The rapid rise of private credit has created a supply/demand imbalance, which is once again squeezing spreads and underwriting terms. according to Fitch Ratings analysts and external panelists at the rating agency’s recent private credit forum in Chicago.

While the possibility of additional regulation kept banks mostly out of the picture last year, managing director Meghan Neenan highlighted that banks have become more involved in recent months, as seen by several bank/non-bank agreements. This begs the question of how the upcoming return of banks and other syndicated market participants may affect direct lending.

Competition is expected to increase, particularly in the upper middle market. While leverage and covenants remain stable, spreads are projected to come under increased pressure.

Senior director Lyle Margolis stated that some lenders are compromising on requirements such as pricing to retain crucial partnerships. Last year, middle market credit performance exceeded Fitch’s forecasts, while there is evidence of greater variance in credit indicators for business development companies (BDCs).

As direct lending continues to develop, the issue of products such as middle-market collateralized loan obligations, feeder funds, and bilateral facilities grows, according to managing director Derek Miller. As new investors gain exposure to private credit through various vehicles and structures, lenders will prioritize personalizing the issuance product to meet both investor and lender demands.

Rapid expansion and many new entrants into the private credit space have heightened the prospect of systemic risk, while the IMF dismissed immediate private credit systemic risks in its most recent report. While the proliferation of semi-liquid products with redemption risk may result in forced asset sales, Neenan pointed out that quarterly redemption limitations will prevent ‘runs’ on funds.