October 2026 | Insights, News & Insights

Q3 2026 Credit Market Update: Rising Rates Test a Selective Market

Contributors

In this installment of the Credit Market Update, the Portage Point Capital Advisory Team summarizes Q3 2026 market activity, benchmarks results against prior periods, comments on key credit market developments and offers insights into the outlook for 2027.

Executive Summary

Sticky inflation pushes the Fed to hike rates

The Federal Reserve (Fed) elected to raise rates by 25 basis points (bps) on September 16, 2026, its first hike since July 2023

What Happened

  • Geopolitical tensions and surging energy costs drove persistent inflation in Q3 2026, above the 2% Federal Reserve (Fed) target
  • In September, headline CPI was 3.7% as Brent crude prices peaked above $100 per barrel on September 15
  • After removing energy costs, core CPI was 2.6% in September and remained above 2% throughout Q3 2026
  • The 10-year yield reached 5.29% on September 30, its highest since June 2007
  • The Fed elected to raise rates by 25 bps on September 16, its first hike since July 2023
  • Sixteen of 18 officials see another hike in 2026 and no return to 2% inflation until 2029
 Why It Matters

  • Middle market borrowers with floating-rate loans experience an immediate increase in interest costs
  • Market participants (according to a PitchBook LCD survey) expect rising borrowing costs will pressure balance sheets, change deal terms and increase default risk
  • 69% expect defaults to rise
  • 54% expect sponsors to contribute more equity
  • 38% expect LBO leverage to decrease

M&A financing returned but remains thin in the middle market

M&A activity rebounded in Q3 2026, but volume was concentrated in large, high-quality buyouts

What Happened

  • M&A activity rebounded in Q3 2026, but volume was concentrated in large, high-quality buyouts
  • Syndicated loan buyout volume increased 40% to $20 billion in Q3 2026
  • September recorded $31 billion of LBO and M&A loan volume, the busiest month since January 2022
  • Direct lending activity backing LBOs totaled $11 billion on 46 deals in Q3 2026, down from $13 billion on 47 deals in Q2 2026 and $27 billion on 57 deals in Q3 2025, the lowest since Q3 2023
 Why It Matters

  • M&A activity gained momentum in Q3, but volume was concentrated in higher-quality borrowers
  • Investors are gravitating toward defensive sectors as geopolitical, interest rate and AI-related uncertainty persists
  • Lower middle market M&A continues to lag, contributing to an increasingly challenging exit environment for sponsors

Lenders are competing hard for high-quality credits

Lender competition for assets is robust as demand exceeds supply, but lenders are prioritizing quality over yield

What Happened

  • Lender competition for assets remains robust – demand exceeded supply by $39 billion as collateralized loan obligation (CLO) issuance recovered to $46 billion in Q3 2026
  • Lenders are becoming more selective with respect to credit quality and use of proceeds
  • 48% of M&A loan volume has gone to borrowers rated BB- or higher, the highest share since the Global Financial Crisis and roughly double the average over the last 10 years
  • 14% of this year’s M&A loan volume has gone to borrowers rated B-, a 14-year low and well below the 34% average over the last 10 years
  • Larger borrowers continue to test the direct lending market and syndicated market to optimize pricing
  • In Q3, a record $16 billion of direct lending loans were refinanced via the syndicated loan market
 Why It Matters

  • Attractive financing terms remain available, particularly for higher-quality borrowers
  • Larger companies with strong balance sheets and in defensive sectors are well positioned and hold material pricing power in today’s environment
  • LBOs supported by new equity capital are receiving significant attention from lenders
  • The direct lending market remains active with attractive spreads, though lenders are becoming more selective

Stress is building in private credit portfolios

Private credit defaults have yet to indicate significant issues, but it appears stress is increasing

What Happened

  • Private credit defaults have yet to indicate significant issues, but it appears stress is increasing
  • According to an LCD analysis, nearly 600 of the roughly 5,000 borrowers (12%) showed credit pressure as of June, up 25% from December, while debt marked below 80 at the 15 largest business development companies (BDCs) rose 64% to $7 billion during the previous 12 months
  • Software accounted for 80% of the increase with 64% of second-lien software debt marked below 80
  • Fitch’s default rate, which counts payment-in-kind (PIK) toggles and distressed extensions, hit a record 6% in August and 12% for issuers under $25 million of EBITDA
 Why It Matters

  • As interest rates continue to increase, smaller borrowers are experiencing increased pressure on cash flows, decreasing the ability of these borrowers to service debt
  • Availability of financing and total leverage capacity may be reduced if inflation remains sticky and SOFR continues to increase

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Portage Point Capital Advisory

Portage Point is a business advisory and investment banking business focused on providing holistic advisory services and solutions to sponsored and non-sponsored middle market companies. The Capital Advisory team partners with clients to evaluate capital requirements, structure tailored financing solutions and run competitive and efficient financing processes to provide certainty of execution and optimize financing outcomes based on unique client goals and priorities.

The team leverages years of transaction execution experience and deep lender relationships across the credit provider landscape to develop an effective process strategy and craft thoughtful marketing materials which highlight attractive credit attributes of the business while addressing key lender concerns. In the constantly evolving private credit and middle market financing landscape, middle market companies, financial sponsors and management teams require an experienced and trusted advisor to navigate this marketplace and secure the financing required to fund business objectives.

The Portage Point differentiated, cross-functional platform enables the firm to add value for clients across a range of capabilities and solutions prior to, during and after a financing transaction, including financial and operational due diligence, transaction execution services, performance improvement initiatives and value creation and capture initiatives.

Contact us to learn how we can positively impact your business.

Investing in securities involves risk, including the potential loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount originally invested. Past performance is not indicative of future results. All investments carry some degree of risk, including the potential for loss of principal.

Private credit typically refers to debt investments in privately negotiated loans or debt securities. Private credit offers potential benefits such as higher yields, customization of terms, and a focus on steady income generation, but it comes with drawbacks like illiquidity and higher credit risk due to the nature of borrowers involved.

In contrast, broadly syndicated loans are large loans provided by a group of lenders to a single borrower. Broadly syndicated loans are typically rated and have standardized terms, making them more transparent and easier to benchmark. However, they may offer lower yields and less flexibility in terms compared to private credit.

Investing in debt securities is not suitable for all investors. Economic downturns, changes in interest rates, and complex contractual terms further contribute to the risk profile of investing in debt. It is important to conduct thorough research and consider your risk tolerance before making any investment decisions.

This document is for informational purposes only and does not constitute an offer or solicitation to purchase or sell securities. Investors should seek advice from a qualified financial advisor and conduct their own research and due diligence before making any investment decisions.

There is no assurance that any investment strategy will achieve its objectives. All investing involves risk, including the possible loss of principal. Diversification does not guarantee a profit or protect against loss in declining markets.

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