Analysis-Cost gap drives some US borrowers from private credit to bank-led syndicated loans

By Saeed Azhar and Matt Tracy

NEW YORK, May 4 (Reuters) – Signs of turmoil in private credit are pushing some borrowers to the syndicated loans market, which is proving to be significantly cheaper even as banks press highly leveraged companies to cut debt. 

Risky loans are about 200 basis points cheaper in the syndicated market – where banks lead deals – compared to the direct lending market, where non-bank players operate, two bankers told Reuters, referring to the market for below-investment-grade loans. The gap is large enough to justify switching markets, the two senior loan bankers told Reuters, adding that some borrowers are making or considering making the switch. 

The move by some borrowers to syndicated loans is a sign that banks could be getting the upper hand after the turmoil in the private credit market, where fundraising has slowed and redemptions have risen. 

“If public markets are open, and your credit profile is strong, there’s a real case for tapping the BLS (broadly syndicated loan) market,” said Marc Pinto, global head of private credit for Moody’s Ratings. “You get liquidity, price discovery, and the ability to refinance down the road.”

Spreads began widening late last year due to fears that software‑heavy portfolios faced disruption from artificial intelligence and that stress is building among mid‑sized borrowers, which pushed up spreads on direct lending loans to between 550 and 600 basis points over the Secured Overnight Financing Rate (SOFR) used as a benchmark rate, according to the bankers. Meanwhile, junk loan spreads in the public market have averaged between 350 and 400 bps over SOFR, the bankers said.

 At least four deals worth $4.3 billion have already moved from direct lending to the syndicated market so far this year and there are far more active conversations happening, one of the sources said, who shared internal industry data, but declined to provide details.

A second banker said he is in talks with sponsors who want some portfolio companies that previously borrowed from the direct lending market to refinance in the broadly syndicated market.

 That person said a movement by borrowers from private credit markets to the broadly syndicated market was still in early stages.  While syndicated loans are usually cheaper on average than direct loans, the gap has been particularly pronounced so far this year, according to the bankers and industry data. 

REAL CASE 

So far data on syndicated loans has not shown evidence of a change in trend,  with the broadly syndicated loan market staying about the same size through the first quarter and last at roughly $1.55 trillion, according to PitchBook data.

 But while recent data on the value of direct lending deals was not immediately available, the number of direct lending deals has sharply declined from last year at this time. Direct lending deals dropped to 104 in the first quarter, from 216 in the same quarter in 2025, according to data from Preqin, which is owned by BlackRock.

 Alternative investment fundraising, such as through direct lending,  totalled approximately $15.0 billion in March 2026, down 5% from February and 18% below levels a year earlier, according to Robert A. Stanger & Co, citing a continued slowdown in Business Development Company (BDC) fundraising as accounting for much of the decline.  BDCs are investment funds that ⁠lend ⁠directly to many mid-sized borrowers.  

Borrowers are still likely to explore both markets depending on their needs.

“While some borrowers may be drawn to the syndicated market because of pricing differentials, the decision is rarely driven by rate alone,” said Sheel Patel, head of New York Private Credit at Mayer Brown.

“Borrowers are also weighing execution risk, timing, flexibility, certainty of capital and the ability to work through downside scenarios.”

Such discussions are at an early stage because the first major wave of maturities for loans to software and information technology companies made by BDCs –  often publicly traded but also private funds that lend ​to private companies – will not come until 2028, according to PitchBook data.  

About $6.15 billion in BDCs’ software company loans will come due next year, which is roughly 5% of BDCs’ software debt, the PitchBook data shows. This figure rises to $20.6 billion, or 18% of BDC software debt, due in 2028. 

One issue that borrowers face with banks is that some sectors are more leveraged than others, prompting bankers to urge companies to improve their debt profile before they go into a new refinancing round, the bankers said. 

Banks are asking some companies to raise capital through preferred equity, to bolster balance sheets without triggering the dilution associated with common stock, one of the bankers said. 

As some borrowers shift to banks from direct lenders, the remaining opportunities for private credit lenders have become much more competitive, according to Angela Hagerman, a debt finance partner at law firm Reed Smith.

“They’re willing to drop the pricing down (and) loosen some of the covenants…In general, they’re willing to be more flexible and truly compete with the traditional bank lender market,” Hagerman said. 

Bankers said the private credit market is in a period of dislocation, caused by the rising redemption pressure and selloff in shares of alternative asset managers, and therefore they are deploying capital more cautiously.

In the recent sale of a $5.75 ​billion loan by banks to help finance the leveraged buyout of ‌Electronic Arts, some private credit funds either pulled back the orders or reduced them, one of the sources, who asked not to be named, told Reuters.

Private credit funds traditionally place surplus capital in syndicated loan deals, bankers say.  EA declined to comment.

“Private credit lenders, particularly the BDCs managers, are becoming more choosy,” said Moody’s Pinto. “With respect to high yield spreads, if it is too tight, then it’s not right. That might not sit well with borrowers that have options.”

(Reporting by Saeed Azhar and Matt Tracy; Editing by Megan Davies and Andrea Ricci)