The prevalence of specific, quantifiable deal terms offers a unique window into the market's mood. Rising structural protections for lenders or increased flexibility for borrowers act as an early warning system, reflecting anxieties and optimism before they appear in traditional economic data.

Default rates are not uniform. High-yield bonds are low due to a 2020 "cleansing." Leveraged loans show elevated defaults due to higher rates. Private credit defaults are masked but may be as high as 6%, indicated by "bad PIK" amendments, suggesting hidden stress.

The credit market appears healthy based on tight average spreads, but this is misleading. A strong top 90% of the market pulls the average down, while the bottom 10% faces severe distress, with loans "dropping like a stone." The weight of prolonged high borrowing costs is creating a clear divide between healthy and struggling companies.

The increase in Payment-In-Kind (PIK) debt to 15-25% of BDC portfolios is not a sign of innovative structuring. Instead, it often results from "amend and extend" processes where weakened companies can no longer afford cash interest payments. This "zombification" signals underlying credit deterioration.

In a distressed scenario, simply asserting seniority as a junior capital provider is ineffective. You cannot force the majority owner and management team, whom you've just told are worthless, to run the business for your benefit. The only viable path is to renegotiate and realign incentives for all parties to work towards a recovery together.

Aegon's Global Head of Leverage Finance, Jim Schaefer, shares a critical heuristic: once a leveraged loan's price falls below the 80-cent mark, it has a high probability of entering a formal restructuring. This price level acts as a key warning indicator for investors, signaling imminent and severe distress.

Official non-accrual rates understate private credit distress. A truer default rate emerges when including covenant defaults and 'bad' Payment-in-Kind interest (PIK) from forced renegotiations. These hidden metrics suggest distress levels are comparable to, if not higher than, public markets.

The rise of Liability Management Exercises (LMEs) has fundamentally changed credit analysis. Performing credit teams must now embed legal and workout specialists in the *front-end* underwriting process. This proactive approach is essential for assessing documentation and potential bad actors before an investment is made, rather than reacting during a restructuring.

Lenders are demanding more structural protections (like "anti-pet smart terms") to lock down collateral, while borrowers are negotiating for more economic flexibility (like generous EBITDA add-backs) to weather potential storms. This "flight to fortification" on both sides signals deep-seated market uncertainty.