State of the Private Credit Market: With an Eye Towards New York Law Credit Agreements

The private credit market has undergone a significant transformation over the last decade, evolving from a niche alternative for middle market, distressed and specialty lending into a dominant force in global leveraged finance at over USD3 trillion assets under management. The scale and maturity of the market is evident in the industry’s increasing participation in “jumbo” financing transactions reaching up to USD5–6 billion, often competing with the Broadly Syndicated Loan (BSL) market in high-stakes, sponsor-backed leveraged buyouts (LBOs). Even with recent heightened geopolitical uncertainty and market volatility, private credit has remained resilient, attractive and durable as an asset class.

Private credit has also started expanding its footprint beyond leveraged finance by making inroads into investment grade, asset-based and infrastructure finance. Private asset-based finance – backed by large, diversified pools of assets, such as consumer loans or mortgages – constitutes a large and growing opportunity set. Some analysts expect the global private asset-based finance to hit the USD8–9 trillion mark of assets under management within the next three years. Moody’s expects asset-based financing to become “the new frontier for private credit”.

2025 also saw an increase in partnerships between banks and private credit lenders. Banks are teaming up with private credit lenders to expand sourcing and to manage balance sheet and risk allocation while pooling resources. Banks also provide private credit lenders leverage and liquidity, which help in aggressively sourcing new deals. Private credit’s liquidity pool may further expand via 401(k) plans. An August 2025 executive order directed the Department of Labor to seek to expand individual retirement savers’ access to alternative assets (covering a broad range of private capital investments), potentially increasing capital inflows and promoting additional private credit growth.

Overall, 2025 saw high levels of private credit activity, with the bulk of the volume being driven by add-ons, refinancings and dividend recapitalisations. New sponsor LBO activity, however, remained muted, with spurts of increased activity at the beginning and the end of 2025. The bid-ask spread for valuations continued to impede sale processes, leaving private equity hold periods stretched. The following themes dominated in 2025.

• Pricing spreads – Pricing decreased, with the vast majority of new buyouts pricing tighter than the levels seen pre-2024.
• Opportunistic transactions – Sponsors increasingly turned to dividend recapitalisations, and continuation vehicle transfers, to generate liquidity for limited partners in a suboptimal valuation environment.
• Picking spots – Private credit lenders (in collaboration with their sponsor counterparts) gravitated towards less cyclical and capital light sectors, including insurance and residential services (such as HVAC and pest control), while technology continued to dominate overall transaction volume.

The outlook for 2026 is broadly upbeat and constructive, anchored by the expectation that the Federal Reserve will continue its rate-cutting cycle. Lower base rates are expected to reduce the cost of capital and support valuations, potentially unlocking the “logjam” of private equity activity. In the short term, the landscape is defined by record levels of dry powder chasing a recovering but not yet fully unleashed sponsor LBO market. This supply–demand imbalance suggests 2026 will remain a borrower’s market, driving competition beyond pricing and into structural flexibility and documentation terms. In 2026, the story will not be limited to new LBOs; it will also be driven by the massive volume of 2020–21 issuances that need to be “re-packaged” because the original exit math no longer works.

In the following sections, this chapter of the guide will explore the tensions between private credit (with emphasis on direct lending) and BSL market including flexibility and manoeuvres (in the form of liability management exercises) under New York law governed credit agreements.

Direct lending competes with BSL market

Direct lending to primarily sponsor-owned companies continues to be the dominant strategy for private credit funds. The growth of direct lending was initially driven by a decades-long trend of bank consolidation and bank regulatory constraints in the aftermath of the global financial crisis, including restrictions on levels of leverage and higher capital reserve requirements. Beyond regulatory arbitrage, the speed and certainty of execution, relationship-driven approach and ability to weather capital market dislocations has helped direct lenders become the preferred funding source for sponsors.

While BSL deals offer a price discount, they require additional time, invite rating scrutiny and come with “flex” risk (which allows the lead bank to change pricing, structure, yield and other deal terms during the syndication process). Direct lenders are also able to offer certain structural advantages to private equity sponsors. For instance, direct lending deals, unlike BSL, have greater flexibility to offer a combination of the following terms:

• DDTL – financing certainty for future M&A in the form of delayed draw term loans (particularly attractive for any “roll up” merger strategy);
• PIK – reduce cash burden by utilising payment-in-kind (PIK) interest toggle, which allows cash interest payments to be deferred and added to the loan amount;
• portability – feature allowing sponsors to sell without triggering any refinancing of existing debt or change of control (BSL deals often have ratings conditionality adding external uncertainty to any portability feature); and
• ARR – annual recurring revenues loans enabling debt financing to earlier stage, often cash flow negative, companies (especially prevalent in high-growth SaaS software businesses).

