* Business development corporations face redemption

pressure on credit quality concerns

* Payment-in-kind financing allows deferral of cash

interest payments, increasing loan principal

* Software sector's struggles may increase PIK frequency

By Matt Tracy

WASHINGTON, March 31 (Reuters) - Private credit lenders

are working with specific borrowers to avoid loan defaults by

enabling them to delay cash payments and extend concessions on

their debt, in a growing sign of stress and postponement of pain

in the sector.

The rise of what is known as "payment in kind" or PIK

provision in loans comes at a time when both the business

development corporations (BDCs), which extend private credit to

smaller enterprises, and the software businesses that form the

bulk of their clientele are struggling.

Some of the biggest BDCs, such as Ares Strategic Income Fund

, Apollo Debt Solutions and BlackRock's ( BLK ) HPS

Corporate Lending Fund, are facing heavy redemption pressure as

investors seek to step back from the lucrative market as

concerns mount around opacity and credit quality.

That has arguably meant software companies that raised

significant private debt during the 2020-2021 low-rates

environment are now not only facing an existential threat from

artificial intelligence but also dealing with looming loan

maturities, falling stock prices and profitability problems.

Under pressure to maintain a low overall level of

non-performing loans, or non-accruals, BDCs are modifying loan

agreements to include PIKs.

DEFERRED PAYMENTS GAIN TRACTION

PIKs allow borrowers to defer cash interest payments, and

instead add the dues to their loan principal.

Analysts at investment banking firm Houlihan Lokey ( HLI ) estimate

more than a third of private credit agreements to software

borrowers at the end of 2025 included the option to switch to

PIK, a three-fold increase in three years.

Oxford Economics estimates PIKs now contribute more than 20%

of BDCs' net investment income, with half of those in the

technology sector, and will spawn more leverage as BDCs borrow

to meet their obligations toward debt and dividends.

Arrangements such as PIKs will rise in frequency if the

troubles facing the software sector persist, especially for

borrowers in BDC portfolios that have lower credit ratings, said

Robert Cohen, director of global developed credit at money

management firm DoubleLine Capital.

"These lenders are going to be incentivized to kick the can

down the road and give the borrower flexibility, rather than

call the borrower in a covenant default and force some sort of

remedy," Cohen said.

"Because then that requires them probably to disclose that

to investors, to mark the loan down, and I don't think they want

to do that."

LENDERS LIMIT INVESTOR WITHDRAWALS

Facing heavy redemption requests, some BDCs have gated their

funds, capping the amount that investors can withdraw.

Behind the scenes, they are working to prevent markdowns in

their loan portfolios by creating more payment flexibility for

borrowers in the software sector.

"Investors in PIKs are likely counting on a hockey-stick

growth in cash flows to cover future debt service," said Varkki

Chacko, managing principal at New Jersey-based Credit Capital

Investments.

Roughly one-fifth of BDC loans were tied to borrowers in the

software sector as of the third quarter of 2025, according to an

analysis of 167 BDCs by data provider SOLVE Fixed Income.

According to their latest filings, this exposure appears to have

ticked up in the fourth quarter.

Saumil Annegiri, the co-founder of CredCore, a platform that

scrapes loan agreements for covenants on behalf of lenders and

borrowers, said software services businesses have also been

failing to meet loan obligations, also known as covenants.

In order to reduce default risk, lenders have been working

to amend these covenants by avoiding the switch to

earnings-based metrics from revenue-based ones.

Analysts at Houlihan Lokey ( HLI ), however, note that while more

loans include the PIK option, a relatively low percentage of

borrowers with the option have actually switched to

payment-in-kind structures, just over 5% at the end of 2025.

Should a large cohort of borrowers experience "constrained

liquidity all at once," this figure could jump as they all

choose to exercise that PIK option, said Chris Cessna, adviser

in Houlihan Lokey's ( HLI ) financial and valuation advisory business.