Middle Market Debt Weekly: Supreme Court Upends Tariff Architecture as Private Credit Stress Deepens and Treasury Yields Plunge Below 4%

The week ending Feb. 28 delivered a series of seismic developments that reverberated across the lending landscape. The U.S. Supreme Court’s February 20 decision striking down President Trump’s IEEPA-based tariffs¹ forced a rapid policy pivot to Section 122 of the Trade Act of 1974, imposing a temporary 10% ad valorem import surcharge effective February 24²—the first-ever invocation of the provision. The resulting policy uncertainty drove a flight to safety that pushed the 10-year Treasury yield below 4.00% for the first time in four months,³ while the S&P 500 closed at 5,954.50 on Friday after falling 0.43% on hot PPI data,⁴ capping a roughly 1% decline for February. The Federal Reserve held rates steady at 3.50–3.75% at its January meeting, with the CME FedWatch tool now pricing a 96% probability of a hold at the March 18 FOMC meeting.⁵

Meanwhile, stress in the private credit ecosystem intensified on multiple fronts. Blue Owl Capital permanently halted quarterly redemptions for its non-traded OBDC II fund while executing a $1.4 billion loan sale across three vehicles.⁶ First Brands Group edged closer to Chapter 7 liquidation for certain units as its senior debt traded at 13–16 cents on the dollar,⁷ and the collateral damage claimed another victim when trade financier Raistone Capital filed for liquidation.⁸ JPMorgan CEO Jamie Dimon escalated his “cockroaches” warnings at the bank’s February 24 investor day, drawing explicit parallels to the 2005–2007 period preceding the Global Financial Crisis.⁹ For middle market lenders, the convergence of trade policy upheaval, private credit redemption pressure, and rising fraud discoveries demands heightened vigilance across credit portfolios and counterparty exposures.

Supreme Court Strikes Down IEEPA Tariffs; Section 122 Invoked for the First Time

In a landmark ruling on February 20, the U.S. Supreme Court invalidated President Trump’s sweeping tariffs imposed under the International Emergency Economic Powers Act, dealing a significant blow to the administration’s trade agenda.¹ Within hours, the White House pivoted to Section 122 of the Trade Act of 1974, a provision that has never before been used, to reimpose a 10% ad valorem import surcharge on virtually all goods entering the United States.² The new duties took effect on February 24, with the President threatening to raise the rate to the statutory maximum of 15%.¹⁰

Section 122’s constraints are significant for market participants: the provision limits tariffs to 150 days and caps rates at 15%, a far cry from the unlimited authority Trump had claimed under IEEPA. Customs and Border Protection confirmed the rate remains at 10% as of February 23.¹¹ Legal scholars are already challenging the administration’s invocation, arguing that Section 122 was designed for currency crises and balance-of-payments emergencies, not broad industrial policy.¹² The administration signaled it will pursue Section 301 investigations to construct a more durable tariff architecture within the 150-day window.²

For middle market borrowers, the tariff whiplash creates acute planning challenges. Companies dependent on imported inputs face renewed uncertainty around cost structures, while the temporary nature of Section 122 makes it difficult to commit to long-term pricing adjustments. Lenders should be stress-testing trade-exposed portfolios against scenarios where tariffs escalate to 15% or are replaced by broader Section 301 duties later in the year.

Blue Owl Halts OBDC II Redemptions, Executes $1.4 Billion Loan Sale

Blue Owl Capital sent shockwaves through the private credit market this week by permanently eliminating quarterly share redemptions for its non-traded business development company, OBDC II.⁶ The firm simultaneously announced the sale of $1.4 billion in direct-lending investments across three BDC vehicles—OBDC II, OTIC, and publicly traded OBDC. OBDC II’s share of the sale totaled approximately $600 million, representing roughly 34% of its portfolio, with loans from 128 companies across 27 industries fetching 99.7% of par value.¹³