In 2025, private credit continued to chip away at BSL’s share of the leveraged finance market. This past year, around USD37.7 billion of BSL deals were refinanced into the private credit market, compared with USD28.2 billion of private credit deals refinanced into BSL deals during 2025, per JPMorgan. More tellingly, LCD estimates that direct lenders had a 58% share of the overall sponsor LBO market from 2023 to 2025 compared to 36% in the 2020–22 period. Direct lenders continued to make steady gains in large-cap transactions including Service Logic, Pike Corporation, Quirch Foods, PCI Pharma, Mitratech and Clario. ManTech International was initially intended to be a BSL refinancing but pivoted to a direct lending deal after the BSL process broke down. With the easing of leveraged lending guidelines at the end of 2025, the competition between the BSL market and direct lenders will increase, benefiting borrowers. The practical outcome of the easing remains to be seen as rating outcomes and fixed charge coverage continue to remain bottlenecks for higher leverage in the BSL market.

Broadly syndicated loans versus private credit terms

The intense competition between the BSL and private credit markets has moved beyond pricing and leverage to documentation terms. In large-cap deals, sponsors are frequently running “dual track” processes across direct lenders and banks to maximise competitive tension not just between constituents of each market but also between both markets. This has naturally led to convergence of terms between the two markets in large-cap deals as well as higher quality middle market deals for top-tier sponsors. Covenant-lite deals (typically, with a springing leveraged-based maintenance covenant) are estimated to have constituted one third of all of 2025 deals with more than USD50 million in EBITDA and a majority of large-cap deals (with EBITDA upwards of USD75 million), a trend that is expected to persist in 2026. However, underwriting in private credit is generally more involved with deeper focus on diligence and underlying documentation terms. Private credit financings, which are almost exclusively documented in New York law governed credit agreements, are focused on restrictions around additional debt incurrence, leakage in the form of distributions, investments and asset transfers, and EBITDA add-backs.

The choice of New York law in both BSL and private credit financings has a long history. Financing parties and sponsors also choose to subject themselves to exclusive jurisdictions of US federal courts and New York state courts located in Manhattan for any disputes. This preference stems from a multitude of factors, including New York’s exhaustive case law surrounding complex financing transactions (which offers predictability) and New York courts’ adherence to the terms negotiated by the parties including by disallowing any extraneous evidence where the final terms of the agreement are unambiguous. Moreover, parties to a New York law governed contract can pursue commercial disputes in New York so long as the contract contains a New York forum selection clause and involves a transaction in the aggregate not less than USD1 million. In light of this, New York law governed credit agreements set the “gold standard” and define what is “market” in these financing transactions.

Below is a comparison of some of the “market terms” between BSL and private credit deals found in New York law governed credit agreements in sponsor-backed LBO financings.

EBITDA add-backs

• Run-rate synergies – Run-rate synergy add-backs in mid to large-cap private credit deals are typically capped at 30–35% of EBITDA; this cap is often shared with business optimisation charges. In smaller-cap private credit transactions, this cap is typically limited to 25% of EBITDA. Revenue synergies are permissible in large-cap transactions subject to a pre-agreed sub-cap, whereas small-cap deals often resist revenue synergies and price improvements as EBITDA add-backs. BSL deals often allow these adjustments to be uncapped, with the option to “flex” and add caps during the syndication process.
• New contract/pre-opening costs – Relatedly, new contract or pre-opening cost add-backs in private credit deals are tightly circumscribed, permitted only in limited cases and subject to a small sub-cap. BSL deals tend to be far more permissive, often leaving add-backs uncapped, but with the ability to “flex” during syndication.
• Other add-backs – Private credit documents tend to exclude “of-the-type” adjustments when it comes to quality of earnings (QoE) report and sponsor models delivered at closing; these deals also apply stricter limits on QoE being delivered for future transactions, generally confining them to permitted acquisitions or similar investments, thereby limiting the availability of generic QoE add-backs. BSL documents, on the other hand, are more inclined to accept “of-the-type” adjustments and QoE may be delivered for various types of future transactions (not just limited to acquisitions and investments).

