Expected likelihood that a borrower will default within a specified horizon (typically 1 year). In the Merton structural model, the risk-neutral PD has a closed form: PD = N(-d_2) where d_2 = [ln(V/D) + (r - σ^2/2)T]/(σ√(T)). For US middle-market direct loans the historical realized PD is roughly 2%–3% annually for senior secured and 4%–6% for second-lien/mezzanine.