The Race to the Bottom on Spreads
The leveraged loan market has shifted aggressively into a borrower-friendly environment, characterized by a rapid compression of spreads not seen since the post-Global Financial Crisis era. New data from the third quarter of 2025 reveals that average spreads for B-minus rated issuers have tightened to S+366, while B-flat borrowers are seeing pricing as low as S+317—historically tight levels that signal a market flushed with liquidity and hungry for yield.
This compression is driven by a supply-demand imbalance. While the primary market has reopened, investor demand is outpacing the available supply of new money paper. As a result, banks and institutional lenders are competing fiercely to win allocations, driving down margins and loosening terms. For corporate borrowers with strong credit profiles, the cost of senior debt has rarely been more attractive, yet this aggressive pricing often masks underlying rigidity in structure.
The Return of the Mega-LBO
After a period of dormancy, the "Mega-LBO" has returned to the headlines, serving as a bellwether for the Broadly Syndicated Loan (BSL) market’s health. Electronic Arts’ announced $55 billion take-private transaction is set to be the largest leveraged buyout in history, anchored by $20 billion in debt underwriting. This transaction, along with Thoma Bravo’s $5.5 billion acquisition of Dayforce, confirms that public markets are once again capable of digesting massive credit risks.
However, the resurgence of M&A is not without headwinds. While deal announcements reached $306 billion in September, actual closings face scrutiny. Market participants cite lingering "White House policy" uncertainty and sector-specific fears—particularly around Artificial Intelligence disrupting borrower business models—as factors that could stall momentum. The pipeline is building, but the execution timeline remains elongated compared to completely risk-on periods.
Refinancing Efficiency Dismantles the Maturity Wall
Earlier fears of a 2025-2026 "maturity wall" triggering a wave of defaults appear to have been overstated. Borrowers have utilized the tightening spread environment to aggressively refinance, reprice, and extend maturities. Recent data indicates that 82% of activity in the third quarter was driven by refinancing and amendments rather than new money issuance.
Consequently, the immediate pressure has dissipated. Only 1.1% of outstanding leveraged loans are now set to mature in the next 12 months. This successful "kicking of the can" has stabilized the default outlook for the near term, buying companies time to grow into their capital structures before the next cycle turns.
What This Means for Borrowers
The current market dynamic presents a dichotomy: senior debt is cheap, but access is highly bifurcated. Banks are aggressively chasing large, pristine credits to fill their books, driving margins down. However, they remain cautious on stories with hair on them—specifically those exposed to tariff risks or technological disruption.
Bond Capital’s Take: Markets are currently priced for perfection. While senior bank debt is cheap, it is often rigid, coming with strict covenants and amortization schedules that leave little room for error. We provide the flexible junior capital that completes the stack when banks hit their leverage limits or when a borrower requires a structure that traditional syndicated markets cannot accommodate.
