In our previous AIMA article, we argued that the lines between European public and private credit were increasingly blurring. Markets have evolved further since, but investor perception has not. The gap between credit on the surface and what lies underneath produces three lessons that matter for how capital is being allocated today.

The uncomfortable truth is that these lessons are not new. What is striking is that the market seems to have forgotten them, and we wonder when it will notice.

The average doesn’t tell you anything about the range

Don’t confuse the index with the opportunity set. Tight indices describe the mean, not the range. In European credit today, around 20% of the total market spread is generated by just the widest 5% of issuers.¹ The range is where opportunity lives.

Beneath the calm waters of headline spreads flows a powerful undercurrent. The market has bifurcated into the ‘haves’ and ‘have-nots’. Some companies continue to demonstrate resilient free cash flow and manageable leverage. Others are surviving largely because refinancing risk has been delayed rather than solved. The split is visible in the data: roughly 18% of European credit currently trades above 1,000 basis points, a different market entirely from the names anchoring the index inside 275 basis points.²

Past performance is not an indication of future results

Historic default and recovery statistics may be a poor guide for the years ahead.

In recent years, forecast default waves never broke onto shore, as sponsors stayed supportive, lenders extended maturities, and capital was both cheap and plentiful for refinancings. Businesses that would previously have defaulted have been carried through amend-and-extend transactions, PIK structures, and liability management exercises (LMEs). The maturity wall has been pushed further out, but borrowers are sailing towards it faster than before.

Three structural shifts explain why the eventual reckoning is likely to look different from the playbook investors are used to, and why questions that were once legal footnotes are now central to underwriting.

First, the early warning system disappeared some time ago. Covenant-lite is now the norm across large parts of the leveraged finance market. Maintenance covenants previously forced a conversation between borrower and lender at the first sign of operational stress, while enterprise value was still intact. Stress now stays hidden for longer, and by the time it surfaces, value has typically already been destroyed.

Second, capital structures are more crowded at the top. Modern documentation gives borrowers wider latitude to incur additional secured debt, move collateral into unrestricted subsidiaries, and reorder priorities outside traditional frameworks. 

The result is materially more senior and pari passu debt secured against the same collateral pool than historic recovery datasets assume.

Third, the restructuring toolkit can be used to redistribute value on a non-pro rata basis. Uptiering transactions can be used to subordinate non-participating lenders and drop-down financings can shift collateral to new-money providers. The result is that creditors who appear to sit in similar parts of the capital structure can end up with very different outcomes depending on which side of an LME they land on.

Taken together, these shifts mean default rates alone are an increasingly poor proxy for underlying market stress, and historic loss-given-default assumptions flatter forward returns.

If you can’t get out, you should get paid more

Through a decade of low rates and abundant capital, investors traded liquidity for spread on attractive terms. Direct lending paid a clear premium over broadly syndicated loans, and the illiquidity itself felt costless because few investors needed to exit. As private credit AUM has scaled and competition has intensified, that premium has compressed, even as the same borrowers are increasingly financed by both markets on similar terms.

Private credit can still offer advantages in areas such as structuring flexibility, lender control, and long-term capital alignment. However, the premium that investors receive for sacrificing liquidity has narrowed materially. The issue is not just that the premium is thinner; it is that the cost of illiquidity has been hidden like a rock beneath the surface – it’s always been there, but only when the tide goes out is it plain to see.

Periodic valuations and held-to-maturity treatment are features of the asset class, not flaws, but the smoothing they generate creates time series that need careful interpretation. Public markets clear information continuously and, at times, uncomfortably; private markets clear it episodically and quietly. The underlying credit risk may be similar but the visibility is not.

For a lender, the practical question is whether the spread pickup on a private loan still compensates for giving up daily price discovery, the ability to reposition into dislocation, and the option to exit at a market-clearing price. In many parts of the market today, we think the honest answer is that it doesn’t.

The full picture

Public credit is not boring because an index is tight. Private credit is not safer because marks move less. The two markets have converged in borrowers, documentation, and behaviour.

The three lessons all point the same way: averages hide dispersion, historic loss assumptions underweight modern restructuring dynamics, and liquidity – long treated as a costless concession – is being repriced in real time. The practical implication is to look harder at the parts of the market most investors are looking past. Dispersion in public credit, recovery analysis at the single-name level, and the optionality that comes with daily liquidity all carry more value today than the consensus reflects.

In our view, that is where credit investors are most likely to capture outsized returns over the coming years. The calm has held longer than anyone expected, but the undercurrent is still running and the tide will turn. When it does, debt will behave much the same way whether it was syndicated or privately held – the only difference is when investors realise the tide has already left them stranded.

This is an opinion piece by Kunal Shah, PVTL Point. PVTL Point LLP (FRN 1034789) is an appointed representative of G10 Capital Limited (FRN 648953), which is authorised and regulated by the Financial Conduct Authority.
 

1  Bloomberg Pan-European High Yield (Euro) index as of 11-May-26

2  Ibid.