Middle Market Debt Weekly: Distress Sharpens as ABF Accelerates

The week ending Jan. 25, 2026, brought a pivotal development in the First Brands Group saga as Oaktree Capital Management and Anchorage Capital accumulated positions in the company’s $1.1 billion debtor-in-possession loan, stepping into what has become one of the most complex restructurings in recent middle market history.^¹ Meanwhile, the broader credit markets demonstrated continued momentum as rating agencies and market participants coalesced around asset-based finance as the primary growth vector for private credit in 2026, with new ABL platforms launching and established players expanding their collateral-backed lending capabilities.

Oaktree, Anchorage Position for First Brands Resolution

The arrival of distressed-debt specialists Oaktree Capital Management and Anchorage Capital into First Brands’ bankruptcy financing signals a potential turning point in the troubled restructuring. According to Bloomberg, the firms have amassed positions in the $1.1 billion DIP loan as it trades at distressed levels, with the company warning it will run out of cash by the end of January without additional funding.^¹

The purchases come as First Brands negotiates a new loan with existing lenders after seeking as much as $800 million in fresh capital in December. A sticking point in the discussions has been the advisory fees accumulated since the company filed for Chapter 11 protection in September, highlighting the tension between operational needs and restructuring costs in complex bankruptcies.^²

Any additional financing would require approval from two-thirds of current DIP lenders, advisers to creditors noted on a recent lender call. The slumping price of the DIP loan suggests creditors have viewed the injection of new, higher-priority money as increasingly likely. First Brands, which supplies auto parts including Fram motor oil, Raybestos brakes, and Trico wipers, has said a failure to secure new financing could force it to shut down parts of the business and sell assets in a piecemeal fashion rather than as going concerns.

The company continues attempting to unwind a series of factoring transactions that restructuring advisers say saddled the business with billions of dollars in fraudulent debt. Examiner Martin De Luca of Boies Schiller Flexner, operating under a $7 million budget, is investigating the alleged scheme involving $2.3 billion in fabricated receivables and financing arrangements that creditors allege returned over 300% to Utah-based Onset Financial.^³

Rating Agencies Identify Asset-Based Finance as Private Credit Growth Engine

In a notable convergence of outlook, major rating agencies identified asset-based finance as the primary catalyst for private credit growth in 2026. Moody’s and KBRA both projected that ABF will increasingly drive private credit expansion as traditional direct lending markets mature and spread compression limits returns.^⁴

KBRA’s 2026 private credit outlook characterized the year as “pivotal” for the broader landscape, noting that “the increased presence of asset-based finance collateral, retail investors, new geographies, and longer-duration funds can introduce new risk profiles, which some managers are better positioned to manage than others.”^⁵ The agency expects strong growth across rated private credit entities and transactions while cautioning that rising complexity will reshape credit risk profiles.

Industry analysis from With Intelligence projected that asset-based finance could “challenge, or even overtake, direct lending over the long term” as banks continue de-risking their balance sheets. The publication noted that specialty finance was the most popular strategy for new private credit fund launches in 2025, with 84 new funds compared to 71 direct lending launches. The 10 largest specialty finance funds in market are collectively targeting around $35 billion, pointing to sustained demand for niche credit strategies.^⁶

Middle Market ABL Activity Accelerates

The week saw notable asset-based lending transactions across the middle market, reflecting both the expansion of established platforms and the emergence of new ABL-focused players. Installed Building Products announced the closing of a $500 million senior unsecured notes offering alongside an amended and increased $375 million ABL revolving credit facility, demonstrating the complementary role of asset-based facilities in diversified capital structures.^⁷

The company used net proceeds of approximately $490 million to redeem its outstanding 5.75% senior unsecured notes due 2028, while the ABL facility maturity was extended to Jan. 21, 2031. Bank of America served as joint-lead arranger and administrative agent, with JPMorgan Chase Bank, RBC Capital Markets, and KeyBank National Association as joint-lead arrangers. The ABL revolver is currently undrawn, providing IBP with significant liquidity headroom.

In a significant market entry, Oxford Finance announced the closing of its first transaction under its recently launched Asset-Based Lending Division with AMX Logistics, a family-owned transportation and logistics provider.^⁸ Oxford Finance, primarily known for senior secured loans to life sciences and healthcare services companies, characterized the ABL platform expansion as reflecting its ability to “structure customized financing solutions that empower family-owned enterprises to strengthen operations and pursue growth opportunities.”

“With the talent we have recently added to the organization, we are well-positioned to scale our ABL platform and provide innovative financing options that help businesses thrive,” Kevin Harbour, managing director at Oxford Finance, said. The deal signals continued private credit expansion into traditional bank lending territory, particularly in the transportation and logistics sector where asset-heavy balance sheets provide natural collateral coverage.

BDC Sector Navigates Yield Compression and Capital Raising

The business development company sector continued adapting to the lower rate environment, with Goldman Sachs BDC pricing a $400 million public offering of 5.100% unsecured notes due 2029 on January 21.^⁹ The company intends to use the net proceeds to pay down debt under its revolving credit facility and for general corporate purposes, with delivery expected on Jan. 28.

The sector continues grappling with the aftermath of the fourth-quarter redemption surge, during which investors in BDCs holding more than $1 billion asked to pull a total of more than $2.9 billion, up 200% from the prior period according to Robert A. Stanger & Co.^¹⁰ Kevin Gannon, Chairman and CEO of Stanger, attributed the dynamic to falling yields: “NAV BDCs are income-driven products that are heavily weighted to floating-rate debt investments, and during Q4 the average distribution rate fell below 10% for the first time since September 2023.”

