Market commentary often relies on anecdote and sentiment. "Spreads are tight." "Leverage is elevated." "Coverage is under pressure." These claims may or may not be accurate, and they're hard to evaluate without data.
Benchmarking data across more than 10,000 middle market loans provides a quantitative snapshot of how direct lending market terms evolved through 2025. The picture is more nuanced—and in some ways more encouraging—than the headlines suggest.
What the Data Shows
Spreads contracted, but modestly. Estimated average new-issue spreads shed approximately 40 basis points over 2025, declining from roughly 536 basis points over SOFR to approximately 496 basis points. Spread compression was slightly more pronounced for seasoned loans, with three-year spreads declining from an estimated 583 basis points to roughly 530 basis points.
This is meaningful compression, but not dramatic. Spreads remain well above the floors reached in prior cycles. The yield premium for private credit over liquid alternatives, while narrower than peak levels, remains substantial.
Leverage held steady. Estimated average leverage started 2025 at approximately 5.1x and ended near 5.0x, with a dip to roughly 4.8x during the middle of the year. Over the full year, leverage was essentially flat.
This is notable given concerns about leverage creep. The data suggests that, at least in aggregate, middle market leverage has stabilized rather than continuing to climb. Whether this reflects lender discipline, borrower financial performance, or simply market composition effects requires further analysis.
Interest coverage improved. Estimated average interest coverage ratios started 2025 around 2.0x and improved to approximately 2.24x by year end. This is an encouraging development.
Tip
When rates rose rapidly in 2022 and 2023, interest coverage ratios compressed as borrowers faced higher debt service costs on floating rate loans. The improvement in coverage through 2025 suggests borrowers have adapted—through EBITDA growth, rate hedging, or simply the passage of time as the shock of higher rates was absorbed.
What the Numbers Suggest
The combination of stable leverage, improving coverage, and modest spread compression paints a picture of a market that is competitive but not reckless.
Spreads have tightened because capital supply remains robust and defaults have remained manageable. This is what healthy markets do—pricing adjusts to reflect risk perceptions. Spread compression alone is not a warning sign; it's a market-clearing mechanism.
Leverage stability is reassuring. After years of concerns about leverage creep, the data suggests underwriting discipline has improved or at least stabilized. Whether this holds if deal activity accelerates remains to be seen.
Coverage improvement is the most significant datapoint. The vintage risk concerns that dominated 2023 and 2024 discussions—that loans originated at near-zero SOFR would face crushing interest burdens when rates normalized—have partially abated. Borrowers, in aggregate, have adjusted.
Caveats and Considerations
Aggregate data masks dispersion. Some borrowers have seen coverage deteriorate while others improved. Some sectors face more stress than others. Averages smooth over tails.
These figures reflect middle market direct lending. Other private credit strategies—distressed, mezzanine, asset-based—have different dynamics and aren't captured in this snapshot.
Market composition effects can influence averages. If new originations skew toward higher quality credits, aggregate metrics improve even if individual borrower trajectories haven't changed.
The Bottom Line
The 2025 data shows leverage holding steady, coverage improving, and spreads compressing modestly. This is not a market in crisis. It's a competitive market that has absorbed the rate shock better than many feared. The question for 2026 is whether these trends continue—and whether manager dispersion around these averages widens as credit cycles mature.
Source: Estimated averages based on proprietary benchmark data covering 10,000+ middle market direct lending loans, as of year-end 2025. Individual loan characteristics may vary significantly from averages.