Q2 2026 Credit & Debt

Capital & Credit

Q2 2026

Credit: More Money Than Conviction

Direct lending entered the second quarter with abundant capital and exited it with fewer companies lenders were willing to finance.

PitchBook LCD estimates lenders provided $33.6 billion across 154 transactions, the lowest quarterly volume since the second quarter of 2023 and a 55% decline from the first quarter. Sponsor-backed volume fell to $19.8 billion; buyout-related direct lending declined to roughly $10 billion across 39 deals.

The cause was not a shortage of lending capacity. It was a weaker private-equity pipeline, geopolitical uncertainty, pressure on semi-liquid credit vehicles and a rapid reassessment of software risk.

Ordinarily, fewer transactions competing for abundant capital would produce lower spreads and looser terms. That did not happen.

The Market Has More Money than Conviction

Capital is abundant, but lenders are narrowing the definition of a financeable borrower.

The Spread is Not the Loan

Covenants, amortization, collateral, call protection, and baskets determine operating freedom.

An Extension Changes the Calendar, Not the Business

Extra runway creates value only if cash flow and leverage improve before the new maturity.

A small sample of direct-lending LBOs averaged SOFR plus 509 basis points in the quarter, against SOFR plus 474 in the first. Plain-vanilla spreads moved 25 to 50 basis points wider from late-2025 levels.

One middle-market lender described typical non-sponsored discussions at approximately SOFR plus 500, with 40% to 50% loan-to-value, roughly 4x leverage, about 60% equity support and one or two maintenance covenants.

These are not distressed terms. They are the terms of a market that has stopped assuming the base case arrives on schedule.
Liquidity is abundant for the borrower the lender wants. It is much less abundant for the borrower who needs it.

The syndicated market: active, but mostly defensive.

Institutional loan activity reached $224 billion in the quarter, down only 7% sequentially and 17% above the five-year quarterly average. But only 27% of it supported borrowing unrelated to maturity extensions or spread reductions.

Sponsors and companies spent the quarter maintaining balance sheets rather than financing new platforms. Corporate borrowers filled part of the gap left by private equity, with better-rated issuers accessing scale and tighter pricing.

This is a two-speed system. Large, stronger companies move between banks, syndicated loans, bonds and private credit. Smaller or more leveraged borrowers may have one realistic channel and little bargaining power over its terms.

The best financing position is not having a lender. It is having a credible alternative.

Amend and extend.

Amend-to-extend volume reached $29.5 billion in the quarter, the highest quarterly total since the global financial crisis, aimed at the 2028 maturity wall — approximately $208.5 billion of institutional term loans, with PE-backed companies responsible for 73% and $117 billion owed by borrowers rated B-minus or lower.

Extensions can be valuable. They prevent forced refinancing, allow an operating plan to mature and move a maturity past a dislocation. They can also postpone recognition of a problem.

The distinction is what the borrower does with the time. A company that converts working capital into cash, reduces leverage, repairs margin or sells a non-core asset arrives at the new maturity with choices. A company that keeps missing plan arrives with more accumulated interest and less enterprise value.

Borrowers should also expect a price beyond spread: amendment fees, tighter covenants, additional collateral, amortization, restricted baskets, sponsor equity, cash sweeps and stronger consent rights. Time is capital, and lenders charge for it.

The spread is not the loan.

Borrowers fixate on the coupon because it is easy to compare. It rarely captures the economic or operational cost of capital.

The terms that matter include original-issue discount and upfront fees; SOFR floors and hedging requirements; cash versus payment-in-kind interest; amortization and excess-cash-flow sweeps; maintenance covenants and testing frequency; covenant cushions and EBITDA-adjustment limits; acquisition, investment, debt, lien and restricted-payment baskets; revolver availability; call protection and prepayment premiums; reporting requirements; equity-cure rights; collateral, guarantees and excluded subsidiaries; and default interest and cross-default provisions.

A modestly lower spread is expensive if the agreement blocks an acquisition, limits inventory purchases, accelerates amortization at a seasonal trough or imposes a premium when refinancing becomes available.

Spread is rent. Covenants are zoning.

The Federal Reserve’s April bank survey reinforces the point: tighter C&I standards, higher premiums on riskier loans, stricter covenants and greater collateral requirements, citing economic uncertainty and reduced risk tolerance.

Cash flow replaced the label.

Software’s share of broadly syndicated issuance fell from 17.6% in 2025 to 8.8% in 2026, the lowest since 2013.

Lenders no longer treat recurring revenue as an automatic substitute for free cash flow.

Medallia illustrates the risk. Private credit lenders had provided a $1.8 billion recurring-revenue loan supporting its 2021 buyout. In 2026 they took control through a recapitalization, reduced debt and invested $150 million of new capital.

The lesson travels beyond technology. “Consumer staple,” “essential service” and “agricultural infrastructure” may open the underwriting conversation. They do not finish it.

EBITDA is an opinion. Interest is a payment.

The lender’s own liabilities.

The Federal Reserve estimates the U.S. private credit market at approximately $1.4 trillion, about 10% of nonfinancial corporate debt and roughly one-third of below-investment-grade corporate debt excluding bank loans. Semi-liquid funds represent approximately $241 billion of net assets, about 20% of private-credit vehicle net assets.

The quarter tested the connection between loans held through a cycle and investors who may request periodic liquidity. Redemption requests reached 10% of shares at Blackstone’s BCRED, and roughly 17% at Apollo Debt Solutions and Cliffwater’s CCLFX. Many funds limited quarterly repurchases to 5%, as permitted.

