In two quarters, private credit lenders have halved the structural flexibility they spent three years handing out. Headline pricing in the European mid-market has barely twitched. Put those two facts side by side and you have the most honest signal the asset class has given anyone about where it thinks we are in the cycle. Most borrowers are still negotiating the wrong number.
By Scott Townsley · Investment Director · 12 min read
The bottom line, up front
- The move: payment-in-kind provisions appeared in 13.5% of newly originated private credit loans in the second quarter of 2026, down from roughly 25% at the end of 2025. EBITDA add-backs, most-favoured-nation protections and maintenance covenants have tightened alongside.
- The tell: European mid-market unitranche pricing has sat at roughly Euribor plus 525 to 625 basis points for three consecutive quarters. Lenders are repricing risk through structure, not spread. That is a deliberate choice, and a revealing one.
- For borrowers: a term sheet signed in 2024 and one landing today can carry an identical margin and be a materially different instrument. The negotiation has moved off page one and into the schedules, which is precisely where most management teams stop reading.
The number that moved, and the number that refused to
Something shifted in this market between December and June that almost nobody outside the lending business registered, because it did not appear in the one figure most borrowers actually track.
At the close of 2025, roughly a quarter of newly originated private credit loans carried a payment-in-kind provision: the contractual right to roll interest into principal rather than pay it in cash. By the second quarter of 2026 that share had fallen to 13.5%, according to Lincoln International, whose valuations team marks tens of thousands of private loans and has become the nearest thing this opaque asset class has to a price screen.
Halved in two quarters. That is not drift. That is a decision, taken more or less simultaneously across a large number of investment committees that do not, formally, talk to each other.
Now consider the number that did not move. European unitranche pricing for the traditional mid-market has sat at roughly Euribor plus 525 to 625 basis points since the fourth quarter of 2025, and it was still sitting there in the second quarter of 2026, having passed through an energy shock driven by conflict in the Middle East, a public credit selloff, a 65 basis point widening in secondary spreads on B rated European paper, and a rolling argument about the durability of AI-exposed software borrowers. Three quarters. Barely a twitch.
Set those two observations next to each other and the picture resolves. Private credit is repricing risk. It is simply not doing it in the place borrowers have been trained to look.
The quiet rewrite: four numbers from the past two quarters
25% to 13.5%
Share of newly originated private credit loans carrying a PIK provision, Q4 2025 versus Q2 2026 (Lincoln International).
E+525-625
European traditional mid-market unitranche pricing in basis points, broadly unchanged across Q4 2025, Q1 2026 and Q2 2026.
88 to 168
Basis point spread differential between broadly syndicated loans and direct lending on sponsored acquisition finance, Q4 2025 versus Q1 2026.
£17bn
Pre-takeover principal foreclosed on by lenders in H1 2026 alone ($22.3bn), against £18.5bn ($24.2bn) for the whole of 2025.
Sources: Lincoln International Private Market Index, August 2026; Valuation Research Corporation European direct lending pricing, Q2 2026; PitchBook LCD via Carlsquare European Debt Markets. Sterling equivalents are indicative conversions of reported dollar figures.
What the market actually took back
The withdrawal of PIK is the headline, but it is not the whole of it. Anyone who has sat on the lender side of a credit committee this year will recognise a broader pattern, and the legal market has been documenting it in real time.
In the UK mid-market, debt service cover ratios alongside leverage tests have become standard again, having been quietly negotiated away in the competitive years. EBITDA adjustments for acquisition synergies and exceptional items are now more tightly controlled, capped and subject to explicit look-forward limits rather than left to a sponsor’s arithmetic. In the European leveraged loan market, CreditSights called the first quarter of 2026 a turning point away from the permissiveness of 2025, with tightening across add-back baskets and most-favoured-nation protections. Portability and change of control provisions, which had drifted towards near-automatic transferability, are being renegotiated against approved sponsor lists.
