Involving tens of billions of dollars in loans from giants like Blackstone and Apollo! Two defaults worsen the predicament of US private credit.

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The U.S. private credit market is facing a new round of stress tests. Software company Medallia and dental services provider Affordable Care have both defaulted on loans, exposing private credit giants such as Blackstone, KKR, and Apollo to more than $4.4 billion, causing this already fraught Wall Street market corner to tighten further.

According to media reports citing informed sources, Medallia is unable to repay about $3 billion in loans, and private equity owner Thoma Bravo recently informed the largest lender Blackstone that it will hand control of the company back to creditors, meaning the approximately $5.1 billion Thoma Bravo invested in the 2021 acquisition will likely be lost entirely. Meanwhile, institutions including Blackstone and KKR are restructuring Affordable Care's $1.4 billion loan.

The two defaults directly hit the market. Blackstone’s largest private credit fund, BCRED, disclosed this week that its first-quarter non-performing loan rate rose to a record 2.4%, covering its $80.5 billion investment portfolio, and specifically named Medallia and Affordable Care as the main reasons. Blackstone CEO Stephen Schwarzman emphasized ample fund liquidity during a Thursday analyst call, but Blackstone shares still fell by 6% on the day.

Currently, private credit fund losses are accelerating. Since the beginning of this year, individual investors have been increasingly withdrawing from private credit funds. Meanwhile, the potential impact of artificial intelligence on the software industry is raising concerns about a larger wave of defaults.

Medallia Default: The Price of a $5.1 Billion Acquisition

Medallia provides employee and customer feedback management software, and its troubles began even before the AI wave surged. In 2021, Thoma Bravo completed a highly leveraged acquisition of the company; then in 2022, the Fed sharply raised rates, causing loan interest expenses to soar—this was a common challenge faced by many leveraged acquisitions at the time. Meanwhile, its competitor Qualtrics, also backed by private equity and deeply mired in debt troubles, continued to eat into Medallia’s market share, putting sales performance under pressure.

This year, a specific clause in the loan agreement became the trigger. The clause required Thoma Bravo to inject additional capital if Medallia failed to meet profit targets. Thoma Bravo had a funding window until the end of June; however, according to informed sources, the company recently confirmed to Blackstone it would hand over company control to creditors.

Creditors have hired financial advisory firm Alvarez & Marsal to examine Medallia’s financial situation, aiming to reorganize outside of court rather than file for bankruptcy protection. According to media reports citing insiders, creditors are considering reducing Medallia’s outstanding loans to about $1 billion to $1.4 billion, equivalent to 5–7 times the company’s approximately $200 million EBITDA, with creditors also acquiring 100% of the company’s equity.

For this costly loss, Thoma Bravo founder Orlando Bravo admitted last month on CNBC, "Medallia is a good company, but we made mistakes that led us to pay too high a price." He added that other portfolio companies are "performing very well". Thoma Bravo also signaled positively at a recent investor conference, saying it can still identify acquisition opportunities and distinguish between companies that could be disrupted or could benefit from AI.

Exposures and Responses of Major Institutions

The two defaults have already left a clear mark on the books of several private credit institutions. Blackstone and KKR valued their Medallia loans at about 80 cents on the dollar last December, but this month it fell abruptly to 60 cents. Blackstone stated both troubled companies together account for only about 1% of BCRED’s investment portfolio fair value, related loans have been substantially written down, and "already reflected in performance". Blackstone also disclosed that first-quarter distributable earnings rose 25% year-over-year, but the share price still dropped 6% on the day.

For KKR, this restructuring will further push up the default rate of one of its roughly $13 billion private credit funds—the fund’s default rate already reached 5.5% last December, and ratings agency Moody’s downgraded the fund to junk status in March due to poor performance.

At Apollo, Co-President and Co-Head of Asset Management John Zito has previously spoken bluntly about peer valuations. According to reports, in discussions with some investors John Zito said, "I really think all the valuations are wrong... I think the private equity valuations are wrong."

AI Impact and Systemic Default Concerns

Medallia’s distress reveals deeper structural risks in the private credit market. Many institutions have concentrated 20% or more of their funds' assets in loans to software companies, and the rapid rise of AI is causing some software business models to face disruptive challenges. UBS analysts warned in a report this month that the looming "SaaSpocalypse" could double private credit defaults this year to 9–10%.

Although fund managers attribute accelerated withdrawals by individual investors to irrational fears fueled by media hype, and emphasize low delinquency rates in their loan portfolios, the reality of rising losses is changing the market mood. Wells Fargo analyst Finian O'Shea noted, "Last quarter, we saw a lot of bad news continually deteriorating. Now things haven’t gotten worse, but haven’t improved either—this is likely to persist all year, just a slow bleed."

Private credit institutions are also actively setting boundaries. Stephen Schwarzman emphasized that while defaults are rising, funds hold sufficient cash and other resources to offset losses, and said there’s a need "to distinguish fact from fiction". The industry also points out that compared to private equity institutions, which may lose their entire investment in a default, losses on the lending side are relatively limited. However, as two large defaults have fallen in quick succession, investors and analysts are finding it increasingly hard to ignore the persistent pressures building in this market corner.

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