The private credit market has grown rapidly over the past decade, filling a void left by banks retreating from mid-market lending. But as the cost of capital rises and bank lending tightens further, a new dynamic is emerging: borrowers are actively refinancing their existing private credit term sheets. This is not a marginal trend. It reflects a structural shift in how mid-market companies manage their balance sheets, and it carries significant implications for lenders, sponsors and financial advisers.
This article explains what is driving the refinancing wave, who is affected, and what may happen next. We separate established facts from reasonable inference, and we flag the uncertainties that remain.
What is driving the refinancing wave?
Several factors are converging to make refinancing attractive for mid-market borrowers.
First, the interest rate environment has changed. Central banks in the UK, US and Europe have raised rates substantially since 2022. Many private credit deals were originated when rates were lower, and their floating-rate coupons have reset higher. Borrowers with improved credit metrics or stronger cash flows now see an opportunity to refinance at tighter spreads, even if the absolute rate remains elevated.
Second, competition among private credit lenders has intensified. The market has attracted new entrants, including large asset managers and specialist direct lending funds. This has increased the supply of capital available to mid-market companies. Lenders are under pressure to deploy capital, and they are willing to offer more favourable terms to win or retain mandates. This dynamic gives borrowers leverage in negotiations.
Third, bank lending is tightening. Regulatory capital requirements, risk aversion and the cost of balance sheet capacity have made banks more selective. They are focusing on larger, more liquid credits. Mid-market borrowers that previously relied on bank facilities are finding that private credit is not just an alternative but often the only viable option. However, the tightening also means that refinancing within the private credit market is more common than switching back to banks.
Fourth, the maturity wall is approaching. Many private credit deals were structured with five-to-seven-year terms. A significant portion of the market is due to mature in the next two to three years. Borrowers are choosing to refinance early rather than face a potential liquidity crunch at maturity. This is a prudent balance sheet management strategy, but it also creates a wave of refinancing activity that lenders must manage.
How are term sheets being restructured?
Refinancing is not simply a matter of extending the maturity. Borrowers are using the process to renegotiate a range of terms.
Covenants are a key focus. Many original term sheets included maintenance covenants that require the borrower to meet specific financial ratios. In a higher-rate environment, these covenants can become restrictive. Borrowers are seeking to loosen them, moving to incurrence-based covenants that only test compliance when the company takes specific actions, such as incurring additional debt. This gives borrowers more operational flexibility.
Pricing is another area of negotiation. Borrowers with improved credit profiles are pushing for lower spreads. Lenders may concede on pricing to retain a relationship or to avoid the cost of a new origination. However, the extent of pricing concessions depends on the borrower's credit quality and the lender's portfolio strategy.
Prepayment penalties and call protection are also being revisited. Many private credit deals include prepayment premiums to compensate lenders for the cost of redeploying capital. Borrowers are seeking to reduce these penalties, particularly if they are refinancing with the same lender. This is a point of tension, as lenders rely on these protections to maintain yield.
Finally, borrowers are seeking more flexibility in terms of dividend distributions, acquisitions and capital expenditure. They want to be able to deploy capital without seeking lender consent for every transaction. This is a significant shift from the more restrictive terms that were common in the early years of private credit.
Who is affected?
Mid-market borrowers are the most directly affected. These are companies with EBITDA typically between £10 million and £100 million. They are often owned by private equity sponsors, but they also include family-owned businesses and public companies that have chosen private credit for speed and certainty of execution.
Private credit lenders are also affected. They face a portfolio management challenge. Refinancing requests require additional underwriting and legal work. They also create a risk of losing assets to competitors if they do not offer competitive terms. Lenders with strong origination capabilities and flexible capital can use this wave to consolidate relationships, but those with weaker portfolios may see an increase in defaults or a decline in returns.
Private equity sponsors are another key group. They are using refinancing to extend the holding period of their portfolio companies, to fund add-on acquisitions, or to return capital to their own investors. The ability to refinance on favourable terms can significantly affect the internal rate of return of a fund.
Financial advisers and legal counsel are also seeing increased demand. Refinancing transactions require valuation work, term sheet negotiation and legal documentation. This is a source of fee income, but it also adds complexity to the market.
Commercial impact
For lenders, the refinancing wave has a direct commercial impact. It affects the yield on their portfolios, the duration of their assets and the cost of redeploying capital. Lenders that are forced to accept lower spreads or looser covenants will see a reduction in net interest margin. However, they may also benefit from longer duration and reduced refinancing risk.
For borrowers, the impact is more positive. Refinancing can reduce interest costs, improve cash flow and provide greater operational flexibility. This can support investment and growth. However, borrowers must be careful not to over-leverage or to accept terms that create future problems.
For the broader market, the refinancing wave is a sign of maturity. The private credit market is becoming more dynamic, with active secondary trading and refinancing activity. This is a positive development, but it also introduces new risks, such as the potential for covenant-lite structures to mask deteriorating credit quality.
Risks and unknowns
There are several risks and unknowns that market participants should monitor.
First, the sustainability of the refinancing wave depends on the interest rate outlook. If rates remain high for longer, borrowers may find that refinancing does not deliver the expected savings. Conversely, if rates fall sharply, lenders may face a wave of prepayments that reduces their yield.
Second, the quality of underwriting is a concern. As competition intensifies, lenders may be tempted to loosen terms to win deals. This could lead to a deterioration in credit standards, which would increase the risk of defaults in the next downturn.
Third, the interaction between private credit and the banking system is uncertain. If bank lending tightens further, more borrowers will turn to private credit, but the capacity of the private credit market to absorb this demand is not unlimited. A sudden surge in demand could lead to a pricing bubble or a decline in underwriting standards.
Fourth, regulatory scrutiny is increasing. Private credit has grown rapidly, and regulators are paying attention. New rules on leverage, liquidity or disclosure could change the economics of the market. The exact form and timing of any regulatory changes are unknown.
FY Outlook
We expect the refinancing wave to continue over the next 12 to 18 months. The maturity wall and the competitive dynamics of the market will drive activity. Borrowers with strong credit profiles will be able to secure improved terms, while weaker borrowers may struggle to refinance and could face higher costs or a lack of available capital.
Lenders will need to be selective. They should focus on maintaining underwriting discipline and on building relationships with high-quality borrowers. The ability to offer flexible terms, such as covenant-lite structures or delayed draw facilities, will be a competitive advantage.
For sponsors and financial advisers, the refinancing wave represents an opportunity to optimise capital structures and to create value. However, they should be cautious about over-optimism. The market is cyclical, and the current favourable conditions may not persist.
Conclusion
The private credit refinancing wave is a structural development that reflects the maturation of the asset class. It is driven by interest rate dynamics, competitive pressure and the approaching maturity wall. For mid-market borrowers, it offers an opportunity to improve their balance sheets. For lenders, it presents both a challenge and an opportunity. The key to success will be disciplined underwriting and a clear understanding of the risks.
As the market evolves, we will continue to monitor the data and provide analysis that is useful to founders, operators, investors and advisers. The FY Times will track the key indicators, including refinancing volumes, spread movements and covenant trends, to help our readers navigate this complex landscape.
Why It Matters
For mid-market borrowers, the ability to refinance private credit term sheets can reduce interest costs, improve cash flow and provide operational flexibility. For lenders, it affects portfolio yields and asset duration. For sponsors and advisers, it creates opportunities to optimise capital structures. Understanding this wave is essential for anyone involved in mid-market corporate finance.
