Private credit promised to fill the gap left by the retreat of banks in the business of lending to mid- and small-businesses. Its growth was dramatic—the market expanded to between $1.5 trillion and $2 trillion, with private credit managers raising nearly $1.3 trillion over the past decade. In 2023 alone, these managers raised $135.7 billion, well over double the annual total from a decade earlier.
The need was real, as mid-market firms with less-than-perfect financials found their banks closed for business; banks’ share of corporate lending decreased to just 29 percent, down from 48 percent in 2015.
For mid-market companies, private credit became a lifeline. Charter Next Generation, a maker of specialty films for food packaging and medical applications, illustrates the transformative potential. When KKR acquired the company in 2021, it launched an employee ownership program then-encompassing more than 1,700 employees. The company has since expanded to 18 facilities across 13 locations and grown to 2,600 employee owners.
But now, as major funds report declines in their net asset values due to markdowns on troubled loans, particularly in software-related positions, worries about a true blowup are growing. KKR’s largest private-credit fund held by individual investors, FS KKR Capital, this week announced a $560 million loss in Q1—equivalent to about 10 percent of the fund’s net asset value—as defaults jumped to 8.1 percent from 5.5 percent in December.
The lack of transparency in private transactions makes it difficult to estimate market-wide risk. Moody’s estimated a 2025 private credit default rate in the range of roughly 1.6 percent to 4.7 percent (compared to a Q4 2023 rate of 1.6 percent according to Proskauer’s Private Credit Default Index).
For small- and mid-market businesses, the implications are significant and will spill into all lending. Loan terms are tilting back toward lenders, with tighter covenant packages and lower leverage in new originations. Sponsors that priced deals at a secured overnight financing rate of +525 last year are now seeing pricing closer to SOFR +575-625 for comparable credit profiles. A Financial Stability Board May 2026 report warned that private credit at its current size has not been tested during a severe economic downturn—a test that may now be underway.
Navigating Credit in a Higher-Risk Environment
For mid-market businesses currently borrowing or considering credit, the shifting landscape demands careful strategy. Here are key considerations for the rest of 2026:
1. Develop a Larger Network of Lenders Now
As unappealing as it sounds, CEOs need to invest time and effort nurturing relationships with a range of lenders well in advance of needing the funds. Reliance on that long-standing “relationship” with your commercial bank for access to credit is largely a quaint relic of the past. You need to be a savvy shopper and begin now to cast as wide a net as possible with local, regional and national banks, as well as specialty lenders and private credit shops.
2. Prepare for Tighter Loan Terms
The era of borrower-friendly deals has ended. Lenders are now requiring stricter covenant packages and lower leverage in new originations. Businesses should budget for higher borrowing costs (at least 50-100 bps) and more restrictive terms when approaching lenders. As before, the smaller the business, the higher the spread.
3. Anchor Rate Assumptions to “Higher-for-Longer”
Heavy odds now show an unchanged federal funds target for the Federal Reserve’s June meeting and one cut for the remainder of 2026, replace prior assumptions of 75-100 basis points of cuts before year-end. Stress-test your coverage ratios assuming a 3.50 percent–3.75 percent policy band through Q4.
4. Strengthen Your Documentation and Transparency
Regulatory scrutiny of private credit is intensifying. The SEC is investigating valuation practices, and the Financial Stability Board has flagged opacity as a key vulnerability. Borrowers who can demonstrate strong financial reporting, clear collateral documentation and transparent cash-flow projections will be better positioned to secure favorable terms.
5. Monitor Your Fixed-Charge Coverage Closely
Given the jittery market, lenders are watching coverage ratios carefully. Borrowers with fixed-charge coverage below 1.10x (earnings of less than $1.10 for every $1.00 in interest, principal payments, taxes and capital expenditures) and fewer than six months of cash runway are increasingly being flagged as restructuring candidates.
Proactive engagement with lenders before covenant breaches occur can preserve relationships and options.
6. Evaluate Refinancing Risk Early
Roughly one-quarter of all private credit loans originated in 2021 will mature by 2027. Borrowers who previously benefited from ultra-low rates must now refinance into a higher-rate environment. Well-performing companies with stable cash flows have successfully refinanced through club deals, while more levered borrowers have relied on amend-and-extend structures or sponsor equity support. Assess your refinancing pathway now rather than waiting until maturity approaches.
