Private credit firms are experiencing a notable decline in their lending volumes, shrinking by 14% in the first quarter of 2026. Conversely, banks have seen a substantial increase in their lending to companies, with a 12.7% rise, marking their fastest growth since 2022. This shift suggests that private credit firms are facing challenges, partly due to increased funding costs stemming from fears of loan losses.
Borrowers are increasingly opting for the syndicated loan market, which is proving to be significantly cheaper than direct lending. In the syndicated market, where banks lead deals, risky loans are approximately 200 basis points cheaper compared to the direct lending market. This substantial cost difference is prompting some borrowers to switch markets, with at least four deals totaling $4.3 billion already moving from direct lending to the syndicated market this year. Analysts note that if public markets are accessible and a company's credit profile is strong, the broadly syndicated loan market offers benefits like liquidity, price discovery, and refinancing flexibility.
The widening spread between direct lending and syndicated loans is contributing to this trend. Spreads on direct lending loans for below-investment-grade borrowers have been between 550 and 600 basis points over the Secured Overnight Financing Rate (SOFR). In contrast, junk loan spreads in the public market have averaged between 350 and 400 basis points over SOFR. This gap began to widen late last year amid concerns about the impact of artificial intelligence on software-heavy portfolios and rising stress among mid-sized borrowers.
Banks are also regaining market share that they had previously lost. After a period where banks' share of buyout financings above $1 billion fell to 39% in 2023, it has since recovered to just over 50% in 2025. Moody's chief economist Mark Zandi attributes this to declining interest rates, eased banking regulations, and private credit lenders grappling with the repercussions of their aggressive past lending practices. He anticipates further credit problems for the private credit sector in the coming months due to geopolitical tensions, higher borrowing costs, and structural pressures in certain industries.
