US LevFin outlook 2026 — Cutting it close

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TLDR

A constructive 2026 backdrop is expected as the rate-cutting cycle continues, fueling a rise in high yield and leveraged loan gross supply
While repricings and refinancings will likely dominate the first half of 2026, a major transition is expected toward new M&A and LBO deals, especially among middle-market, sponsor-backed activities
Massive debt financing for AI will shift from a pure IG play to a broad market influence. While adoption could improve corporate margins, AI disruption poses a significant risk to tech and business service sectors
The competition between broadly syndicated and private credit markets, which will only intensify in 2026, has created a more more borrower-friendly environment

It’s never easy

Never say never. If we learned anything from 2025, it’s that you probably should not make predictions: what was expected to be a lofty year for issuance met Liberation Day and came to a brief standstill. But the market then surprised all of us with its resilience, as activity has picked up significantly since Q3, adding a few major deals to next year’s pipeline.

Who knows what unexpected shocks 2026 will bring. In any case, we’ve been asking around and are hearing a healthy dose of optimism from different sides of the market. But despite moderating inflation and improved earnings quality, several negative factors point to a bifurcated, K-shaped credit market that’s echoing similar pressures among consumers.

Rate cuts in focus

This year kick-started a rate-cutting cycle that will remain in focus in 2026.

The market has already priced in additional rate cuts in 2026, which is projected to bring Federal Fund rates down to 3% to 3.25%, sources said. The lower cost of capital has translated into a constructive backdrop for increased deal flow, net new loan supply to the CLO market, and increased M&A and LBO activity, which has already shown during the second half of this year.

US high yield gross supply is forecasted to increase 6% year-over-year to $330bn, with net supply at $90bn, while US leveraged loan gross supply is forecasted to increase 5% to $485bn. according to BNP Paribas data.

“[Rate cuts] are helpful on the margin,” said Mike Schueller, head of US high yield at Allspring Global Investments. “The growth we have seen is incremental, but it's been steady. And I think we are going to see net issuance be positive again next year.”

Spreads are still at historic tights, which created a strong environment for issuers to address upcoming maturities.

Some research reports expected spreads to widen modestly: Barclays predicted high yield spreads to be in the 310bps-340bps range. Bank of America expected high yield fair value to increase from 325bps to 350bps, while loan fair value to increase from 430bps to 460bps over 2026. On the other hand, BNP analysts said that spreads could still tighten as the credit cycle is not over, forecasting a high yield spread of 275bps and leveraged loan spread of 430bps.

As a result of double tailwinds from spreads and rates, sources expected repricings and refinancings to continue to be the dominant uses of proceeds in the primary market next year. However, borrowers will also become more comfortable with issuing new debt and the market will seek more opportunistic transactions.

“When loans trade above par and are callable, they’re well-positioned for repricing. We expect to see continued repricing activity in the first half of the year,” said Seth Katzenstein, head of liquid credit at Antares Capital, who pointed out that 70% of non-distressed loans are trading above par.

“However, as M&A, LBO, and new-money transactions pick up, that could temper repricing activity somewhat and create opportunities for primary issuance. Overall, next year is shaping up to be a very active primary market with both new deals and refinancings,” he added.

Rebound in new money deals

For most of 2025, the story was that lenders were craving for new money deals, while supply was limited. Now, that’s finally coming to a balance.

There is no doubt that M&A and LBO activity will pick up, driven by favorable financing conditions, including lower costs and narrower valuation gaps, as well as demand for new assets.

Setting the stage are several mega deals that were announced late this year: Electronic Arts, Hologic, and Sealed Air. Financing will largely be next year’s business, although it is expected that the debt syndication for Hologic could come to the market very soon.

“The story of the second half of 2025 was mega deals,” said Todd Koretzky, partner at A&O Shearman. “But a few massive trades don’t drive the broader market. They are exciting and increase total volumes, but what we want is for the deal count to rise. By that metric the overall numbers for 2025 are still modest by historical standards, but hope springs eternal for 2026.”

What really should populate the market are the middle-market, sponsor-backed deals, sources said. As private equity firms came under increasing pressure to deploy dry powder, the return of such deal flow is not a question of if but when.

“Genuine deal activity is likely to increase as buyer and seller expectations align,” said Sheel Patel, head of NY private credit at Mayer Brown.

