Survey Results: How Lenders Are Thinking About Deal Activity and Credit in 1H23

By Rocky Gor

CAPX recently conducted a survey of U.S. credit professionals—at both banks and direct lenders (DLs)—on their expectations for deal activity, credit and pricing in 1H23. 

In this article, we will provide insights into how lenders are approaching deal activity and borrower credit-worthiness. Our next article will cover debt structuring and pricing trends for corporate borrowers, PE firms and independent sponsors, specifically. 

Key Takeaways: 

  • Other than an expected slowdown in LBO and M&A activity, there is no clear consensus on what deal activity for 1H23 will look like. Though DLs are more optimistic than banks, likely because they are expecting to see deal flow stemming from the conservative stance of banks.
  • Banks are more concerned about borrower credit quality and a slowdown in LBO and M&A activity, and DLs are more concerned about the effect of SOFR on overall yields.
  • 74% of respondents are a 6/10 or higher when it comes to expecting default rates to rise meaningfully. Many lenders are therefore treading cautiously through the first half of this year.
  • Concerns about cash flow compression are generating expectations that owners will need to support companies when the going gets rough—which means higher equitization, lower leverage and a preference for more established and stable ownership.
  • Both banks and DLs believe credit will be pulled back by their credit committees. The expectation of that pullback is greater amongst DLs than for banks. One possible reason for this is that banks have already pulled back, and therefore any decline from this point on won’t be as steep.

Overall, lenders experienced a slower 2H’22, however almost twice as many banks experienced much slower deal activity compared to direct lenders (DLs), illustrating that there was more activity for DLs during this period.  

The reason? Banks likely stepped back and allowed DLs to take on more of the deals they could have. This implies that if a recession fails to materialize and default rates do not rise meaningfully, deal activity for banks will likely whipsaw, as many are sitting on large pools of capital that they want to put to work. 

The slowdown of 2H’22 does not dampen anticipation for 1H’23, as almost half of lenders surveyed expect to close more deals. However, banks are split evenly, with the same number expecting fewer deals and fewer closings, while the other half predict the exact opposite.

Still, banks are more pessimistic on this front compared to DLs. Almost three times as many bank respondents expect to see fewer deals and close even fewer compared to DL respondents. When it comes to closing more deals, an equal number of bank and DL respondents agreed with that sentiment.

The largest number of overall respondents expect poorer credit quality due to declining cash flows, and a slowdown in LBO and M&A activity. Both of these are larger concerns for banks than they are for DLs. In the case of the former, this is likely a reflection of a tighter credit environment for banks. In the case of the latter, DLs are likely counting on a high volume of deals passed on by banks, which they can finance.

DLs are more concerned about the effect of SOFR on overall yields than banks, which makes sense, given that paying 8% cash interest is quite different than paying 12%.

Another intriguing data point: DL pessimism is spread across every answer (except higher competition), while bank pessimism is concentrated in ‘fewer deals’ and ‘poorer credit quality.’  This implies that DLs have more points of concern than banks. When juxtaposed next to Q2’s finding that DLs anticipate more deal activity during 1H23, we are perhaps witnessing an expression of the old adage, “the more you have, the more you have to lose” (with more deal activity on the table, DLs are concerned about more issues affecting deal flow). 

More than 3x as many lenders expect default rates to increase meaningfully compared to those that are more tepid about the potential for a meaningful increase. 

The expectation of higher default rates lead to higher loss reserves at banks, which means less capital available to lend. On the other hand, banks will be aggressive for the credits they do like, as they seek to offset the effect of declining credits with those that can stabilize or improve the overall portfolio.

Cash flow compression due to rising costs is by far the #1 borrower concern going into 2023, with over 53% of respondents citing it as their main concern. Interestingly, while increasing unemployment and the potential for a recession barely made the list, lenders are worried that companies will default when they cannot pass on expenses and that consumer demand will soften.

This implies that companies with niche, must-have products and services, and companies with ample liquidity will do well with lenders. Companies reliant on discretionary consumer spending will be out of favor.

Both banks and DLs expect credit tightening, almost to the same extent. Although, this is one category where DLs are more pessimistic, as they expect more tightening relative to banks. This could be a sign of concern regarding the portfolio, and likely also an indication that higher risk will require higher returns.  


Credit markets have tightened, as both banks and DLs are anticipating an unpredictable credit environment due to macroeconomic headwinds during 1H23 (though DLs are somewhat more optimistic). 

Issues such as borrower credit quality and the effect of SOFR on overall yields continue to weigh on market sentiment. Additionally, there is no way to ascertain which credit committees will approve your transaction, once it makes its way up the lender flagpole. 

Given the looming uncertainty, borrowers should adopt a strategy of approaching as many lenders as possible. Casting a wide net when approaching the debt markets will help ensure that your deal is approved, and that you receive the most favorable terms and lowest cost of capital. 

Speed and efficiency are critical factors as well, given that the market can rapidly evolve should an underlying sentiment shift take place (for example, a majority of lenders are expecting default rates to rise meaningfully. Should that fail to materialize, expect a deluge of lending activity). Borrowers who approach a wide pool of lenders will be well-positioned to take advantage of any increased lender activity, or mitigate the chances of their deal being rejected should lenders suddenly pull back due to changing market conditions. 

If you’d like to learn more about how CAPX helps borrowers access banks and direct lenders across the country in as efficient a manner as possible (averaging 4 days to first term sheet from deal launch), click the link below to schedule a brief phone consultation. 





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