The same product, two years apart: what has changed in the mid-market term sheet
| Term sheet element | Where it sat in 2024 | Where it sits now |
|---|---|---|
| Headline margin | Compressing, with competitive tension between funds and the syndicated market. | Broadly flat for three quarters. The one number everyone negotiates has stopped telling you very much. |
| PIK toggle | Widely available and frequently presented as costless optionality. | Present on roughly one in seven new loans, and explicitly priced where it survives. |
| EBITDA add-backs | Generous. Synergies and exceptionals lightly controlled. | Capped, defined, time-limited and subject to clear deduction controls. |
| Financial covenants | Leverage-only in much of the upper mid-market; cov-loose the aspiration. | Debt service cover alongside leverage back as standard in mid-market deals. |
| Reporting and information | Quarterly management accounts, light liquidity visibility. | Expanded reporting, liquidity monitoring, transaction and sale milestones. |
| Amendment economics | Negotiable, relationship-driven. | Priced. Amendment fees, PIK premiums and principal repayments in exchange for flex. |
None of this shows up in a pricing grid. All of it shows up in a downside case.
Flexibility was never free. It was an option the lender wrote, buried in the margin, and has now decided to stop writing.
Discipline, or procyclicality? The honest answer is neither
There is a comfortable reading of all this, and it is the one the industry has settled on: private credit is growing up. The case is stronger than it sounds.
Lincoln’s own data suggests that more than half of the PIK loans it values involve what it terms “bad PIK”, meaning PIK that was not part of the original deal but was granted afterwards to a borrower that could not pay cash interest. That works out at roughly 6% of the portfolio effectively on an interest payment accommodation. Academic work out of Frankfurt School last year reached a similar conclusion, finding PIK used predominantly as forbearance, concentrated among distressed borrowers, and predictive of continued deterioration rather than recovery. On that evidence, a market withdrawing PIK is a market removing a mechanism that mostly disguised problems rather than solved them. Deferring cash interest at a double-digit coupon is not flexibility; it is a slow transfer of enterprise value from the equity to the lender, agreed by a management team under pressure and discovered by the shareholders three years later.
The less comfortable reading is that the flexibility is being withdrawn at the precise moment borrowers need it most, which is the behaviour private credit spent a decade telling everyone it was designed to avoid. Lenders foreclosed on around $22.3 billion, some £17 billion, of pre-takeover principal in the first half of 2026 alone, nearly matching the total for all of 2025, with 70% of it concentrated in 2021 and 2022 vintage buyouts underwritten at higher multiples and higher leverage. Fitch data indicates that distressed maturity extensions have now overtaken PIK and interest deferrals as the leading default mechanism. S&P has revised its European speculative-grade default projection upwards to 3.75% by March 2027, a reversal of the improving path it forecast only in December.
The Bank of England’s Financial Policy Committee made the point in July with more restraint and more force than the trade press managed. A tightening of private credit supply, the FPC observed, could reach even relatively resilient borrowers who depend on private-market financing, UK corporates among them, and it noted that UK private markets lean heavily on overseas investors. That is a central bank telling mid-market Britain that the marginal lender to a good business here may be an allocation decision taken in New York or Toronto.
Having spent enough cycles on both sides of this to be suspicious of tidy narratives, I would argue that neither reading is quite right. What is happening is not a tightening. It is a sorting.
The market is not closing. It is dividing
The evidence for dispersion rather than contraction is everywhere, once you stop reading aggregate figures. European direct lenders are still holding substantial dry powder against limited new issuance, which keeps terms genuinely competitive for what valuation practitioners have started calling “regular-way credits”: clean businesses, credible management, cash conversion that survives contact with a spreadsheet. Those borrowers are being fought over as hard as at any point in the past three years.
Meanwhile the spread between the syndicated and direct lending markets on sponsored acquisition finance widened from 88 basis points in the fourth quarter of 2025 to 168 basis points in the first quarter of 2026. Direct lenders held their pricing while bank-arranged syndicated markets tightened theirs. The consequence is entirely predictable and is now visible in the data: Wall Street banks refinanced nine deals worth $4.5 billion, roughly £3.4 billion, out of the private loan market in the second quarter, against three deals worth $1.3 billion, around £1 billion, moving the other way.
