Credit risk headlines are starting to move in the right direction. As of Q1 2026, the average forward-looking one-year probability of default for U.S. high-yield companies has eased to 3.2%. Moody's Ratings’ baseline forecast calls for its speculative-grade default rates to drift toward 3.2% by year-end. On the surface, things are looking calmer.
But in a piece we published recently — Falling Defaults, Rising Fragility — we highlighted a dynamic that deserves more attention: the historically high share of credit events that are distressed exchanges rather than hard defaults. Moody's Ratings data shows that in 2025, roughly 65% of all corporate defaults were distressed restructurings, which includes workouts, indenture modifications, debt-for-equity swaps, and other "soft" credit events.
The sharp increase in restructurings shows the shift in distressed dynamics
Distressed exchanges as a share of all default events, annually
Data source: Moody’s Ratings
Depending on how you count them, that gap translates into a proxy default rate for private credit (direct lending) that ranges from 1.6% (without distressed exchanges) to 4.7% (including them). The difference is not academic. It reflects a real question about how much stress has actually been resolved versus how much has simply been deferred.
That question prompted me to look at the historical record.
What happens after a distressed restructuring?
Using Moody's Default & Recovery database, I examined the outcomes for the 1,173 unique borrowers that experienced a distressed exchange event (distressed exchanges, impairments, non-default credit events, forced changes of terms, or indenture modifications) from 1979 to 2026 and tracked what happened to them afterward.
A few things stand out.
First, the good news: liquidity management strategies work most of the time. Roughly two-thirds of borrowers that experience a distressed exchange do not go on to suffer a hard default or repeat credit event within a decade. When a restructuring holds, it tends to hold for good.
Second, the BUT: about one in four distressed exchanges ultimately ends in hard default (missed payment, bankruptcy, etc.), and more than one in three ends in either a hard default or another distressed credit event. These are not trivial odds for a market in which distressed exchanges now account for the majority of all credit events.
Third — and perhaps most important for where we sit today — the hazard is heavily front-loaded. More than 70% of eventual hard defaults following a distressed exchange occur within the first two years. The curve begins to flatten after year three, adding fewer than half a percentage point per year from year five onward. The implication: the borrowers that restructured in 2023 and 2024 are entering their most vulnerable window right now.
More than 1 in 3 distressed restructurings end in either a hard default or another distressed credit event
Cumulative percent of companies that experienced another credit event after restructuring
Data source: Moody’s Default & Recovery Database, author’s calculations
Why the macro backdrop matters
What enabled so many distressed exchanges to stick in the post-pandemic period was a combination of factors: a narrow but open refinancing window, lender forbearance buoyed by the expectation of rate cuts, and covenant structures flexible enough to absorb a workout without triggering a cascade. Several of those conditions are now less certain.
Markets have sharply scaled back expectations for Federal Reserve rate cuts in 2026. Moody's baseline GDP growth forecast of ~1.5% sits just above the historical "stall speed" below which credit events tend to accelerate. Recent inflation data, and the renewed possibility that higher rates could be back on the menu, disproportionately pressures the floating-rate borrowers who are most heavily represented in private credit portfolios.
Against this backdrop, the cohort of borrowers that underwent distressed exchanges in 2024 and 2025 deserves careful monitoring. History suggests that whether those workouts hold or unravel will likely be determined in the next 12 to 24 months — precisely the window in which the macro environment is most uncertain.
The bottom line
Falling default rates are real and welcome. But the composition of those defaults, which are heavily weighted toward soft credit events that often defer rather than resolve underlying stress, means the improvement in headline numbers may be slower and more fragile than it appears. For credit professionals and investors in private markets, this is a moment that rewards issuer-level diligence over top-down optimism. The history of distressed exchanges suggests that the next two years will tell us a great deal about how durable the current calm actually is.