Rather than honor quarterly redemption requests, Blue Owl will deliver a return-of-capital distribution of up to $2.35 per share, approximately 30% of NAV as of December 31, 2025, expected by March 31, 2026.¹³ The move follows the collapse of a proposed merger between OBDC and OBDC II in November 2025, which investors rejected over concerns about an estimated 20% haircut on share value.¹⁴ Blue Owl (NYSE: OWL) shares fell 9% on the announcement, dragging Apollo Global Management and Ares Management down 3–5% in sympathy.¹⁵

The OBDC II situation highlights the fundamental asset-liability mismatch inherent in semiliquid fund structures—vehicles promising quarterly liquidity while holding illiquid private loans. Morningstar characterized the episode as “a harsh lesson for semiliquid fund investors.”¹⁶ For middle market lenders, the implications extend beyond Blue Owl: redemption pressure across the BDC complex could accelerate loan sales at discounts, creating both risks for existing portfolios and potential opportunities for well-capitalized acquirers.

First Brands Bankruptcy Deepens as Chapter 7 Discussions Emerge and Raistone Liquidates

The slow-motion collapse of First Brands Group, the Cleveland-based automotive aftermarket manufacturer, accelerated this week as the company and certain creditors began weighing a shift to Chapter 7 liquidation for some of its units.⁷ The auto-parts maker, which filed Chapter 11 in September 2025 with 98 affiliated debtors, is winding down North American operations of its Brake Parts, Cardone, and Autolite divisions after failing to secure buyers or additional financing. The company has been operating on a week-to-week basis, relying on advance payments from automakers to keep vital parts flowing.¹⁷

The depth of the distress is evident in the company’s debt pricing: most senior debt was quoted at 13–16 cents on the dollar as of February 13, the second-lien loan at 0.375–0.625 cents, and the pre-petition first-lien at a staggering 0.0625 cents.⁷ In December, an $800 million financing request was rebuffed as rising advisory costs and federal fraud charges against founders Patrick and Edward James diminished lender appetite.¹⁸ Ford and General Motors convened an emergency meeting to assess supply-chain disruption risks.¹⁸

The collateral damage continued to spread: trade financier Raistone Capital filed for Chapter 7 liquidation on February 24, listing $3.7 million in assets and $1.9 million in liabilities, directly attributing its demise to exposure from the First Brands collapse.⁸ For middle market lenders with automotive, manufacturing, or trade-finance exposure, First Brands serves as a cautionary tale about the cascading risks that emerge when fraud combines with operational distress in a heavily leveraged capital structure.

Dimon Escalates “Cockroaches” Warning as Private Credit Defaults Projected to Rise

JPMorgan Chase CEO Jamie Dimon used the bank’s February 24 investor day to deliver his most pointed warning yet about systemic risks in private credit, drawing explicit parallels to the 2005–2007 period that preceded the Global Financial Crisis.⁹ Citing elevated asset prices, high leverage, and “dumb things” being done by market participants, Dimon reiterated his October 2025 admonition: “When you see one cockroach, there’s probably more.”¹⁹ That warning, initially triggered by the Tricolor Holdings and First Brands failures, has proven prescient as fraud charges, redemption freezes, and NAV collapses have proliferated across the sector.

The broader private credit market—now valued at roughly $3 trillion—faces a convergence of challenges. Analysts project private credit default rates could rise 2 percentage points to 6% in 2026.²⁰ An AI-driven selloff in BDC shares in early February—triggered by concerns that artificial intelligence could accelerate software company defaults—erased billions in market capitalization, with Ares Management falling 12%, Blue Owl dropping 8%, and KKR losing 10%.²¹ PitchBook data shows software comprises 17% of BDC investments, while KBRA estimates software accounts for 22% of debt exposure across 2,400 middle market borrowers, approximately $224 billion.²¹

Despite these warnings, capital continues to flow: KKR completed a $2.5 billion fundraise for its Asia Credit Opportunities Fund II, and TPG closed more than $6 billion for its third flagship Credit Solutions fund.²⁰ Fed Chair Powell acknowledged the cracks but stated he does not see “a broader credit issue” at this point.²² For middle market lenders, the disconnect between bullish fundraising and deteriorating fundamentals warrants careful reassessment of concentration risk, particularly in software and technology-adjacent portfolios.

