For the better part of five years, private credit was a borrower’s market: tight spreads, loose covenants, and more capital chasing deals than deals chasing capital. That era is ending. Spreads have widened by 50 to 100 basis points since late 2025, covenants are returning to documentation, and European direct lending volumes have fallen by more than a third. The market has not crashed; it has recalibrated. For any mid-market CFO approaching a refinancing conversation in the next twelve months, understanding what has changed is the difference between negotiating from strength and discovering the shift at the table.
By Scott Townsley · Investment Director · 10 min read
The bottom line, up front
- The market: European direct lending volumes fell 35% in the first half of 2026, from EUR23.5 billion to EUR15.2 billion. Spreads on new issuance have widened by 50 to 100 basis points since late 2025, and covenants are returning to documentation after years of erosion. This is not a crisis; it is a correction.
- The shift: the balance of power has moved from borrower to lender. Capital has not disappeared, but lenders are deploying it more selectively: wider deal flow and greater caution mean they no longer need to compete with each other down on price and terms. Quality matters again, and so does negotiating leverage.
- For you: if your last financing was priced when the market was still reaching for yield, do not assume your next conversation picks up where that one left off. The terms available to you today are tighter, and the lenders writing them are more selective.
Key term: lender-friendly reset
A shift in market dynamics from conditions favouring borrowers to those favouring lenders: characterised by wider credit spreads, stronger covenant packages, lower leverage multiples, and more selective capital deployment. The term captures the rebalancing underway in private credit after an extended period where abundant capital compressed pricing and weakened documentation standards. It does not imply distress; rather, it describes a market returning to a more sustainable equilibrium between risk and reward.
What five years of easy money actually bought
The numbers on spread compression tell the story clearly. In 2019, private credit spreads were roughly 350 basis points over public high yield for comparable credit risk. By late 2025, that premium had compressed to 150 to 200 basis points. The explanation is straightforward: capital inflows into the asset class roughly quadrupled its size over five years, creating more supply of financing than demand for it. When money is abundant, borrowers capture the savings.
But spread compression was only the visible symptom. The deeper change happened in documentation. According to Resonanz Capital, even in private credit, maintenance covenants have become rare on larger, syndicated-style club deals that compete directly with the broadly syndicated loan market, with fewer than 10% of loans above $500 million including them. It is a subset of the market, but a telling one: it is exactly where private credit has been most willing to mimic covenant-lite syndicated terms to win deals. The periodic financial tests that historically gave lenders an early warning system simply disappeared from most facilities at that end of the market. In their place: covenant-lite structures that leave lenders with few tools until a borrower misses a payment or liquidity depletes entirely.
Having spent enough cycles watching these patterns repeat, I have learned to read loose documentation as a signal rather than a feature. When lenders compete so aggressively that they strip out their own protections, it tells you something about how much capital is chasing too few opportunities. And that reversal, now underway, carries real implications both for borrowers seeking new financing and for existing borrowers approaching refinancing.
The reset in numbers: what has changed since late 2025
50-100bp
Spread widening on new private credit issuance since late 2025, according to Lord Abbett.
35%
Decline in European direct lending volumes, H1 2026 vs H1 2025 (EUR15.2bn vs EUR23.5bn).
10.8x
European median PE buyout multiple, June 2026; down 14% from 12.6x in 2025.
40%
Share of private credit borrowers now with negative free cash flow, up from 25% in 2021.
Source: Lord Abbett 2026 Midyear Investment Outlook; Valuation Research Corporation Q2 2026 European Private Market Update; With Intelligence Private Credit Outlook 2026; Resonanz Capital covenant analysis; IMF Global Financial Stability Report, October 2025.
Why the pendulum swung
The forces behind this reset are not mysterious; they are the predictable consequences of a market that ran too hot for too long.
First, deal flow has increased. M&A activity, suppressed through 2023 and much of 2024, has picked up meaningfully. More borrowers competing for capital means lenders no longer need to win every mandate. They can afford to be selective, and selectivity shows up in pricing and terms.
Second, capital has become more cautious. The sector-specific concerns that emerged in late 2025, particularly around technology and software exposures after the AI repricing, have made allocators more discriminating. Redemption pressures in several retail private credit vehicles, some of which have gated withdrawals, have reinforced the message that liquidity risk in private markets is real. Lenders who faced those pressures are not rushing back into marginal credits.
