By Glenn August, Founder and Chief Executive Officer, Oak Hill Advisors, a T. Rowe Price company
Credit investors have spent much of 2026 assessing whether a series of high-profile failures, rapid advances in artificial intelligence and renewed geopolitical tensions could signal broader deterioration across credit markets.
Individual failures deserve careful scrutiny. However, current conditions appear more consistent with rising dispersion than broad-based stress. Risks are becoming increasingly borrower-specific, sector-specific and dependent on where an investor sits in the capital structure.
That may create a more demanding environment. It could also broaden the opportunity set for investors able to distinguish temporary complexity from permanent impairment.
Periods of disruption often expose weaker businesses, aggressive capital structures or inadequate documentation. Yet the presence of individual problem credits does not necessarily indicate systemic deterioration. Default rates across US leveraged loans and high-yield bonds remain relatively benign compared with long-term experience1, although pressure is becoming more visible in certain sectors and borrowers.
In this environment, disciplined underwriting, careful security selection and strong structural protections may be more important than broad market exposure.
AI is widening the range of credit outcomes
Artificial intelligence is one of the clearest examples of rising dispersion.
The rapid development of generative AI could weaken the durability of some software business models, particularly among less differentiated providers and companies whose products may become less distinctive as AI capabilities evolve.
The initial repricing of software credit was relatively broad. Since then, outcomes have become more varied. Senior secured credit and debt backed by mission-critical products, contracted enterprise customers and durable recurring revenues have generally appeared more resilient than junior capital and less differentiated issuers.
The implications of AI are therefore unlikely to be uniformly positive or negative. Some businesses may face greater competitive pressure, while others could benefit from the investment required to develop and support AI capabilities.
Entry valuations, leverage, documentation, collateral and downside protection are likely to remain decisive. The scale of expected investment may be significant, but the quality of individual projects, borrowers and capital structures will still determine credit outcomes.
Higher costs can expose weaker capital structures
Conflicts in the Middle East are adding another source of uncertainty. Geopolitical developments can quickly influence expectations for energy prices, inflation and interest rates, even when their longer-term economic effects remain difficult to predict.
For credit investors, the key consideration is how prolonged energy-price volatility and the possibility of higher-for-longer interest rates could affect corporate input costs, profit margins, consumer spending and debt-servicing capacity.
Companies with limited pricing power, energy-intensive operations or highly leveraged balance sheets may be more exposed. The impact of higher costs and elevated financing rates is also likely to differ materially across sectors and borrowers.
Detailed, security-level analysis may therefore become increasingly important. Investors will need to assess which companies can pass on higher costs, which can absorb them within existing margins and which may experience pressure on cash flows and interest coverage.
These pressures are particularly relevant for capital structures established between 2018 and 2021, when financing costs were lower and earnings expectations were often more optimistic. Some of those structures may remain manageable, while others could prove more difficult to sustain if rates remain elevated or earnings fall short of earlier assumptions.
This suggests that outcomes may increasingly depend on the underlying resilience of the business, its position in the capital structure and the flexibility available to both borrowers and lenders.
Maturity pressures may expand the need for capital solutions
The approaching private credit maturity wall could become an important part of the opportunity set.
Maturities in first-lien, unitranche and second-lien private credit are projected to increase from US$63 billion in 2027 to US$123 billion in 2028, before remaining above US$100 billion in both 2029 and 20302. Not all borrowers approaching maturity are likely to encounter difficulty. However, some may require additional capital, maturity extensions or more comprehensive balance-sheet solutions.
The growing use of liability-management exercises also reflects pressure within some capital structures. These transactions can weaken the position of existing lenders when collateral or value is transferred away from them. At the same time, they may create demand for restructuring expertise, bespoke financing and other forms of flexible capital.
Investors with patient capital and experience across performing credit, stressed situations and restructurings may be positioned to support otherwise viable companies while seeking appropriate pricing, stronger documentation and improved structural protections.
Private credit requires closer scrutiny. Underwriting standards, documentation, portfolio construction and valuation practices can vary significantly between managers. Measures such as non-accruals, payment-in-kind interest, interest coverage and leverage remain important indicators of portfolio health.
The structure of the asset class also matters. A substantial portion of private credit is held in closed-end vehicles with largely institutional investors and permanent-capital structures, which may help limit liquidation risk arising from short-term investor outflows.
Greater dispersion may reward disciplined capital
The current environment may prove compelling precisely because complexity and dispersion are increasing. AI disruption, geopolitical uncertainty, elevated financing costs and approaching maturities are likely to create a wider range of outcomes across companies, sectors and capital structures.
For investors with disciplined underwriting, flexible capital and a strong focus on downside protection, that dispersion could create more favourable entry points and potentially attractive risk-adjusted opportunities.
Success is likely to be increasingly dependent on identifying where uncertainty may have caused risk to be priced more attractively.
1 Past performance is not indicative of future results. As of June 22, 2026. Current US leveraged-loan default rate: 2.9%. Current US high-yield default rate: 1.9%. Long-term historical default rates: averaging approximately 3%–4%, with a range from around 2% to above 10% during severe stress periods. Sources: BofA Global Research, ICE Data Indices LLC, LCD/Pitchbook. J.P. Morgan Research, covering US high yield since 1987 and leveraged loans since 1998, calculated by par on a last-12-month basis and including distressed exchanges.
2 Private credit maturity wall sourced from KBRA DLD as of March 31, 2026. Dataset inclusive of unitranche, first lien and second lien loans and is comprised of $688 B through 2033.