Here is the part that gets lost when this story is written for large-cap desks. That escape route is a privilege of scale. S&P’s work on private-to-syndicated transitions found the threshold remains high and the population small, available only to borrowers with strong growth, demonstrated performance stability and meaningful deleveraging. Those who make it have historically achieved a median spread reduction of around 250 basis points. Those who do not, which is to say the overwhelming majority of businesses between £5 million and £30 million of EBITDA, have no syndicated market to run to. They have their existing lender, a handful of credible alternatives, and whatever negotiating position they built before they needed one.
What this means in practice
The lower mid-market does not get the benefit of the bank refinancing wave, but it does get the full weight of the documentary tightening. That asymmetry is the single most important thing for a UK business owner to understand about the current market, and it is almost entirely absent from mainstream coverage of private credit, which is written from the perspective of billion-pound sponsor deals.
Why the UK sits more exposed than most of Europe
Britain is not an average European market in this respect, and the reasons are structural rather than cyclical.
- Depth cuts both ways. The UK is Europe’s most developed direct lending market, having scaled first after the financial crisis, with well over two thousand direct lending transactions completed since 2012 against roughly eight hundred in Germany. That maturity is an advantage in normal conditions and a concentration when the product changes.
- Unitranche dominance. Unitranche has consistently accounted for around two thirds of UK private debt transactions against roughly half across continental Europe. UK borrowers are therefore disproportionately exposed to shifts in direct lending structure, with less of the bank-club and Schuldschein alternative that a German Mittelstand business might reach for.
- A consolidated banking sector. The concentration of UK clearing banks left more room for institutional capital in the mid-market than in almost any comparable economy. Excellent when funds are competing. Less excellent when they are all reading the same portfolio data and reaching the same conclusion in the same quarter.
- Rates that are not helping. The Monetary Policy Committee held Bank Rate at 3.75% on 30 July, a fifth consecutive hold, on a six to three vote in which three members wanted a rise to 4%. With CPI at 2.6% in June and the next decision due on 17 September, the cheap refinancing that many boards pencilled into their 2026 plans is not arriving on the schedule they assumed.
Five things worth doing in the next quarter
- 1Model the covenant, not the coupon. Run the downside case against the covenant package, not the interest bill. The question is not what the debt costs; it is at what point in a bad year control of the business passes to someone else. Most management teams can answer the first question instantly and the second not at all.
- 2Price the flexibility you are being asked to give upIf a lender is offering twenty five basis points off the margin in exchange for a tighter add-back definition or a shorter equity cure window, that is a trade with a real value. It should be quantified rather than accepted as a goodwill gesture, because the lender has certainly quantified it.
- 3Fix the reporting before it becomes a covenantExpanded information undertakings are now standard. A business that can produce clean, timely, reconciled monthly numbers negotiates from strength; one that cannot will find the reporting schedule becoming the tightest term in the document, and the first one it breaches.
- 4Know who actually holds the paperFund vintage, remaining investment period, dry powder and redemption pressure at the vehicle level all shape how a lender behaves in an amendment conversation. A fund at the end of its life and a fund with three years to deploy will give you very different answers to the same request.
- 5Start the refinancing conversation twelve months outFour months before maturity, a borrower has one counterparty and no leverage. Twelve months out, there is time to run a genuine process, and running a process is what turns a repricing into a negotiation. In a sorting market, the sorting happens to borrowers who arrive late.
The signal underneath the noise
There is a version of this story in which private credit is quietly deteriorating and the withdrawal of PIK is the first crack. There is another in which the asset class is behaving exactly as a mature, well-underwritten market should when it sees a maturity wall in the middle distance, and the tightening is evidence of health rather than fragility. Both are being argued vigorously, and each has real data behind it.
My own view, formed over a career that has now covered enough cycles to distrust confident predictions, is that the argument itself is a distraction for anyone running a business rather than a fund. The useful observation is narrower and harder to dismiss. For three years, borrowers were sold a product in which the headline margin carried a bundle of embedded options: the right to defer cash interest, the right to define your own EBITDA, the right to grow through acquisition without asking. Those options were never free. They were priced into the spread, and the spread has not fallen even as the options have been withdrawn.
