What are the two markets, and how different are they?
Roughly the same size, and different in nearly everything else. Federal Reserve staff put private credit and the leveraged loan market at about 1.4 trillion dollars each at the end of 2025, together around 45 percent of all lending to privately held non-financial corporations.
The structural differences are what produce different behaviour. Leveraged loans are arranged and underwritten by banks and then syndicated to institutional investors, mostly through collateralized loan obligations, loan funds and insurance companies. They trade in a secondary market and are marked at daily market prices. Private credit loans are originated and held directly by non-bank lenders, bilaterally or in small groups, with private debt funds and business development companies together supplying about 90 percent of the market. There is no secondary market, and valuations are quarterly and model based.
Banks sit in both markets but not in the same seat. In the syndicated market they arrange, underwrite and distribute, keeping part of the term loan and providing the revolver. In private credit they do not originate at all: they lend to the lending vehicles.
That distinction is the reason financing conditions in the two markets can move apart rather than together. The syndicated market tightens when arranging banks pull back or when institutional demand for the paper weakens. Private credit tightens when committed capital runs short, when fund inflows slow, when business development companies cannot issue equity, or when the banks financing those vehicles reduce leverage. Different pressure points, different timing.
Which borrower ends up in which market?
Smaller and more levered companies end up in private credit. On 2025 issuance the median leveraged loan borrower had revenue of 902 million dollars against 223 million dollars in private credit, and carried 3.2 times debt to earnings before interest, tax, depreciation and amortization against 5.0 times.
Interest coverage separates the two populations further. Average coverage of cash interest was 3.7 times for leveraged loan borrowers and 2.2 times for private credit borrowers. On estimated credit quality, 28 percent of the leveraged loan market sits at BB or above and none of the private credit sample does, while 15 percent of private credit borrowers are assessed at CCC or below against 9 percent.
The loans themselves are the same instrument at very different scale. Median maturity is five years in both markets. The median leveraged loan was 275 million dollars at 400 basis points over the base rate; the median private credit loan was 20 million dollars at 500 basis points. That is a hundred basis point difference in the middle of the two markets, on a loan roughly one fourteenth the size.
What the money is for is broadly similar. Leveraged buyouts and acquisitions account for 38 percent of leveraged loan issuance and 32 percent of private credit issuance, with refinancing and general corporate purposes taking most of the rest. Dividends and recapitalizations are a small share of both, 9 percent and 5 percent. These are not different uses of capital. They are different populations of borrower reaching the same set of transactions.
| Measure | Leveraged loans | Private credit |
|---|---|---|
| Median borrower revenue | 902 million dollars | 223 million dollars |
| Interquartile range of borrower revenue | 264 to 2,747 million dollars | 35 to 700 million dollars |
| Median leverage, debt to EBITDA | 3.2x | 5.0x |
| Average interest coverage, EBITDA to cash interest | 3.7x | 2.2x |
| Median loan amount | 275 million dollars | 20 million dollars |
| Median spread over the base rate | 400 bps | 500 bps |
| Median maturity | 5 years | 5 years |
| Rated or estimated BB or above | 28% | 0% |
| Rated or estimated single B | 63% | 85% |
| Rated or estimated CCC or below | 9% | 15% |
| Issuance for buyouts and acquisitions | 38% | 32% |
| Issuance for dividends and recapitalizations | 9% | 5% |
How many of these markets can one company actually reach?
Most can reach one. Among middle-market companies that have issued debt since the start of 2020, roughly a third have borrowed only in the syndicated market and roughly a third have used both. The remainder have borrowed only in private credit.
The split by size is the finding that matters. Among larger companies, meaning revenue above 250 million dollars in the Fed's classification, 43 percent have borrowed only in the syndicated market, 41 percent have used both, and 16 percent have used only private credit. Among smaller companies the distribution inverts: 57 percent have used only private credit and just 25 percent have reached both markets.
Note what this is not. The 250 million dollar line is the cut the authors drew for their own analysis, not a threshold any lender publishes or applies. No credit committee has that number in its policy. It is a description of where the borrower population divides in practice, which is a different and more useful thing than a rule.
It is also worth being clear about the direction of travel. The growth of private credit has not been small companies migrating out of the syndicated market. Larger companies tapped private credit at an increasing rate after the financial crisis, reaching a peak of 50 percent of large-firm borrowing in 2022 before falling back. The market grew by adding borrowers who already had somewhere else to go.
“Every borrower believes their negotiating position is the quality of the business. Some of it is, but a great deal of it is simply whether a second market would take the paper, and most companies in the middle market find out the answer at the worst possible moment. The ones who know in advance behave differently in the room, and the terms show it.”
What is a second market actually worth?
It is worth the ability to leave. Companies with access to both markets move between them when conditions diverge, and the Fed measures the swing: the share of borrowers moving from the syndicated market into private credit reached about 50 percent in early 2023, at the peak of the tightening cycle, which was roughly a quarter of all private credit issuance at the time.
