According to LSEG LPC’s Middle Market Syndicated Stats, 2024 closed strong:

- Total syndicated middle market loan volume reached $159.6 billion, a 32% YoY increase.
- New money issuance totaled $78.8 billion, with refinancings at $80.8 billion.
- Institutional middle market volume hit $24 billion, more than doubling YoY.
- Covenant-lite issuance rose by 117%, reaching $3.5 billion.

But the picture changed in Q1 2025. The Middle Market Connect 2Q25 Lender Outlook Survey revealed a pullback:

- 92% of banks and 67% of direct lenders did not lend as much as desired.
- Deal quality concerns intensified—only 5% of respondents rated deals “above average,” down from 18% the prior quarter.
- Tariff uncertainty and macro volatility were cited as top reasons for stalling LBOs and refinancing activity.

Tariff Anxiety and Policy Whiplash Cloud Outlook

Middle-market lenders are adjusting to what one respondent described as the "whipsaw policies of the Trump administration." Tariff announcements in early 2025 disrupted supply chains, increased import costs, and sparked market volatility—killing momentum in sponsor-led M&A activity.

- 41% of surveyed lenders expect middle-market loan default rates to rise to 6–7% by year-end, with 51% projecting rates will go even higher.
- M&A across the market is expected to remain flat or decline in Q2 2025, with lenders demanding greater clarity on trade policy before deploying capital.

The Fight for Quality: Spread Compression and Risk Tolerance

While some asset quality remains strong—58% of portfolios are performing in line with expectations—there’s growing pressure on spreads and structure:

- Spread thresholds are falling:
  - Banks: Nearly 60% now accept sub-375bps for first-lien spreads.
  - Direct lenders: 71% accept spreads in the 450–475bps range.
  - Unitranche: 44% of lenders now accept spreads under 500bps.

Risk tolerance remains a story of divergence:
- Banks: 43% cap first-lien leverage at 3.5x EBITDA.
- Direct lenders: 65% allow 5.0x+ for first-lien, and nearly half tolerate total leverage at 6.0x+.

What’s Working: Incrementals, Add-ons, and Refi

With new platform LBOs largely frozen, lenders are focused on opportunistic refinancing, portfolio add-ons, and tuck-in acquisitions:

- The lower middle market (deals <$250M) remains the hottest zone.
- Demand rises for companies with domestic operations and limited tariff exposure.
- Non-cyclical sectors—services, food & beverage, healthcare, and business services—dominate sponsor focus.

Average deal structures now lean toward:
- Borrowers with $10–20M EBITDA (43% of respondent focus).
- Hold sizes >$100M among direct lenders (71%); banks prefer $25–50M.

The Macroeconomic Overlay: Fed, SLOOS, and Inflation

The macro picture from the Fed reinforces lender caution:

- The Senior Loan Officer Opinion Survey confirms tighter standards across C&I loans.
- Fed projections (March 2025): GDP growth at 1.7%, inflation at 2.3–2.8%, and unemployment rising to 4.4%.
- The April Beige Book warns of “pervasive uncertainty” in investment and demand.

These signals explain the continued spread compression, tight volume, and hyper-competitive bidding among lenders.

Looking Ahead: Will the Middle Market Find its Footing?

The near-term outlook hinges on four critical factors:

1. Tariff Clarity: 84% of lenders cited tariffs as a primary concern.
2. Economic Stability: Markets anticipate three rate cuts, but inflation remains sticky.
3. Portfolio Discipline: With 20% of portfolios below plan, lender selectivity is tightening.
4. Private Credit’s Push Downstream: Competition in the <$500M deal space is heating up.

Adjustment, Not Retreat

The U.S. middle market is not in decline—it’s in adjustment. Tariffs and volatility have prompted a return to disciplined underwriting and strategic deal-making.

Sponsors still have dry powder, borrowers still need capital, and deals—albeit fewer—are getting done. In this new phase, success will favor those who understand that the middle market is not broken—it’s just being re-priced.