Oct 1, 2026 · 48 min
Private-credit lenders move closer to controlling distressed companies
Kirkland & Ellis Sees More Distressed Lenders Flipping Company Boards
As refinancing pressure builds, lenders are using tighter documents, liability-management tools and board remedies to protect troubled investments without directly taking equity.
- 1Higher rates, looming maturities and operating problems are pushing private-credit lenders to reassess portfolios and borrower viability.
- 2Payment-in-kind interest can preserve flexibility strategically, but it can also conceal a company’s inability to meet cash obligations.
- 3Board replacements, new money and flexible capital are expanding lenders’ options as private-credit distress develops toward a heavier refinancing cycle.
Don't miss
Flanagan explains how lenders can replace a distressed company’s board, appoint independent directors and pursue a sale without directly taking equity ownership.
The brief
Private credit is entering a more consequential stress phase as higher rates, heavy maturities and operational problems pressure leveraged companies. H.T. Flanagan of Kirkland & Ellis outlines how lenders are responding.
Payment-in-kind interest can give a troubled borrower time, but it can also mask an inability to pay. Flanagan distinguishes strategic flexibility from financial deterioration while discussing BDCs as a public window into private credit.
Liability-management exercises and amend-and-extend deals remain active, with the right strategy depending on documents, deal structure and coordination. Early planning can help borrowers, lenders and opportunistic capital providers.
The sharpest shift comes when lenders use board-control provisions: replacing directors, installing an independent board, running a sale and exiting without directly taking equity ownership.
Flanagan places the private-credit distress cycle around the fifth inning, with flexible and junior capital poised to supply the last turn of leverage as refinancing pressure grows.
What was said on this episode
32 statements · 18 positive · 9 negative · 5 neutral
Private-credit stress is gradually increasing beneath the surface.
“the stress is building slowly a little bit underneath the surface”
Listen at 2:27
Many underperforming private-credit borrowers have unsustainable capital structures.
“A lot of them just have unsustainable capital structures.”
Listen at 3:00
Private-credit funds are becoming more diversified.
“a lot more of them are increasingly diversified”
Listen at 3:38
Some private-credit funds are increasingly willing to own and restructure troubled companies.
“if I have to own it, I'll own it and I'll turn it around myself”
Listen at 4:13
Greater lender ownership capability will influence distressed-credit outcomes over coming years.
“that's something that you're going to see is really influencing kind of where these credits go over the next year, two years, three years”
Listen at 4:55
Some small private-equity firms lack capital to improve troubled portfolio companies.
“I certainly see some small private equity firms that, you know, just don't have the capital to really necessarily improve certain of their credits.”
Listen at 5:45
Public BDC metrics understate a quieter wave of defaults and restructurings.
“I think you're correct.”
Listen at 7:51
Some payment-in-kind structures reflect companies unable to pay interest.
“there's bad PIC, where it's... Company can't pay our interest”
Listen at 8:57
BDC investments remain fundamentally credit instruments.
“these are still fundamentally credit instruments”
Listen at 10:08
Private credit is an important component of diversified portfolios.
“private credit as an asset class is a key part of any diversified portfolio”
Listen at 10:30
Liability-management exercises remain active and viable.
“I don't think LME is dead. I think it's very alive and well.”
Listen at 13:37
Liability-management exercises are not a major risk in private credit.
“I still do not think that LME is a real risk”
Listen at 13:57
Amend-and-extend transactions with incentives and penalties are currently prevalent in BSL markets.
“amend and extends with, you know, carrots and sticks, sticks especially, are kind of the flavor of the month”
Listen at 14:54
Fiduciaries may rationally pursue LMEs despite uncertain success rates.
“there's plenty of situations where folks go, it still is worth it to try”
Listen at 16:12
LME risks are rarely exercised in true middle-market private credit.
“I don't see it in practice. At least I don't see it exercised very often in practice.”
Listen at 16:40
Companies and lenders should involve lawyers early and begin preparation.
“Talking to lawyers earlier rather than better and starting to do prep work, I think is always worth the time.”
Listen at 18:58
Existing loan pricing and yields often no longer reflect current risk.
“The pricing does not make sense. The yield does not make sense.”
Listen at 21:23
Distressed situations increasingly contain an unfavorable risk imbalance between equity and debt.
“there's now an imbalance in terms of risk between the equity and the debt”
Listen at 21:39
Hybrid instruments can improve lender upside while preserving debt downside protection.
“can we create a kind of hybrid capital instrument that gives you better sharing with the equity upside but preserves your debt downside”
Listen at 22:02
Credit documentation is tightening around traditional LME techniques.
“docs are getting a little tighter”
Listen at 26:53
Credit documents are tighter on LME provisions than during the prior M&A boom.
“I do think that that means that docks are getting tighter on these points than they were during the M&A boom a few years ago.”
Listen at 27:33
Middle-market lenders can provide stabilizing institutional capital and resources.
“there's real opportunity to be. the adult in the room that is a capital provider for this business”
Listen at 29:57
Market disruptions have greater impact on lower-middle-market companies because of scale.
“in the lower middle market a hiccup a mark if there is a market hiccup it can have a greater kind of impact on that company”
Listen at 31:33
AI will require substantial capital investment going forward.
“it's here and it's going to take a lot of capital going forward”
Listen at 33:27
Board flipping is a core remedy for lenders in large private-credit transactions resembling BSL loans.
“that is often, especially in kind of the removing the mega unit tranche where it's kind of private credit loan, but it looks more like a BSL. That's your core remedy.”
Listen at 34:17
Board-flipping provisions are powerful and important lender remedies.
“it is a very powerful remedy. It's a very important remedy.”
Listen at 35:54
Courts have upheld properly executed board-control appointments.
“the courts have upheld that”
Listen at 40:08
Lenders are exploring and executing board flips more frequently.
“I have seen folks explore this with greater frequency and execute it with greater frequency.”
Listen at 40:30
Board flips require a clear operational plan and rationale.
“you have to go in with kind of a, why did we do this? And what is our plan going forward?”
Listen at 41:30
Capital-solutions financing will continue to grow.
“the continued rise of capital solutions”
Listen at 42:01
Flexible-capital providers can finance partial sponsor capital returns when exits are unavailable.
“these kind of providers are able to finance a return of capital to the sponsor”
Listen at 44:41
Private-credit distress is approximately halfway through its cycle.
“I think we're in the fifth.”
Listen at 45:24
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.