Quarterly Loan Market Update

Video

What You Will Learn

In our 2026 first quarter loan market update, we highlight three themes shaping the private credit landscape:

The evolution of key headwinds;
The differing impact across managers; and
How environments like today tend to unfold based on our decades of experience.

Theme 1: Headwinds persisted—but key dynamics are shifting

We’ve talked about headwinds before: low base rates, tight spreads and heightened credit stress. So, where do things stand as of the end of this quarter?

Over the past two years, base rates have declined by nearly 175 basis points. This has reduced direct lending returns, even as it has provided some relief to borrowers.

At the same time, credit stress remains elevated. Defaults are still higher across both the private credit and broadly syndicated loan (BSL) markets. While they’ve moderated somewhat, we’re still in what we’d characterize as an unusually long credit cycle.

The key new development this quarter was spread widening.

After an extended period of very tight spreads, loan spreads widened in the quarter by more than half a percentage point in the BSL market.

The impact of wider spreads is complex, with different short- and long-term implications for investors. Over the long term, they benefit investors by allowing credit managers to charge a higher interest rate on the loans they originate. But in the short term, there is a negative accounting implication: when spreads widen, direct lending funds must take a fair value markdown on their loans, even when the underlying borrower is performing as expected.

As a result, many direct lending fund portfolios experienced unrealized losses this quarter.

But these fair value adjustments are NOT necessarily permanent losses from credit impairment. Over time, as loans perform and repay, unrealized losses reverse—that’s just loan math.

Shifting back to spread widening, notably, it didn’t occur uniformly across the market.

Software loans saw larger price declines than the broader market. That’s another way of saying they saw more spread widening, as prices and spreads move inversely. The broad decline in software loan prices was partly driven by investor concerns around AI. Whether those concerns prove durable remains to be seen, but they disproportionately impacted software loan prices this quarter.

Theme 2: The impact of these headwinds showed up in different ways for different managers

One impact we’ve talked about is that private credit returns have come down across the industry. If you look at public business development companies (BDCs), returns have fallen from 9–10% in 2023 and 2024 to just over 4% in 2025.

But that’s only part of the story. More challenging environments tend to increase performance dispersion across managers. In practice, stronger managers have generally been able to navigate these headwinds and limit the impact while still producing solid returns. By contrast, less-strong managers have been more heavily impacted—often resulting in materially lower or negative returns.

And this is exactly what we’ve seen. Not only have returns come down, but the gap between good managers and not-so-good ones has widened meaningfully since 2023.

At the same time, investor behavior is shifting.

In response to lower returns and increased dispersion, redemption requests in non-traded BDCs have risen significantly, often exceeding these funds’ structural limits.

There are two important takeaways:

Firms with a greater reliance on capital from vehicles with redemption features are likely to face more pressure.
Capital has left—and in some cases continues to leave—direct lending. As that happens, the supply-demand balance typically improves, which is one of the key mechanisms that shifts markets back toward more lender-friendly conditions.

Theme 3: From a credit specialist’s perspective, we've seen this pattern before

Experience and pattern recognition matter here. We’ve successfully navigated multiple credit cycles over more than 30 years, including the Global Financial Crisis.

We’ve seen this story, and there are a few important takeaways:

In past periods of spread widening, mark-to-market losses weighed on near-term results. But over time, managers who can avoid credit impairments will see these mark-to-market losses reverse, improving future returns. We expect a similar dynamic to play out this time.
It’s important to avoid sweeping generalizations, whether about sectors like software or the asset class as a whole. Credit outcomes are case by case, borrower by borrower—not driven by broad sector or asset class narratives. And the same is true for managers: not all will be impacted equally.

This brings me to our last point. These environments tend to be Darwinian.

If we take a step back, the same forces pressuring the market today set up a more favorable lending environment going forward. Wider spreads mean higher interest rates charged on new loans, and capital outflows mean less competition for new deals and more lender-friendly terms. So, while the current environment can feel uncomfortable for investors, it can lay the foundation for stronger forward returns.

But not all managers benefit equally.

We believe firms with strong credit performance and well-diversified, long-term capital bases will disproportionately benefit in this environment. These managers have ready capital and competitive advantages to go on the offensive, deploying increasingly attractive opportunities.

By contrast, firms dealing with credit issues or redemption pressure are less likely to be in a position to capitalize.

And as that plays out, we expect that the gap between managers will continue to widen—reinforcing the importance of experience, competitive advantages and a stable capital base.

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Disclaimer

Please note that the views expressed here reflect the current views of Golub Capital and are based on Golub Capital’s views of the current market environment, which are subject to change.

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Views expressed represent Golub Capital’s current internal viewpoints and are based on Golub Capital’s views of the current market environment, which is subject to change. Certain information contained in these materials discusses general market activity, industry or sector trends or other broad-based economic, market or political conditions and should not be construed as investment advice. There can be no assurance that any of the views or trends described herein will continue or will not reverse. Forecasts, estimates and certain information contained herein are based upon proprietary and other research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results. Private credit involves an investment in non-publicly traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.

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