BlackRock TCP Capital NAV Collapses 19%; Securities Fraud Lawsuit Filed

BlackRock TCP Capital Corp. (NASDAQ: TCPC) reported a devastating 19% decline in net asset value to $7.06 per share for the fourth quarter of 2025, down from $8.71 as of September 30.²³ The NAV destruction was concentrated in six portfolio companies—Edmentum, Razor, SellerX, HomeRenew/Renovo, Hylan, and InMobi—which together accounted for approximately 67% of the total NAV loss. Debt investments on non-accrual status surged from 3.7% to 14.4% of the portfolio at cost, a 289% increase.²⁴

Shares tumbled 12.97% to $5.10 on January 26 following the preliminary disclosure, and a securities fraud class action has been filed in the Central District of California naming the company, former CEO Raj Vig, current CEO Phil Tseng, and CFO Erik Cuellar as defendants.²⁴ The complaint alleges that investments were not being appropriately valued, portfolio restructuring efforts failed to resolve challenged credits, and NAV was materially overstated throughout the class period of November 2024 through January 2026.²⁵ Estimated shareholder damages total approximately $65 million.²⁵

The TCPC situation underscores the valuation risks embedded across the BDC sector, where mark-to-model portfolios can mask deteriorating credit quality until sudden write-downs force recognition. Middle market lenders should view TCPC’s experience as a signal to scrutinize their own valuation methodologies and the concentration of exposure to challenged credits that may be subject to delayed loss recognition.

Warsh Fed Chair Nomination Formally Transmitted to Senate; Tillis Remains Key Obstacle

The White House formally transmitted Kevin Warsh’s nomination as Federal Reserve Chair to the U.S. Senate on February 24, setting the stage for Senate Banking Committee confirmation hearings expected throughout March.²⁶ Warsh, the youngest-ever Fed Governor when appointed by President George W. Bush in 2006, is expected to take the helm on May 15, 2026, bringing a doctrine of “Sound Money” that prioritizes currency stability and a leaner central bank balance sheet.²⁷

A key obstacle remains Senator Thom Tillis (R-NC), who reiterated he will oppose any Fed nominee until the DOJ’s inquiry into Chairman Powell is “fully and transparently resolved.”²⁸ If the vote falls along party lines, Tillis’s support would be necessary to advance Warsh through committee. Analysts are closely watching Warsh’s anticipated “QT-for-cuts” framework—a strategy combining front-loaded interest rate reductions with accelerated balance sheet runoff—which could reshape the yield curve dynamics that underpin middle market lending economics.²⁷ For floating-rate borrowers and their lenders, the prospect of a more dovish rate trajectory under Warsh represents a potential tailwind, though the confirmation timeline introduces near-term policy uncertainty.

Markets Close February on Sour Note as Hot PPI Data Revives Inflation Concerns

The S&P 500 closed at 5,954.50 on February 27, shedding 0.43% on the day after the Producer Price Index came in far hotter than expected, with core wholesale prices rising 0.8% versus the 0.3% consensus.⁴ The index posted a roughly 1% decline for February, while the Nasdaq Composite fell 0.92% on Friday to 22,668.21, notching its worst monthly performance since March 2025 with a decline exceeding 3%.²⁹ The Dow Jones Industrial Average dropped 1.05% to 48,977.92.⁴

The flight to safety was pronounced in fixed income: the 10-year Treasury yield fell to approximately 4.00%, its lowest level in four months, declining 25 basis points for the month—its strongest monthly performance in a year.³ Safe-haven demand accelerated amid trade policy upheaval, AI-driven equity rotation, and geopolitical tensions. The KBW Bank Index slumped 4.9% for the week, dragging financial shares to three-month lows as credit concerns compounded the AI-driven technology selloff.²¹

For middle market lenders, the simultaneous decline in equities and Treasury yields creates a mixed environment: lower benchmark rates support refinancing activity and borrower debt service capacity, but the hot PPI print complicates the Fed’s easing trajectory. Bullish investor sentiment, as measured by the AAII survey, fell to just 33.2%, reflecting broad skepticism about the near-term outlook.⁴

