Financial Markets & Risk Dynamics

May 19, 2026

Rate Hikes Accelerated the Migration to Direct Lending

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Torsten Slok

Partner, Chief Economist

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When the Fed began hiking rates aggressively in early 2022, the cost of capital for leveraged borrowers rose sharply and reshaped how corporate finance gets done. All-in coupons on floating-rate syndicated paper jumped from roughly 4% to 10%, crushing LBO economics and forcing sponsors to rethink deal structures that had been underwritten on the assumption of cheap debt. With higher rates also compressing CLO equity arbitrage, new CLO issuance slowed and the dominant buyer of syndicated paper stepped back from the market.

Direct lenders filled the gap, deploying record private credit dry powder while offering sponsors what the syndicated market couldn't: speed of execution, flexible bespoke structures (tailored amortization schedules, delayed-draw facilities) and the confidentiality of negotiating with a single lender rather than syndicating terms to the broader market.

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