Which means the effective cost of mid-market debt in Britain has risen materially in the past nine months without a single lender raising a margin. That is the repricing nobody announced, and it will not show up in a market commentary until it shows up in somebody’s covenant test.
Good businesses will still find capital, and will still find it on competitive terms; the dry powder is real and the competition for clean credits is genuine. But the terms of the conversation have changed, and the borrowers who do best over the next eighteen months will be the ones who worked out what they were actually buying before they signed for it.
Scott
PrivateCredit Weekly
A weekly read on private credit, leveraged finance and what it means for businesses raising capital in the UK and Europe.
Written for owners, boards and finance leaders, not for fund managers.
Frequently asked questions
What is a PIK provision, and why does its disappearance matter?
Payment-in-kind allows a borrower to roll interest into the loan principal rather than paying it in cash, easing near-term cash flow at the cost of a larger balance at maturity. Its rapid withdrawal from new loans matters because it removes a shock absorber that many capital structures were implicitly relying on, and because the speed of the withdrawal tells you what lenders expect the next two years to look like.
If pricing has not moved, has debt actually become more expensive?
In headline terms, no. In economic terms, yes. A loan with a capped add-back definition, a debt service cover test and no PIK toggle is a different and less valuable instrument to the borrower than one without those features, even at an identical margin. The change has been made in the schedules rather than the pricing grid, which is why it has gone largely unremarked.
Should a mid-market business be looking at the bank market instead?
It is worth testing, and dual-track processes that run banks and funds in parallel have moved down from large-cap into the mid-market for exactly this reason. But the syndicated market that is currently refinancing private loans at meaningful savings is not open to most businesses below the upper mid-market. For a company with under £30 million of EBITDA, the realistic competitive tension is between funds, and between funds and clearing or challenger banks, rather than with public credit.
Is this the start of a private credit downturn?
The evidence is genuinely mixed. Default and lender-control activity is rising and concentrated in 2021 and 2022 vintages, and S&P has raised its European default projections. At the same time, European direct lending fundraising has been strong, dry powder remains substantial, and terms for good credits are still competitive. The more defensible conclusion is dispersion: the gap between what a strong borrower and a marginal one can achieve is widening quickly.
What should a board do if its facility matures in 2027?
Begin work now rather than in twelve months. That means stress-testing the existing covenant package against a genuine downside, understanding the position and incentives of the current lender, cleaning up management reporting, and mapping the realistic alternatives so that any refinancing is a competitive process rather than a renewal conversation with a single counterparty.
About the author: Scott Townsley is an Investment Director who originates and structures private credit transactions for lower and mid-market businesses across the UK and Europe. Over more than two decades in banking, investment banking, leveraged finance and private credit, he has financed sound, sub-investment-grade companies through several market cycles, including many that traditional lenders overlook. Get in touch or subscribe to PrivateCredit Weekly.
This article draws on the Lincoln International Private Market Index for the second quarter of 2026 (published 13 August 2026) and Lincoln International portfolio valuation commentary; Wall Street Journal reporting of 11 August 2026 on payment-in-kind usage; Bloomberg credit market reporting of 6 and 8 August 2026; Valuation Research Corporation’s European Private Market Updates for the first and second quarters of 2026; Carlsquare European Debt Markets Quarterly Insights, editions one and two, 2026; CreditSights European TrendLines on loan covenant trends in the first quarter of 2026; Robert W. Baird’s European debt market commentary, June 2026; the Bank of England Financial Stability Report, July 2026, and the Financial Policy Committee Record, April 2026; Bank of England Monetary Policy Committee decision of 30 July 2026; S&P Global Ratings research on private credit to broadly syndicated loan transitions; PitchBook LCD European credit market data; Deloitte Private Debt Deal Tracker; Shoosmiths’ UK leveraged finance outlook for 2026; and Rintamäki and Steffen, “When Flexibility Becomes Forbearance: Payment-in-Kind in Private Credit”, Frankfurt School of Finance and Management, 2025. Dollar and euro figures have been converted to sterling at indicative rates for comparison, with original currencies retained where a specific reported figure is cited. The views expressed are the author’s own and do not constitute investment advice.