Private Credit’s Rise is Reshaping Corporate Debt Restructurings

Over the past decade, the U.S. leveraged loan market has significantly shifted. Where traditionally only banks arranged large loans, typically syndicated to many investors, leveraged lending has shifted towards direct lending, where private credit funds originate loans and hold those loans on their balance sheet until maturity. This evolution impacts how companies restructure their debts in distress. This piece will examine the traditional model of syndicated loans and Chapter 11 bankruptcies and provide an analysis of how the rise of private credit enables out-of-court restructurings.

Traditional Syndicated Loans and Chapter 11

Historically, leveraged loans were almost exclusively underwritten by banks and syndicated to a wide range of institutional investors—CLOs, mutual funds, hedge funds, and insurers. These loans trade on a secondary market and are often held by dozens, even hundreds, of passive investors. When a company financed through a broadly syndicated debt faces financial distress—for example, due to rising interest rates or changes in international trade policy—this fragmented ownership makes it nearly impossible to negotiate a consensual restructuring. Just identifying all the creditors can be challenging. Passive investors, such as CLOs or mutual funds, typically play a limited role in financial restructuring, while distressed debt hedge funds buy the debt at a discount to assert influence in a bankruptcy process and possibly obtain majority ownership of the restructured company.

Given these coordination challenges, distressed companies often resort to Chapter 11 bankruptcy. The process allows the debtor to obtain additional liquidity through debtor-in-possession (DIP) financing, continue operations, and propose a reorganization plan. DIP financing can take priority over existing debt of the bankrupt entity without consent of existing creditors, even when those creditors bargained for consent rights in their debt documents. Importantly, Chapter 11 empowered courts to bind holdouts through a cramdown, making it an effective tool to impose a plan across a fragmented capital structure. However, this comes at a cost: legal and advisory fees can be substantial, value often erodes during drawn-out proceedings, and public scrutiny creates additional risks for the business.

The Rise of Private Credit

Private credit has emerged as a dominant force in leveraged finance. These non-bank institutions—such as asset managers and specialized credit funds—provide loans directly to companies without broadly syndicating them. By one estimate, the private credit market grew to roughly $1.5 trillion in 2024 and is projected to reach around $2.5–2.8 trillion by 2028. In the middle market, direct lenders now finance approximately 90% of all leveraged buyouts, up from just over a third a decade ago.

Unlike syndicated loans, direct lending deals are typically bilateral or involve a small group of lenders in a “club” structure. These loans are not actively traded and are generally held to maturity. The direct lender is often involved from origination through resolution, maintaining a relationship with the borrower and private equity sponsor throughout.

How Direct Lending Reshapes Restructuring

The rise of direct lending is reshaping how corporate debt is restructured. Because private credit deals involve fewer lenders, it is often feasible to negotiate out-of-court solutions. These may include maturity extensions, covenant relief, payment-in-kind (PIK) toggles, or debt-for-equity swaps. The relative simplicity of the creditor structure reduces coordination problems and enables more efficient resolution.

Moreover, direct lenders are typically sophisticated credit investors who anticipate the possibility of restructuring at the time of origination. This allows them to move quickly and decisively in distress, often working directly with the sponsor to implement a consensual solution. In contrast to traditional syndicated deals, where creditors may have divergent interests and strategies, private credit lenders are often more aligned.

Importantly, out-of-court restructurings reduce the need for expensive legal and financial advisors and avoid the business disruption of bankruptcy filings. Companies can preserve relationships with customers, employees, and suppliers without the overhang of a public court process.

Implications for Chapter 11

Private credit growth could lead to a decline in traditional Chapter 11 cases, particularly in the middle market. When a borrower’s capital structure consists entirely of direct loans, there may be little need for court intervention. Instead, lenders and sponsors can resolve distress privately, and the original lenders may be willing to contribute new money or take equity if necessary.

Granted, Chapter 11 will remain relevant in operational restructuring, multiple creditor classes, or public bondholders. It also serves as a backstop when consensual negotiations fail. But the dynamics have shifted: with direct lending, the need for a court-supervised process and cram downs is less frequent. In direct lending, Chapter 11 may instead be used more narrowly—for example, to reject burdensome contracts and leases or to sell certain assets free and clear under Section 363 of the Bankruptcy Code.

Conclusion

The rise of private credit is transforming the way distressed companies restructure their debts. With fewer, more engaged creditors, direct lending fosters a more collaborative and cost-effective restructuring environment. As private credit continues to grow, particularly in the middle market, out-of-court workouts may become the norm rather than the exception.

Wouter Korevaar is an LL.M. candidate at NYU School of Law and a Graduate Editor of the NYU Journal of Law & Business. Prior to NYU, he was an associate in the Finance practice and Private Equity sector group at a leading international law firm in the Netherlands. His practice focused on debt finance, advising both borrowers and lenders on a wide range of transactions, including leveraged acquisition finance, fund finance, and financial restructuring.