Third, and most fundamentally, borrower quality has deteriorated. According to the IMF’s October 2025 Global Financial Stability Report, around 40 percent of direct lending borrowers now have negative free cash flow, up from 25 percent in 2021. That statistic alone should give any CFO pause. It means nearly half the companies in these portfolios are not generating enough cash to service their obligations without drawing on reserves, revolvers, or PIK toggles. When borrower health weakens at scale, lenders respond by tightening the terms they are willing to offer to everyone.
What this means for you
If you are a profitable, cash-generative business approaching a refinancing, you are exactly the credit profile lenders are competing for. But “competing for” now means something different than it did eighteen months ago. The competition is over quality borrowers, not over who can offer the loosest terms. Expect better pricing and documentation if your fundamentals are strong; expect harder questions if they are not.
The covenant question: is protection coming back?
One of the more interesting developments in recent months is the quiet return of covenant protections. After years in which covenant-lite became the default, lenders are beginning to insist on maintenance tests again: leverage ratios, interest coverage, and the periodic financial reporting that gives them visibility into borrower performance between payment dates.
The industry’s own research tells the story. Lord Abbett’s midyear outlook notes that new loans are featuring “increased covenant requirements” alongside wider spreads and lower leverage ratios. This is not lenders being punitive; it is lenders learning from experience. The covenant erosion of the past five years left many without early warning when borrowers began to struggle. By the time problems surfaced in missed payments or liquidity crises, collateral had often already deteriorated and restructuring options were limited.
For borrowers, the return of covenants is a double-edged development. On one side, it means accepting more constraints on operational flexibility: the requirement to maintain certain financial ratios, to report more frequently, to seek consent for actions that covenant-lite documentation would have permitted unilaterally. On the other side, it can mean access to capital that might otherwise not be available. A lender may well be willing to underwrite a credit with maintenance covenants attached that they would otherwise pass on without them.
The practical question for any CFO is not whether covenants are good or bad in the abstract. It is whether the covenants being offered are set at levels that give your business genuine operating headroom. A leverage covenant set too tight becomes a tripwire waiting for any temporary downturn to trigger a technical default. A coverage covenant set appropriately becomes a tool for managing the lending relationship rather than a threat to it.
The European picture: quieter, but not frozen
Europe has felt this reset more acutely than the US, partly because its lending market is smaller and more concentrated among a handful of large managers, meaning any pullback in appetite has an outsized effect on overall market activity, and partly because macroeconomic conditions have been less forgiving. The Bank of England’s July 2026 Financial Stability Report flagged “risky credit markets, including private credit” as vulnerable to a tightening in financing conditions, noting that investor sentiment had weakened even before the recent geopolitical tensions.
Direct lending volumes in Europe fell by 35% in the first half of this year. That is a significant pullback, though it needs to be read in context. The comparison base, H1 2025, was itself elevated by a wave of refinancing activity as borrowers rushed to address near-term maturities. The decline reflects both a normalisation of that activity and a genuine increase in lender selectivity.
What has not changed is the structural case for private credit in the European mid-market. Banks remain constrained by Basel capital rules, particularly for leveraged and sponsor-backed exposures. The companies that historically relied on relationship banking for growth capital are still underserved by the traditional lending market. And private credit managers, despite the reset, still have substantial dry powder to deploy: roughly EUR 2.5 trillion globally, a figure that ensures competition for quality credits remains robust even as marginal borrowers find the market less accommodating.
The reset across key metrics: 2025 vs 2026
| Metric | Late 2025 | Mid-2026 | Direction |
|---|---|---|---|
| Private credit spread premium vs HY | 150-200bp | 200-250bp | Widening |
| European direct lending volume (H1) | EUR23.5bn | EUR15.2bn | Down 35% |
| Covenant-lite share of new issuance | >90% | Declining | Covenants returning |
| PE buyout multiples (Europe median) | 12.6x | 10.8x | Down 14% |
| Borrowers with negative FCF | ~30% | ~40% | Deteriorating |
Source: Lord Abbett; Valuation Research Corporation; With Intelligence; Owners.pe spread analysis.
What does this mean for your next financing?
The practical implications for a mid-market CFO or finance director are straightforward, even if they require adjusting expectations.
First, pricing is likely to be higher. If your last facility was priced in 2023 or 2024, at the peak of spread compression, expect your next one to cost 50 to 100 basis points more on the margin, all else equal. That is not a reflection of your credit quality; it is a reflection of market conditions. The delta between where you refinanced and where you will refinance is itself a cost that should be factored into your planning.
