Lower interest rates have pushed companies back to the broadly syndicated loan (BSL) markets to refinance outstanding loans, reducing the share of loans issued by direct lenders, according to a report by Moody’s Ratings.

The rating agency said this trend is accelerating from a year ago, but that direct lenders will continue to win over higher-risk borrowers that covet greater deal flexibility and speed.

Read more: The race is on in the direct lending market

The report also noted that leveraged buyouts (LBOs) and M&A have been slow to return as markets wait for valuations to stabilise amid geopolitical and economic volatility. This has led refinancings to continue to dominate the leveraged loans market, with collateralised loan obligations (CLOs) taking the biggest share in the BSL markets.

For Moody’s the next big question is when new LBO deals will meaningfully return, and whether the syndicated market will be able to wrest lost market share from direct lenders.

Read more: Private credit yields to remain attractive despite reduced illiquidity premium

While new LBO volume is similar to 2024, the actual number of deals has dramatically declined, said the rating agency, reflecting a shift toward significantly larger “mega” deals – typically valued at $10bn (£7.4bn) or more. Mega deals is an area where direct lenders still lead mandates, with private credit lenders generally attracting riskier deals, in instances where the BSL market is less accessible, Moody’s said.

For example, when LBOs have limited cash flow but are expected to grow over time, direct lenders are more inclined to offer payment-in-kind terms, which is a riskier form of financing that promises investors more yield.

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