Fitch Ratings released a report on Thursday showing that U.S. private credit default rates continued to climb in the second quarter of this year, reaching an all-time high. This reflects the persistent pressure high interest rates are exerting on highly leveraged borrowers.

Data from Fitch's tracking of approximately 1,300 U.S. private credit borrowers indicates that, as of the end of the second quarter, the trailing 12-month private credit default rate rose to 6%, surpassing the previous record of 5.7% set in the first quarter. During the second quarter, Fitch recorded 32 private credit defaults, involving 20 newly defaulting companies, bringing the total number of defaulting firms to 84.

The report notes that among the defaults occurring in the second quarter, maturity extensions have replaced payment-in-kind (PIK) interest and interest deferrals as the most common form of default. Of the 32 defaults recorded in the second quarter, more than half involved various forms of debt extensions, reflecting that a growing number of borrowers are alleviating short-term repayment pressures by prolonging debt maturities.

Lyle Margolis, Head of North American Private Credit at Fitch, stated that earlier in the year, the market expected the Federal Reserve to enter a rate-cutting cycle, and combined with a rebound in merger and acquisition activity, private credit default rates were anticipated to gradually decline. However, with the market now repricing the possibility of rate hikes and continued sluggish M&A activity, Fitch expects private credit default rates to remain elevated for the remainder of the year.

By sector, the industrial and manufacturing sectors have become the areas with the highest default risk. As of the end of the second quarter, the private credit default rate in this sector surged to 10.4%, a sharp increase from 5.9% in the first quarter. The healthcare sector's default rate also rose from 6.9% to 9.4%, indicating escalating financing pressures.

In contrast, despite the rapid development of artificial intelligence reshaping the competitive landscape of the tech industry, the overall credit health of the software sector remains relatively stable. Fitch noted that the default rate in the software sector is only 1.2%, making it not only the lowest among major industries but also a further decline from 2.3% in the first quarter, suggesting that the credit pressure on these companies is currently limited.

Fitch stated that its overall outlook for the global private credit market remains "neutral." However, the report also pointed out that geopolitical risks in the Middle East, particularly the inflationary risks from the Iran conflict, have weakened market expectations for near-term rate cuts. This means that highly leveraged borrowers will continue to face higher financing costs and debt repayment pressures in the foreseeable future.