PIMCO Sees A Private Credit Shift: Better Deals For New Loans, Bigger Risks In Old Ones

Private credit lenders are regaining leverage in negotiations with borrowers as redemption pressure forces fund managers to tighten lending standards, but older portfolios remain vulnerable to mounting credit stress.

The market is increasingly splitting between newly originated loans with stronger protections and legacy investments made during years of intense competition, when lenders accepted higher leverage and weaker terms to put capital to work, according to a new report from PIMCO’s Lotfi Karoui.

"Recent redemptions from semiliquid direct lending vehicles have tightened financing conditions at the margin, helping lenders regain negotiating power," Karoui wrote.

The shift could improve returns and credit outcomes for newer loans, but it is unlikely to quickly resolve problems in existing portfolios.

New Loans Offer Better Protections

Recent data suggest underwriting standards are improving. Spreads on newly originated direct-lending loans have widened modestly even as spreads in the broadly syndicated loan market have tightened, increasing the relative compensation available to direct lenders.

The spread between direct-lending and syndicated loans reached about 2.7 percentage points in the latest quarter, according to PIMCO data through June 2026

Borrowers are also taking on less leverage and providing more equity support. Lincoln International data cited by PIMCO shows that loans issued in August to companies with $40 million to $100 million in EBITDA had larger equity cushions than loans issued in late 2025. Required equity cushions rose from 45% to 50%, while leverage levels declined.

Meanwhile, interest coverage ratios on newly originated direct-lending loans reached 2.5 times in the second quarter, the highest level since 2022, according to KBRA DLD data cited in the report.

PIMCO cautioned that the improvements remain preliminary, saying they represent "tentative green shoots rather than evidence of a regime shift." The trends will need to persist for several quarters before signaling a meaningful change in underwriting conditions, PIMCO said.

Legacy Portfolios Still Face Pressure

Older loans remain exposed to the more borrower-friendly terms negotiated during the industry’s peak fundraising and deployment years.

PIMCO’s analysis of PitchBook data found that the share of issuers in business development company portfolios classified as financially distressed reached 18.8% in June 2026, up from about 8.6% in 2015.

Public market valuations also suggest investors remain cautious. Publicly traded BDCs traded at a median of about 0.7 times reported book value in October, meaning their shares traded at roughly a 30% discount to reported net asset value.

Questions about valuation practices are adding to the uncertainty. Loans held by multiple BDCs carried average valuation differences of roughly six percentage points, Karoui said, making it harder for investors to distinguish differences in underlying credit quality from differences in how managers mark their portfolios.

Karoui also warned that "more frequent marks do not, by themselves, create price discovery." He said model-based valuations cannot fully address the lack of observable transactions and limited secondary-market liquidity in private credit.

The result is an increasingly divided market. New loans may benefit from stronger lender protections, while older portfolios continue to face the consequences of aggressive underwriting. Karoui noted that credit losses, markdowns and earnings pressure in legacy investments "have yet to fully run their course."

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