The traffic reverses when the syndicated market loosens, because it is normally the cheaper of the two. More recently, with private credit conditions less accommodating, larger companies have been moving back the other way. Among smaller companies that movement has stayed muted, which is the same finding in a second form: they are not choosing to stay, they have nowhere to go.
This is what a hundred basis point spread difference does and does not tell you. For a company that can borrow in both markets, the gap is a price for speed, certainty and bespoke terms, and it is negotiable against a live alternative. For a company that can borrow in only one, the gap is not a choice at all, and nothing about it compresses when that single market tightens.
The systemic version of the same point, which is the note's actual concern, is that larger and smaller companies each account for roughly half of private credit lending volume. If private credit alone were to pull back, the half that can substitute would largely do so. The half that cannot would absorb it.
What should an owner or a sponsor do with this?
Establish which side of the line the company sits on before the financing is live, not during it. This is our read rather than the Fed's, which describes populations and does not advise anyone. But the distribution is clear enough to act on: below roughly 250 million dollars of revenue, the working assumption should be one market, and any second bid is something to be earned rather than expected.
That changes what a process is for. When there is a genuine second market, running one is price discovery and the leverage comes from the alternative. When there is not, running the same process against several lenders inside one market is still worth doing, but what it discovers is which lender wants the asset most, not what the other market would pay. Confusing the two produces a process that looks competitive and negotiates like a single-source deal.
It changes which questions get asked. Where does this paper end up, and who holds it in three years. Whether the lender is funding from committed capital, from vehicle-level leverage, or from flows that can reverse. Whether the same institution has behaved consistently through a tightening. None of that is visible from the term sheet, and all of it determines how the relationship performs when conditions move.
And it changes the timing question. The population data says that access is a function of scale, so scale itself has a financing value quite separate from its valuation value. A company approaching the range where a second market opens has a reason to understand that threshold before it commits to a capital structure that assumes it has already crossed it.
What would change this picture?
Movement in the substitution rates, which are the live series here rather than the borrower medians. A sustained rise in movement from private credit back into the syndicated market among smaller companies would mean the second market had genuinely opened downward. So far the Fed finds that movement muted.
Convergence in the borrower medians would be the slower version of the same signal. A hundred basis point spread gap and a 1.8 turn leverage gap are the current price of the two populations being different. If they narrowed materially without the populations converging, the two markets would be competing for the same borrower rather than dividing them.
Treat the underlying counts with the caution the authors do. These are staff estimates drawn from commercial data, private credit borrowers mostly lack public ratings so their credit quality is estimated rather than rated, and the two markets are measured on perimeters that other publishers draw differently. The relative comparison is the robust part. The absolute market size is contested and is a separate argument.
The durable finding is the one that does not depend on any of that. Two markets of roughly equal size lend to overlapping populations of companies, and the ability to move between them is distributed by size rather than by credit quality. For most middle-market borrowers, the choice between them is not a choice.
As of August 2026
Sources: Ayelen Banegas, Sophia Castelo, Ahmet Degerli, Christine Dobridge and Will Kennedy, 'Private Credit and Leveraged Loan Markets: Similarities, Differences, and Substitution', FEDS Notes, Board of Governors of the Federal Reserve System, 11 August 2026, with figure notes revised 13 August 2026, for private credit and leveraged loan markets each standing at approximately 1.4 trillion dollars as at the end of 2025 and together accounting for around 45 percent of total lending to privately held non-financial corporations; for private debt funds and business development companies together accounting for about 90 percent of private credit market funding as at the third quarter of 2025; for the description of origination, distribution, secondary market and valuation practice in each market and of the distinct role of banks in both; for all borrower and loan characteristics in the table above, drawn from Table 1 of that note and sourced there to PitchBook Data, KBRA Direct Lending Deals, S&P Global Market Intelligence and staff estimates on 2025 loan issuance; for the definition of the middle market as companies with revenue between 10 million and 1 billion dollars and for the classification of companies above and below 250 million dollars of revenue as larger and smaller; for roughly a third of middle-market companies issuing debt since the start of 2020 having accessed only the leveraged loan market and roughly a third having accessed both; for larger companies dividing 43 percent leveraged loan only, 41 percent both markets and 16 percent private credit only, and smaller companies showing 57 percent private credit only and about 25 percent both markets; for the share of large companies borrowing in private credit peaking at 50 percent in 2022; for the share of borrowers switching from the leveraged loan market to private credit reaching about 50 percent in early 2023, equivalent to roughly 25 percent of total private credit issuance at that time, and for switching back when syndicated conditions became more accommodating; for recent private credit to leveraged loan switching having increased among larger companies while remaining muted among smaller ones; and for larger and smaller companies each accounting for about half of private credit loan volume. The judgement about what an owner or sponsor should establish before a financing is live, what a process discovers when there is no second market, and what questions to put to a lender is entirely our own and carries no figure. The observation that the 250 million dollar line is an analytical classification rather than a lending threshold is also ours. A companion article on this site covers the dispute over the absolute size of private credit, and another covers the choice between a bank and a private credit lender, which is a different pair of options from the one examined here.