Notes From the Wharton Restructuring and Distressed Investing Conference

The 22^nd annual Wharton Restructuring and Distressed Investing Conference (WRDIC and wrdic.org) was held on February 20 in New York City. This was my first year attending.  The focus of this year’s conference was predominantly on the private credit market, which at an estimated $1.8 trillion in size, is now larger than both the Broadly Syndicated Loan (BSL) market and the High Yield (HY) market, each of which are estimated at $1.7 trillion.

Private credit has been a hot topic in the business media.  Given the sector’s rapid growth, some think it is now in a bubble.  The panelists did not address the bubble issue directly in the sessions that I intended; but they did offer counterpoints to concerns raised in the media.

Among those concerns:  Market opacity often makes it difficult for many institutional investors and the credit rating agencies to stay on top of borrower financial and operating trends.  However, active market participants, especially giants like Apollo, Blackstone, KKR and ARES Management, say they have greater access to management, which facilitates credit monitoring.

Private credit lenders also say that they maintain close relationships with private equity sponsors.  This makes it easier to adjust loan terms when needed.  In cases where the borrowers are overleveraged, these close relationships facilitate out-of-court restructurings (a/k/a liability management exercises or LMEs).  Where the required debt reductions are significant, private equity sponsors are now more willing to “hand over the keys” to private credit lenders.

Relationships between sponsors and investors may be a bit too close, according to lenders and other creditors who are not part of the club.  In recent years, there are more instances of so-called “creditor-on-creditor violence,” where a group of lenders holding a majority of the loans outstanding enter into a cooperation agreement with the intention to strip collateral away from smaller participants in the lending facility.  The industry has responded by incorporating provisions against such tactics in new loan agreements, but many outstanding loans do not have such protections.  Some disadvantaged lenders are also suing the cliques that take such actions, asserting violations of antitrust laws.  A permanent resolution to this problem, if indeed one is possible, is still in process.

The terms of loans in the PC market are also more flexible.  Covenants are usually not nearly as tight.  About 14% of PC facilities now have payment-in-kind (PIK) options, which give borrowers the option of skipping interest payments (and adding them to principal).  PIKs are often derided as merely delaying an inevitable restructuring or bankruptcy filing.

Yet PIKs are useful in certain situations.  They can buy time to avoid near-term capital raises or to help ready a company for sale or better position a company for bankruptcy.

With these tools, critics point out that most LMEs prove to be only temporary fixes; so the borrowers usually end up in bankruptcy anyway.  Even so, the proponents say that bankruptcy is expensive and time consuming; so any steps taken to keep a company out of bankruptcy may be justified.

Despite these advantages, PC borrowers are more highly leveraged, so defaults will certainly rise in the next economic downturn.  Still, in the absence of a full blown recession, the WRDIC panelists believe that market will make the necessary adjustments to address problems as they arise.  Consequently, they expect that growth of the private credit market will continue.

This is a summary of my recent report, “Notes from the Wharton Restructuring & Distressed Investing Conference. A copy of the report is available here.

February 26, 2026 (Report published on February 26, 2026.)

Stephen P. Percoco
Lark Research
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