Monroe Capital Chief Criticizes Private Credit Tactics
Ted Koenig warns that lenders are using payment-in-kind and maturity extensions to obscure portfolio distress.
Updated on Oct. 15, 2026 in Corporate Finance
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Monroe Capital executive Ted Koenig recently criticized common industry practices that may hide the true extent of financial stress within private credit. His comments follow a report from Moody's Ratings indicating that private credit default rates are higher than previously reported when adjusted for specific repayment maneuvers.
Why it matters
The use of payment-in-kind and maturity extensions allows borrowers to defer interest and avoid loan covenants, potentially masking the underlying inability of companies to meet financial obligations. This practice complicates the assessment of risk for investors navigating a high-interest-rate environment.
Moody's tracked 607 middle-market CLO issuers and found that 106, or 17%, pay interest in kind with an interest coverage ratio of 1x EBITDA. This occurs as the Federal Reserve anticipates another quarter-point rate hike before the end of 2026.
The players
Ted Koenig
He is the head of Monroe Capital, an asset management firm that held $23.6 billion in assets under management as of January 1.
Moody's Ratings
This is a credit rating agency that tracks issuer performance and provided the data on middle-market CLO private credit default rates.
The details
Lenders are increasingly using payment-in-kind (PIK) arrangements, which allow borrowers to defer interest by adding it to the loan principal. Koenig highlighted these tactics during his appearance at the CAIS Alternative Investment Summit in Los Angeles.
Timeline
January 1, 2026: Date for Monroe Capital's recorded $23.6 billion in assets under management.
12 months to June 2026: Period covered by the Moody's default rate analysis.
September 2026: The Federal Reserve enacted a quarter-percentage-point interest rate increase.
Week of October 15, 2026: Ted Koenig spoke at the CAIS Alternative Investment Summit.
Before end of 2026: Expected timeline for the next Federal Reserve interest rate hike.
Market Dynamics
The prevalence of PIK arrangements follows the Federal Reserve's monetary policy tightening cycle, which has increased borrowing costs for middle-market companies. As rates remain elevated, the industry faces a structural shift where traditional debt covenants are increasingly bypassed to maintain liquidity.
Retail and institutional investors should be aware that reported default rates in private credit may understate actual risks due to interest deferral tactics. This nuance suggests that yield projections and portfolio risk assessments may require deeper scrutiny of underlying issuer loan agreements.
The takeaway
Investors should scrutinize credit portfolios for an over-reliance on PIK arrangements, which can temporarily mask severe financial strain. Monitoring these accounting maneuvers is essential for assessing the true health of private credit holdings during periods of rising interest rates.
What happens next
The Federal Reserve is projected to implement one additional quarter-point interest rate increase before the end of 2026.
Further reading
For broader trends in debt management, see Corporate Finance.
Source note: This article includes information reported by Pitchbook.
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