor-backed software as one of the safest sectors in their books, citing recurring revenue and high margins. The second-quarter data points the other way. Software produced more PIK flips than any other sector, ahead of health care services at 25. Lenders who sized software exposure on recurring-revenue assumptions now hold loans where borrowers are deferring cash interest.
By The Numbers
7 lenders: Exabeam flipped to PIK at seven private credit funds in one quarter. Four of them are New Mountain funds.
12.09%: The highest PIK rate on Diligent's first lien loan, which flipped at four lenders.
24.2%: Share of deep-discount PIK flips that entered non-accrual within four quarters in PRISM's historical data.
3%: The approximate base rate for all positions over the same horizon.
Zoom In
Exabeam was marked as low as 76% of par. PRISM's distress model places it in the Severe band.
Diligent was marked as low as 73% of par. PIK spread across LGAM Private Credit, New Mountain Finance, North Haven Private Income Fund and T Series Middle Market Loan Fund.
Securonix flipped at Blue Owl Credit Income Corp. at a 78% mark. Across all its lenders, it already carries PRISM's multi-fund distress signal.
Sparq flipped at PennantPark Floating Rate Capital while marked at 59% of par.
New Era Technology moved both ways in one quarter. One lender flipped its revolver to PIK, while another restored cash pay.
The Wrap
Software stress in private credit portfolios now shows up in coupons, with borrowers deferring cash interest at several lenders at once. The pattern strengthens if Q3 filings add lenders to the Exabeam and Diligent flips or push marks lower. It weakens if those names return to cash pay, as New Era did at one lender. Cross-lender counts become reliable once most funds have filed, around November 17.
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