Add-on debt and free and clear capacity

• Free and clear capacity (“freebie”) – Private credit deals generally size these baskets no more than 100% of EBITDA and often push back on reallocating general debt baskets to the freebie capacity, except in large-cap mandates. BSL deals, by comparison, feature substantially larger freebies, often double those found in private credit, but there exists “flex” risk during syndication whereby the nominal fixed amounts may be adjusted, or EBITDA grower percentages associated with freebie basket may be reduced.
• No worse tests – The “no worse” test, which allows unlimited debt incurrence so long as borrower’s pro forma leverage ratio (after giving effect to the debt incurrence and relevant transaction) is not worse than its leverage ratio immediately before giving effect to the relevant transaction, remains relatively less common in direct lending transactions. If it appears at all, it is found primarily in top-tier sponsor or large-cap private credit deals and then usually only for “A” category credits. In the BSL documents, this test is commonly accepted, except it may be “flexed” during the syndication process and be limited to investment capacity only or be occasionally removed in its entirety.
• MFN sunset and carve-outs – Private credit deals require most favoured nation (MFN) treatment with respect to pricing differential, such that if yield differential on new debt raises of equal priority exceeds 50bps the same should be applied to the benefit of the original loan. Such pricing MFN also applies to incremental equivalent debt (also known as “side-car” debt), ratio debt and acquisition debt. Some large-cap and top-tier sponsor deals in the private credit space are starting to have sunsets. BSL facilities tend to be more flexible on these. MFN differential in BSL deals may range from 50 to 100 bps and is often accompanied by a six-month sunset, with margin-based triggers becoming more common; these can be “flexed” during syndication to reduce yield trigger, expand the scope of pricing MFN, and extend the sunset term.
• Inside maturity carve-outs – Inside maturity carve-outs – which permit a portion of incremental debt to mature ahead of the existing loans – are rare outside large-cap private credit deals, where they are typically limited to 20–25% of EBITDA. BSL financings, in contrast, often include broad inside maturity carve-outs, with “flex” rights to reduce or remove them.

Covenant packages

Financial maintenance covenants largely remain a bright-line distinction between the private credit and BSL deals. In private credit, financial maintenance covenants are common across small and mid-cap transactions (often with a covenant toggle at USD50 million EBITDA mark), with covenant-lite structures appearing predominantly in large-cap deals. This contrasts starkly with the BSL market, where covenant-lite structures are the prevailing norm and maintenance tests on term loans are largely absent.

DDTLs and PIKs

As noted above, delayed draw term loans (DDTLs) in private credit are typically available for up to two years since closing. Some private credit deals also offer PIK interest option for two years during the life of the loan, with a pricing premium and a minimum cash-pay component. Very few BSL deals can offer DDTL capability and PIK optionality remains rare in the BSL world.

Asset sale step downs

These provisions, which reduce mandatory prepayment amounts or sweep percentages as leverage improves, are rare in private credit but have appeared in some large-cap deals. They are routine in BSL transactions.

Other negative covenant exceptions

In case of each of the negative covenants relating to the ability to use available amount basket to incur debt and unlimited securitisation/receivables, BSL documents tend to be more permissive. In private credit deals, the inclusion of these terms is not the norm. And while unlimited securitisation/receivables baskets are rare in private credit, when they are included, they are usually capped and limited to receivables.

Other specialised debt features

“High water mark” provisions which lock in a fixed dollar basket based on a percentage of EBITDA, calculated at the borrower’s peak EBITDA levels, irrespective of subsequent decline in borrower’s performance, are extremely rare in private credit deals but began surfacing sporadically in 2025 within the BSL credit agreements. Similarly, while mid and large-cap private credit deals may include a secured contribution debt basket (capped at 100% of EBITDA and typically unsecured), BSL deals routinely permit up to 200% of EBITDA for such capacity (and allow such debt to be secured).

Liability management transactions

Given the varying levels of flexibility offered under the New York law governed credit agreements, distressed borrowers are increasingly turning to liability management transactions (LMTs) in order to address their capital structure. Following the COVID-19 pandemic, the prevalence and sophistication of LMTs have increased and LMTs are a preferred option of distressed borrowers facing liquidity constraints over expensive and disruptive bankruptcy proceedings. Predictably, such manoeuvres have been frequently challenged in New York courts, the pre-eminent venue for any credit agreement disputes.

