The Race to the Bottom on Pricing
The leveraged loan market is closing 2025 with a distinct signal: aggressive pricing power has returned to borrowers. In a rush to deploy capital before year-end, banks and institutional investors have driven spreads to historically tight levels. Data from the third quarter of 2025 highlights a record $394 billion in U.S. leveraged loan launches, a surge heavily dominated by repricings and refinancings rather than new money [news.bloomberglaw.com](https://news.bloomberglaw.com/private-equity/record-394-billion-of-us-leveraged-loan-launches-this-quarter). Investors are betting big on a deal revival extending into 2026, creating a supply-demand mismatch that is crushing margins for high-quality credits [bloomberg.com](https://www.bloomberg.com/news/articles/2025-12-15/clo-managers-bet-big-on-buyout-revival-to-lift-profits-in-2026).
However, this liquidity is not indiscriminate. While the Broadly Syndicated Loan (BSL) market is technically “open,” it remains bifurcated. Top-tier issuers are securing cheap capital, while those with complex narratives face execution risk. This compression of margins for “perfect” deals masks the underlying stress building in the system, where credit discipline is being tested by a market eager to overlook potential macro headwinds [news.bloomberglaw.com](https://news.bloomberglaw.com/bankruptcy-law/leveraged-loans-are-sending-signals-of-credit-stress-macro-view).
The “AI Discount” and Regulatory Friction
Despite the influx of liquidity, significant friction remains in the M&A pipeline. Beyond the standard regulatory hurdles, a new form of diligence risk has emerged: AI vulnerability. Reports indicate that several primary market deals in the tech and business services sectors have struggled or been pulled recently due to investor fears regarding Artificial Intelligence disruption. Lenders are increasingly wary of business models that could be rendered obsolete, causing price widening or failed syndication for issuers that cannot prove their “AI resilience” [octus.com](https://octus.com/resources/articles/leveraged-finance-market-participants-cautiously-optimistic/).
Furthermore, the power struggle between sponsors and lenders has intensified. We are observing a rise in “Disqualified Counsel” provisions in loan documentation, a tactic allowing sponsors to veto specific legal firms representing creditors. This erosion of lender protections is a classic symptom of a market where capital is too plentiful and diligence is taking a backseat to deal volume [octus.com](https://octus.com/resources/articles/leveraged-finance-market-participants-cautiously-optimistic/).
The Bond Capital View: Certainty in a Selective Market
The current environment—thin margins and aggressive terms—suggests a market priced for perfection. For borrowers that fit the “fairway” box, senior bank debt is undeniably cheap. However, cheap capital is often the most rigid. When banks reach their leverage caps or when a transaction involves complications like antitrust scrutiny or technology transition risks, the public market’s appetite evaporates.
This is where the distinction between public and private credit becomes stark. While banks aggressively loosen terms to win the easiest deals, Bond Capital maintains credit discipline to protect investors and serve borrowers who require structural flexibility. We do not compete on the thinnest margin; we provide the junior capital that completes the stack when rigid senior lenders pull back. In a market fixated on 2026 projections, we remain focused on the credit reality of today.