The caps functioned as designed. The Federal Reserve characterized the pressure as manageable, and by July 23 Blackstone said early third-quarter BCRED requests had declined materially.

That is encouraging, and it does not make lender funding irrelevant. A lender backed by long-duration institutional capital may behave differently in a downturn than a vehicle balancing quarterly repurchases, even at the same spread. Funding pressure influences appetite for amendments, new-money commitments and secondary sales.

Borrowers should diligence their lenders: which vehicles hold the loan, whether they are permanent, drawdown or semi-liquid, whether the lender can fund a later acquisition or working-capital need, whether it holds the whole position, how it has handled restructurings in the borrower’s industry, who approves amendments, and how concentrated it is in the sector.

EBITDA is An Option, Interest is A Payment

Lenders ultimately underwrite cash conversion, not labels or adjusted metrics.

Inventory Has A Half-Life

Consumer-goods collateral can lose value through age, spoilage, fashion, or promotion.

Match the Debt to Asset

Land, seasonal inputs, equipment, processing plants, and acquisitions require different financing durations.

Know Who Funds Your Lender

Two lenders offering identical terms may behave differently when their own capital is under pressure.

Consumer: working capital is where leverage hides.

Debt sees a consumer brand differently than equity does. Equity asks how large the category could become. Debt asks whether the retailer’s order turns into cash before interest is due.

The macro backdrop is demanding. May headline PCE inflation reached 4.1% year over year, core PCE was 3.4%, and the personal saving rate was 3.0%.

A consumer business can grow revenue while weakening its credit profile. New distribution requires inventory, freight, trade spending, slotting fees, deductions and receivables. If products turn slowly or promotions fail, the company has borrowed to manufacture inventory that will need discounting to move.

Lenders are focused accordingly on retailer and channel concentration, sell-through rather than shipments, inventory turns and age and remaining shelf life, gross-to-net deductions and promotional dependency, returns and chargebacks and spoilage, contribution margin by channel, seasonal working-capital peaks, co-manufacturer concentration and minimum commitments, forecast accuracy and cancellation history, and the timing gap between paying suppliers and collecting from retailers.

Inventory is collateral only when somebody wants to buy it. Receivables are collateral only when the customer intends to pay without deductions.

A five-year term loan funding permanently slow-moving inventory makes leverage look stable while liquidity deteriorates.

Agriculture and processing: match the debt to the asset.

U.S. farm-sector debt is forecast to rise 5.2% to $624.7 billion in 2026 while net farm income declines 2.6% after inflation. Firm land values provide support, but land value and debt service are not the same thing. A farm can hold substantial equity and insufficient cash in a weak crop year.

The financing should follow the asset. Land and permanent improvements require long-duration real-estate debt. Seasonal inputs and inventory belong in an operating revolver. Machinery belongs in equipment financing matched to useful life. Livestock and stored commodities may support borrowing-base facilities. Processing plants may combine real-estate, equipment, working-capital and cash-flow debt. Acquisitions may need sponsor equity, seller financing or structured capital alongside senior debt.

Processors require a different underwriting model than farms: throughput, utilization, customer and supplier concentration, commodity pass-through, food safety, water and energy, deferred maintenance, environmental exposure and seasonal working capital. A facility can hold valuable hard assets and still produce weak recoveries without supply, labor, permits or nearby customers. Specialized equipment is worth substantially less outside the system that makes it useful.

Eligible smaller food-chain businesses may also access government-supported financing. In March the SBA expanded its International Trade Loan program for qualifying food-chain businesses through a “Grocery Guarantee,” providing guarantees up to 90% against the standard 75% under 7(a).

A guarantee can improve access and pricing. It cannot turn an uneconomic expansion into a good loan.

An acre can be patient. A revolver cannot.

Building the stack.

The right answer is usually a combination: a bank revolver for ordinary working capital; an asset-based facility for receivables and inventory; equipment financing for machinery; real-estate debt or a sale-leaseback for property; a direct-lending term loan for an acquisition; seller financing to bridge a valuation gap; subordinated debt or structured equity for risk senior lenders will not take; SBA or USDA programs where eligibility and use of proceeds align; and equity for investments whose cash generation is too distant for debt.

Each layer should have a job. Problems arise when short-term debt funds long-duration assets, senior leverage funds speculative growth, or a revolver becomes the permanent answer to operating losses.

Why it matters.

The federal funds target remained at 3.50% to 3.75% in June while inflation stayed above the Federal Reserve’s objective. Floating-rate borrowers cannot plan on immediate, substantial relief.

For operators the real risk is not default. It is losing strategic freedom before default occurs — remaining current while unable to invest, acquire, replace equipment, build inventory or withstand a customer loss because headroom and liquidity are gone.

The best time to build an alternative financing channel is while the existing lender is still comfortable. When the covenant is already broken, every conversation costs more.

Operator move.

Treat any maturity inside 18 months as a current project.
Maintain a rolling 13-week cash forecast alongside the annual budget.
Negotiate covenants, amortization, call protection, collateral and operating flexibility with the same intensity as spread.
Model interest expense without assuming rate cuts.
Preserve at least two credible financing channels, even if the final answer is hybrid or staged.
Use an extension to improve the business, not to move the date.

A Maturity Inside 18 Months is A Current Project

Refinancing options are widest before the need becomes visible.