The tricky part is that this credit cycle is characterized by an exit slowdown among private equity sponsors, sources said.

“In a normal cycle, you make an investment, you carry it for a while, and then you get an exit. But those have been tough to come by,” said Schueller.

BofA analysts expected that the preferred funding source for M&A transactions will be the loan market, given its issuer-friendly call schedules.

High yield M&A issuance is expected to grow by 0%-5% year-over-year, bringing the total issuance in 2026 to $65bn, including $45bn in M&A and $20bn in sponsor-led activity, BofA data showed. Barclays forecasted $40bn-$55bn in M&A-driven supply volume, compared with $49bn annualized in 2025.

AI: the swing factor

The hype around AI has been around for over three years, but large-scale debt financing for AI-related buildouts has only recently started to come at full force.

In previous years, tech companies funded AI capital expenditures primarily with cash flow, but capex are now growing much faster than operating cash flow. As a result, the hyperscalers will increasingly tap debt markets, as BNP estimated $250bn in bond supply from these players next year — 10 times higher than their five-year average.

Although the AI-driven releveraging itself is an IG story for the most part, its impact flows into the LevFin market through increased issuance, sector-specific disruption risks, and tactical relative value shifts, sources said.

“Data centers have been around for decades and were often financed as real estate assets. As the ecosystem has become more stable and robust, attracting seemingly endless amounts of capital, other types of financing structures are being deployed — including those with a hybrid infrastructure-leveraged finance flavor,” said Koretzky.

For one, issuance among IG hyperscalers leads to increasingly higher debt costs, therefore resulting in a large wave of fallen angels over time, according to a BofA analysis. Therefore, LevFin issuers should expect to see some data center deals as well. Second, the whole ecosystem surrounding AI will benefit from data center financing needs, contributing to tailwinds for sectors like utilities and power in the high yield space.

But beyond the financing for AI infrastructure itself, a more widespread theme surrounding AI is adoption and disruption. On one hand, lenders are optimistic about the benefits of companies implementing AI.

“We are all taking some small steps in that direction, but we are probably going to get to the point of the adoption curve where the benefits come pretty quickly. I think you could see some margin improvement,” said Schueller.

On the other hand, AI disruption risks have already led to selloffs, although some of the credits previously seen as vulnerable to AI competition — including legal providers such as Epiq and Consilio — have traded back up in the secondary market. By and large, it remains hard for lenders to fully estimate the impact of AI, whether it’s positive or negative, sources said.

“AI is proving disruptive to certain end markets and companies. We are seeing it impact tech and business services, anywhere AI can perform tasks traditionally done by people,” said Katzenstein. “Anytime a company within a sector, or an AI firm, signals plans to compete in that space, the entire sector often experiences a sharp decline.”

BSL-PC tug-of-war

No discussion of the BSL market is complete without talking about private credit.

The relationship between the two asset classes is one of “frenemies,” said Patel. “On one hand, sponsors are leveraging their convergence to draw on both markets and pit them against each other; on the other, banks are moving to act as intermediaries in private credit transactions and building dedicated private credit partnerships.”

2025 saw a significant increase in BSL takeout of private credit, and refinancing volume has been almost evenly distributed between the two. Competition between the markets will only intensify as private credit checks get bigger and continue to converge on pricing and structure.

Meanwhile, the BSL market also shows greater flexibility, adapting to deal structures that once favored direct lenders. Sources highlighted, for example, that AI-driven movements could mean more opportunities for the BSL market.

“AI and some of the tech space have been historically heavily financed by direct lenders,” a LevFin banker said. “Just given the concerns or considerations driven by AI, it would have meant that some of our sponsor clients would have no choice but to look for more diverse financing options going forward.”

As a result of the competition, the market has grown even more borrower-friendly. Sponsors are taking advantage by running tighter and faster processes using both markets, especially for bigger deals.

Therefore, as borrowers gain more sway over the financing route, it also resulted in weaker documentations and some features that were once specific to private credit making their way to the public market.

For example, the BSL market has allowed more PIK usage such as in the Skechers buyout, while deals like Opella attempted to bring controversial provisions such as “high watermark” EBITDA to credit agreements — although lenders have successfully pushed back on such languages in most instances.