In late 2025, a handful of defaults captured investors’ attention, prompting questions about the health of alternative credit markets. While each case is idiosyncratic, together they highlight dramatic shifts that have unfolded over the past decade. For investors, the takeaway is clear: focus on areas of the market where the risk/reward trade-off remains attractive and where underwriting discipline still matters. Headlines can be noisy, but they often point to structural changes that investors shouldn’t ignore.
How Have Credit Markets Evolved?
Since the global financial crisis (GFC), a combination of more stringent banking regulation and prolonged zero interest rates drove substantial investor flows into the broadly syndicated loan (BSL), high-yield bond, and private credit markets (Display).
That flood of capital reshaped the landscape in several ways. On the one hand, those funds filled the void left by banks that had scaled back certain lending activities that carried hefty regulatory burdens. In effect, those loans moved from bank balance sheets into investment funds. At the same time, crowding sparked intense competition among private credit players, particularly for larger, more liquid investments. As a result, credit spreads tightened and lender protections like covenants gradually eroded in recent years. Consider that in 2010, less than 10% of leveraged lending new issuance was deemed “covenant lite.” A decade later, that figure skyrocketed to over 80%.
Cracks Beneath the Surface in Credit Markets
For better or worse (mainly for better), the majority of the post-GFC period has been relatively tranquil from a credit perspective. Economic growth has continued largely unchecked, households and corporations have reduced leverage, and credit risk remains relatively low. An injection of liquidity from the government to the private sector during the pandemic provided further support.
Yet such a benign environment masked underlying weaknesses, which pandemic-born disruptions and the rising inflation and interest rate environment subsequently exposed. While literal default rates—which measure borrowers failing to pay interest—have moderated since the pandemic, metrics like “liability management exercises” tell a different story (Display). The latter includes drop‑down financings (moving valuable assets into separate subsidiaries to raise new debt), up-tiering transactions (reshuffling debt so some lenders are pushed higher in priority, displacing others), and distressed exchanges (swapping old debt for new instruments with less favorable terms, effectively a quiet restructuring), which tend to produce losses for some creditors. Put simply, value isn’t created with these maneuvers; it’s simply reshuffled, with some lenders profiting and others bearing the cost.
Why Middle Market Credit Stands Out
Not all parts of the credit market have been uniformly impacted by these trends. While larger deals have become more competitive, regulatory limits on bank lending and smaller borrowers’ inability to access the BSL or high-yield bond markets has opened up a distinct middle market opportunity that persists today.
What do we mean by “middle market”? Middle market direct lending refers to privately-negotiated loans to middle-market or private companies that need speed, certainty of execution, and customized financing. Borrowers get a direct relationship with a single lender but pay a premium for that certainty, flexibility, and confidentiality.
In middle market private credit, managers often face less competition, allowing them to earn higher spreads while maintaining protective loan covenants. For instance, middle market loans have exhibited an average spread premium of 1.1% over large corporate loans since 2008. What’s more, through 3Q25, nearly half of middle market deals had two or more covenants compared to only 10% for larger transactions.1 The result is a more attractive return profile with stronger risk mitigants compared to the larger corporate loan market.
Credit Fundamentals Remain Resilient
Despite certain pockets of concern, borrower fundamentals generally remain relatively strong. Corporate leverage still appears reasonable compared to long-term averages, and despite the surge in interest rates since 2022, both household and corporate balance sheets seem healthy enough to shoulder their debt payments.
While growth has been leveling off lately, borrowers generally entered this period from a position of strength, given their broad deleveraging over the past 15 years. In addition, a resilient economy has helped offset policy uncertainty and higher interest rates. At today’s prevailing rates, astute credit investors are embracing the opportunity to diversify balanced portfolios as equity valuations drift into more concerning territory.
Keys to Success in Middle Market Private Credit
Credit markets continue to evolve, and not all corners offer the same balance of risk and reward. The most favorable opportunities lie in smaller, middle market deals, where investors are likelier to capture higher yields alongside stronger lender protections. Above all, success in this environment depends on discipline.
How does that discipline manifest in reality? It first shows up in where you play—staying in the middle market offers a more attractive risk-adjusted opportunity set. Discipline also becomes apparent as lenders maintain rigorous underwriting standards even when competitive pressures tempt them to loosen them. With public and private equity markets exhibiting historically rich multiples, private credit remains a powerful source of diversification, and we expect the middle market to continue delivering strong return potential in the coming years.
[1] Middle market deals are defined as those with EBITDA of less than $50 million while large transactions are defined as those with $50 million+ in EBITDA. Source: KBRA DLD Research