Second, documentation will be tighter. Covenants that were negotiated away two years ago may reappear. The flexibility you had to make acquisitions, incur additional debt, or distribute cash to shareholders without lender consent may be narrower. This is the reset in action: lenders reclaiming the protections they gave up when capital was abundant.
Third, the process will reward preparation. The borrowers who win the best terms are the ones who can demonstrate durable cash flows, resilient business models, and a clear path to deleveraging. The information pack you bring to the table, the quality of your financial reporting, your ability to articulate the investment case, and the lead time you build in for a more considered underwriting and negotiation process all matter more when lenders have the luxury of choice.
Four moves worth making before your next financing
- Stress-test your covenants against today’s market, not yesterday’s. If your existing facility was set with generous headroom in 2023, model what the same credit would look like underwritten today. That is the baseline your lender will use.
- Get your reporting in order. Lenders who are being selective want to see clean, timely, and detailed financial information. The time to fix reporting gaps is before the process starts, not during it.
- Start the conversation early. The refinancing wall of 2026 and 2027 means a lot of borrowers will be approaching lenders at once. Being early in that queue, with a well-prepared credit story, is worth real money.
- Know your alternatives. The reset has not eliminated competition; it has made it more selective. A borrower who can credibly point to multiple financing options still has leverage, even in a lender-friendly market.
So: correction, or something worse?
The question I get most often is whether this reset is the beginning of a broader unravelling in private credit. My honest answer: probably not, but the next twelve months will tell us more.
As covered in previous editions, default rates remain elevated but not catastrophic, with the “true” default rate, including selective defaults and liability management exercises, running closer to 5%, which suggests borrowers are finding ways to avoid hard defaults even when cash flow is tight.
What is perhaps of greater concern is the concentration of stress in certain sectors and the limited visibility regulators have into the market. The Bank of England’s July report noted that AI-related exposures in private credit jumped from 9% in 2024 to 34% in 2025. That is a rapid concentration of risk in a sector whose fundamentals are still being tested.
For a mid-market borrower, the macro debate matters less than the micro reality. The market has reset. Terms are tighter, pricing is higher, and lenders are more selective. The pendulum has swung. What matters now is that you recognise the shift and position accordingly before your next financing conversation, rather than during it.
Scott
Stay ahead of the curve
Private credit has reset. Get the weekly read on what that means for your financing before your next conversation.
Frequently asked questions
What exactly is a lender-friendly reset?
A shift in market dynamics from conditions that favour borrowers to those that favour lenders: wider spreads, tighter covenants, lower leverage, and more selective capital deployment. It does not mean the market has crashed; it means the balance of negotiating power has moved.
Does this affect all borrowers equally?
No. The reset hits marginal credits hardest: those with weak cash flow, cyclical exposure, or business models that lenders now view as higher risk. Strong, cash-generative businesses are still seeing competitive interest from lenders; they are just seeing it on different terms than eighteen months ago.
Are covenants actually coming back?
Yes, though unevenly. New issuance is seeing more maintenance covenants than at any point in the past several years. The degree depends on credit quality and lender appetite, but the trend is clear: lenders are reclaiming protections they gave up during the competitive peak.
Should I wait for conditions to improve before refinancing?
That depends on your maturity timeline and your view on where the market goes from here. Waiting only helps if conditions improve; they may not. If your facility matures in the next eighteen months, starting the conversation now gives you more options than arriving at the last minute when you have no choice.
About the author: Scott Townsley structures and advises on private credit and leveraged finance transactions for lower- and mid-market UK and European businesses, drawing on experience across credit cycles to help companies secure financing on the right terms. If this raises questions about your own position, get in touch, or subscribe for the weekly read.
This article draws on research from Lord Abbett’s 2026 Midyear Investment Outlook on private credit, Valuation Research Corporation’s Q2 2026 European Private Market Update, With Intelligence’s Private Credit Outlook 2026, Chambers Partners’ UK Private Credit 2026 Practice Guide, the Bank of England’s July 2026 Financial Stability Report, Morgan Stanley Investment Management’s 2026 Midyear Outlook, Owners.pe spread compression analysis, S&P Global Ratings European default projections, Resonanz Capital’s analysis of covenant erosion in private credit, and the IMF’s Global Financial Stability Report, October 2025. The views expressed are the author’s own and do not constitute investment advice.