Middle Market M&A Poised for Recovery as Private Equity Deployment Pressure Builds

Despite macroeconomic crosscurrents, the outlook for middle market mergers and acquisitions continues to brighten. A Capstone Partners survey found that 58% of executives expect M&A deal volume to increase in 2026, while private equity confidence in deal-making rose to 86% in the fourth quarter, up sharply from 48% in the first quarter.³⁰ After three years of relative restraint, PE firms are sitting on approximately $1.6 trillion in dry powder and facing mounting pressure from limited partners to deploy capital and deliver exits.³¹

Add-on acquisitions continue to dominate PE deal activity, with technology—particularly AI-enabling software—healthcare services, and B2B services leading sector interest.³² The gap between buyer and seller expectations has narrowed meaningfully, with deals in the pipeline priced at more realistic levels than a year ago.³¹ However, continued trade policy volatility and the specter of Section 301 investigations could reinforce a dynamic in which the largest sponsors are the most active dealmakers, leaving smaller middle market transactions more exposed to macro shocks.

For asset-based lenders and middle market credit providers, the improving deal pipeline represents potential growth in origination activity, particularly in sponsor-backed leveraged buyouts and recapitalizations. Lenders should position their teams and credit processes to capitalize on an expected acceleration in deal flow during the second and third quarters.

Items to Discuss in Your Monday Meetings

Stress-Test Trade-Exposed Portfolios Against Section 122 Scenarios. With the 10% tariff effective February 24 and the administration threatening to raise rates to 15%, lenders should immediately assess exposure to borrowers with significant imported-input dependencies. Model the impact of both the current 10% surcharge and a potential 15% escalation on borrower cash flows, particularly in manufacturing, retail, and food and beverage sectors.

Evaluate BDC and Private Credit Counterparty Exposures. The Blue Owl redemption halt and BlackRock TCP Capital’s NAV collapse demonstrate that stress in the private credit ecosystem can materialize rapidly. Review participation agreements, loan syndication partners, and any co-lending relationships with BDCs facing redemption pressure or elevated non-accrual rates.

Reassess Software and Technology Portfolio Concentration. With software comprising 17–22% of BDC debt exposure and AI-driven disruption concerns accelerating, conduct a targeted review of technology borrowers. Focus on companies where AI substitution risk could erode recurring revenue streams, and evaluate whether current spreads and covenants adequately compensate for emerging risks.

Monitor Warsh Confirmation for Yield Curve Implications. Kevin Warsh’s anticipated “QT-for-cuts” framework could meaningfully reshape the yield curve dynamics that drive middle market lending economics. Prepare sensitivity analyses for scenarios where front-loaded rate cuts accelerate while the balance sheet runoff steepens the long end of the curve.

Review Automotive and Manufacturing Supply-Chain Credits. First Brands’ progression toward Chapter 7 and the cascading failure of Raistone Capital highlight how fraud-tainted distress can propagate through supply chains. Identify borrowers with direct or indirect exposure to First Brands’ aftermarket parts ecosystem and assess the adequacy of advance rates on related collateral.

The week ending Feb. 28 will likely be remembered as an inflection point for the middle market lending cycle. The Supreme Court’s rejection of IEEPA tariffs and the administration’s scramble to Section 122 have injected a new layer of policy uncertainty into an already complex environment. The private credit ecosystem’s stress points—from Blue Owl’s redemption freeze to First Brands’ descent toward liquidation to BlackRock TCP Capital’s NAV implosion—are no longer isolated incidents but emerging patterns that validate Jamie Dimon’s “cockroaches” thesis. Meanwhile, the 10-year Treasury’s drop below 4% and the hot PPI print create a conflicting macro backdrop that complicates Fed policy and lending decisions alike. As Kevin Warsh’s confirmation process unfolds and Section 122’s 150-day clock begins ticking, middle market participants must navigate with a dual mandate of their own: managing existing portfolio risks while positioning for a potentially robust M&A recovery that stands ready to emerge once the fog of policy uncertainty clears.

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