Types of LMTs and protection mechanism

• Drop-down transactions – Drop-downs involve transferring material assets from parties providing collateral and guarantee support to non-guarantor entities (whether a non-guarantor restricted subsidiary or an unrestricted subsidiary), enabling the borrower to obtain separate secured financing at such non-guarantor or unrestricted subsidiary. Also known as “JCrew”, when transferring material assets, particularly intellectual property, into an unrestricted subsidiary, and “Pluralsight” if such asset transfer is made to any non-guarantor restricted subsidiary.
• Release of non-wholly owned subsidiary – Credit agreements require wholly owned domestic subsidiaries to extend collateral and guarantee support. If a portion of equity ownership is transferred such that a wholly owned guarantor subsidiary becomes a non-wholly owned subsidiary, it triggers automatic release provisions. These types of manoeuvres are now labelled as “Chewy” transactions, but are less commonly used as the newly minted non-wholly owned subsidiary is still subject to restricted subsidiary covenants.
• Uptier transactions – These transactions, often referred to as “Serta”, are effectuated by changing the relative payment or lien priorities (or both) within a capital stack. This is made possible either by amending a credit agreement with the consent of required subset of lender group to allow for non-pro rata debt exchange (in whole or in part) or incurrence of super senior or priming debt.
• Double dip manoeuvres – At their heart, these transactions enhance (or double up) the claims and recovery of a particular creditor. This is achieved by first incurring additional secured debt at a non-guarantor restricted subsidiary or an unrestricted subsidiary (the “double dip borrower”). The additional secured debt is also guaranteed by the existing borrower and the remainder of the guarantor group. The transaction is completed by lending the proceeds of this new debt facility to the existing borrower as an intercompany debt. The new intercompany debt is also guaranteed and secured by the same guarantor and collateral pool (the intercompany debt is also pledged for the benefit of such lenders). This results in two distinct claims in the hands of the lenders providing debt financing to the double dip borrower – the secured guarantee and the secured intercompany debt.

While the majority of the LMTs have been organised and executed in the BSL space, private credit lenders are on guard and often insist on including blockers in their documents to eliminate the possibility of such LMTs, especially in the post-Pluralsight era. Private credit documentation has coalesced around the form and substance of LMT blockers. Some of the typical blockers included in private credit deals are as follows.

• JCrew/Pluralsight – Prohibits transfer of certain assets to non-guarantor restricted subsidiaries and unrestricted subsidiaries. Typically, this limitation extends to material intellectual property.
• Serta – Requires affected lender consent for any amendment or transaction that subordinates existing lenders’ lien or payment priority (or both) via priming / uptier debt, with some limited carve-outs.
• Envision – Permits transfers and dispositions to unrestricted subsidiaries so long as confined to a single investment basket (without any allocation or stacking or rebuilding with the investments so made).
• Chewy – Blocks non-wholly owned subsidiaries from being released from providing collateral and guaranty support unless there is a bona fide third-party sale (to an unaffiliated entity).
• Incora – Addresses the issue of consent via “phantom note” that arose in the Incora matter, with the blocker aimed at limiting incremental commitments from being counted towards voting thresholds unless such debt is drawn (with some leeway for debt incurred for bona fide purposes and not for the primary purpose of influencing any voting thresholds).
• At Home – Neuters the risks associated with double dip manoeuvres and requires intercompany debt (above a certain threshold) to be subordinated to the existing facilities or restricts the guarantees of non-loan party debt.

Structurally priming debt

As a part of LMT transactions, borrowers often also incur structurally priming debt, whether at a non-guarantor subsidiary or by way of securitisation financing. Private credit lenders continue to push for smaller baskets for each of these, whereas in the BSL market, securitisation financings are frequently uncapped.

Direct lending at its core remains “clubby”, with fewer lenders and broadly aligned incentives. As a relationship driven business with a concentration of capital among the top-tier lenders, direct lenders have typically more negotiating leverage than widely dispersed lender groups in BSL deals across CLOs, mutual funds, hedge funds and insurance companies. Sponsors are reluctant to employ LMTs and risk losing access to funding from direct lenders for future deals, aside from the potential reputational risks arising from such manoeuvres. In addition, borrowers find it relatively easier and more efficient to negotiate covenant relief, increase liquidity by way of PIK toggles and obtain amortisation waivers and get maturity extensions from direct lenders. These consensual solutions are highly negotiated with a give and take often involving further equity infusion from the sponsor. Both direct lenders and sponsors place a premium on long-term relationships leading typically to a less contentious workout process.

Conclusion

The private credit market has not only established itself as the “third leg” of the leveraged finance markets alongside high-yield bonds and term loan Bs but also become an increasingly preferred choice for sponsor finance – all of which are grounded deeply in New York law. The defining features of 2025 were lower than expected LBO volumes, abundant dry powder and the consequent prevalence of borrower-friendly terms and opportunistic refinancing transactions. LBO deal volumes are expected to increase significantly in 2026, generating much anticipated “new money” supply for private credit lenders.

The intense competition both within the direct lending market as well as with the BSL market is expected to continue in 2026 in the absence of any major macro-economic shocks. The competitive battleground has moved past pricing into the more arcane parts of the New York law governed credit agreements. For market participants, the priority is no longer simply securing capital but instead securing control as well. The continued convergence with syndicated terms in large-cap deals and the steady term creep in middle market deals, including the rise of “cov-lite” structures, and the growing influence of cross-border practices, will continue to demand closer attention to these New York law governed credit agreements. In 2026, lenders and borrowers will continue to remain focused on LMT manoeuvres and credit agreement provisions facilitating “uptiering”, “drop-downs”, “double dips”, leakages and more (including in the form of amend-to-extend).