Why middle-market spreads have decoupled from the broadly syndicated loan index.
Direct lenders have absorbed a structural share of LBO financing — and the implications for refinancing windows are not yet fully priced.
For most of the post-GFC period, spreads on middle-market term loans and the Morningstar LSTA Leveraged Loan 100 moved together. They tracked the same macro inputs — policy rate, default expectations, primary issuance calendars — and the relationship was tight enough that a credit officer at a middle-market lender could reasonably benchmark a new facility against the BSL index for context.
That relationship has been weakening for three years, and in the trailing six months it has broken outright. The middle market — both the unrated commercial bank universe and the direct lending universe — has traded inside the BSL index by 50 to 90 basis points, depending on how one screens, and the relationship is increasingly orthogonal.
The cause is not a mystery. Direct lenders have absorbed a structural share of LBO financing that the broadly syndicated market used to write. The pool of borrowers trading in the BSL market has shrunk; the pool of borrowers trading in the direct market has grown; and spreads in each have begun to reflect their own demand dynamics rather than a common one.
Why this matters for refinancing windows
The implication that interests us most is for the refinancing wall of 2026 and 2027 — the cohort of loans originated in the 2021 and 2022 vintages that come up for refinancing across the next twenty-four months. A meaningful share of those loans were syndicated at terms that no longer clear the BSL market. Some will be refinanced in the BSL market at materially wider terms; some will not be refinanced there at all, and will move to direct lenders; some will be restructured with the existing lender group.
For Steelbanc, this is mostly background noise — we do not participate in the BSL market and our refinancing exposure is to our own balance sheet. But for borrowers we cover, the implication is that the world of available financing in 2026 looks different from the world they last saw in 2021, and they should plan accordingly.
Views expressed are those of the author and not necessarily those of Steelbanc Holdings, Inc. or its affiliates. Not investment advice.