Despite the pickup in redemptions, Stanger emphasized that fundraising across the BDC sector remains resilient, projecting total BDC capital formation to exceed $60 billion in 2025, including more than $40 billion from registered offerings. The divergence between large and small platforms continues, with smaller NAV BDCs reporting little to no material redemption activity while larger vehicles face continued withdrawal pressure.

Federal Reserve Poised to Hold as Markets Await FOMC Decision

Market participants entered the final days before the January 28-29 FOMC meeting with near-certainty that the Federal Reserve will maintain the federal funds rate in its current 3.50%-3.75% range. Bond futures markets show minimal probability of a cut at this meeting, with consensus expectations pointing to no additional easing until June at the earliest.^¹¹

The extended pause reflects the Committee’s dual-mandate tension, with inflation remaining above target while the labor market shows signs of softening. Chair Jerome Powell’s term expires in May 2026, introducing additional uncertainty around monetary policy direction. Analysts at Morgan Stanley updated their forecast, now projecting one rate cut in June and another in September, citing “improved economic momentum and the decline in the unemployment rate” as reducing the need for near-term cuts.^¹²

For middle market borrowers carrying floating-rate debt, the extended pause provides both challenges and planning visibility. Interest coverage ratios remain compressed at 2.3x-3.1x across many portfolios, well below the 4.0x+ levels maintained during 2019-2022. The stable rate environment through mid-year allows for more predictable cash flow modeling, though the ultimate direction of policy remains data-dependent.

M&A Confidence Sustains as PE Prepares for Deployment

Middle market M&A sentiment continues at elevated levels as private equity firms position for increased deployment. According to the Citizens 15th annual M&A Outlook, 58% of respondents characterize the current deal environment as strong—the highest level in six years. Private equity executives demonstrated 86% confidence in M&A decision-making by year-end 2025, up from 48% in the first quarter.^¹³

More than half of PE firms expect to initiate deals in the second quarter, before midterm elections introduce potential uncertainty. The BCG M&A Outlook noted that global private equity deal value rose by 59% in 2025, with firms continuing to hold approximately $2 trillion in undeployed capital. However, the publication cautioned that “uncertainty remains a defining feature of today’s environment,” with economic-policy uncertainty, geopolitical tensions, and unexpected political developments weighing on executive confidence.^¹⁴

Private Credit Quality Indicators Warrant Monitoring

Credit quality across private credit portfolios remains a focal point as the sector navigates its first significant test since the pandemic. Cambridge Associates characterized recent bankruptcies including First Brands as highlighting “the risk of weaker underwriting in at least some segments,” recommending investors focus on less correlated private credit strategies such as asset-based finance for better diversification and risk-adjusted returns.^¹⁵

The headline default rate in private credit has remained below 2% for several years, though once selective defaults and liability management exercises are included, the “true” default rate approaches 5% according to With Intelligence analysis. Payment-in-kind usage continues rising, with public BDCs now receiving an average of 8% of investment income via PIK.^⁶

Items to Consider for Market Participants

First Brands Resolution Timeline. The arrival of sophisticated distressed investors suggests the endgame for First Brands may be approaching. The company’s end-of-January cash deadline creates urgency around new DIP financing or asset sales. Market participants should monitor whether a consensual resolution emerges or if the case proceeds toward Chapter 7 liquidation or piecemeal asset sales.

Asset-Based Finance Positioning. The convergence of rating agency and market participant views around ABF as the growth engine for private credit creates both opportunity and competition dynamics. New entrants like Oxford Finance’s ABL platform signal increasing institutional interest in the space, potentially compressing spreads while expanding access for borrowers.

BDC Yield Dynamics. With distribution rates falling below 10% for the first time since 2023, BDC managers face continued pressure to balance yield maintenance against credit quality. The divergence between large and small platform redemption activity suggests scale-dependent investor behavior that may persist through 2026.

Rate Environment Planning. The Fed’s expected hold through at least mid-year provides planning visibility for floating-rate borrowers. Interest coverage metrics remain compressed across middle market portfolios, warranting continued focus on operational performance and covenant compliance rather than relying on rate relief.

M&A Window Considerations. With PE firms targeting Q2 deal initiation ahead of midterm election uncertainty, borrowers and lenders should prepare for potential volume increases in acquisition financing. The elevated M&A confidence coupled with $2 trillion in dry powder suggests deployment pressures may drive competitive dynamics in deal terms.

Conclusion

The week ending Jan. 25, 2026, illustrated the dual nature of the current middle market environment—significant distress in high-profile situations like First Brands coexisting with structural growth in asset-based finance and sustained M&A appetite. The arrival of Oaktree and Anchorage into First Brands’ DIP loan may signal the beginning of the endgame for the largest ABL fraud in recent memory, while the broader market continues evolving toward collateral-backed lending structures that rating agencies now identify as the primary growth vector for private credit. For middle market participants, the environment requires balancing awareness of emerging credit stress against opportunity in expanding ABF markets, all while navigating an extended Federal Reserve pause that provides rate stability at the cost of compressed coverage metrics. Success in this environment favors those who can distinguish between idiosyncratic fraud situations and systemic credit deterioration while positioning for the structural shift toward asset-based finance that is reshaping the private credit landscape.

Footnotes