Middle Market Debt Weekly: Economic Mixed Signals Stir Caution While ABL Activity Holds Firm

The U.S. middle market navigated a shortened trading week dominated by the Thanksgiving holiday and continued uncertainty regarding the future path of Federal Reserve policy. The release of long-delayed September economic data did little to resolve the ambiguity, as mixed signals and divided central bank commentary on a December rate cut sustained market caution. Meanwhile, the Asset-Based Lending (ABL) sector demonstrated continued structural strength and the private credit market faced sustained scrutiny.

Mixed Signals from Delayed Economic Data and Fed Commentary

The week was framed by the release of the long-delayed September jobs report on the preceding Thursday, November 20. The data indicated the U.S. economy added 119,000 jobs in September, exceeding economists’ expectations. However, previously-reported job additions for July and August were revised downwards by 33,000. Furthermore, the unemployment rate ticked up to 4.4% from 4.3% in the prior month as more workers joined the labor force.

Policy Outlook: Minutes released from the Federal Reserve’s latest October meeting revealed divided opinions among governors regarding an additional rate cut in December. Officials continue to weigh elevated inflation against downside risks to employment.
Rate Cut Expectations Volatile: Market expectations for a December rate cut plunged to 35% early in the week as officials adopted a neutral-to-hawkish tone, citing persistent inflation and limited data visibility. However, a late-week statement from NY Fed President John Williams, suggesting “room for a further adjustment in the near term,” caused rate-cut odds to surge again to 68%. This extreme volatility in rate-cut projections underscores the lack of consensus and elevated uncertainty for floating-rate middle market borrowers.
Treasury Yield Consolidation: Treasury yields mirrored the policy uncertainty, with the 10-year yield oscillating within a tight range of 4.03% to 4.16%. As of November 26, the 10-year nominal Treasury yield was 4.00% and the 2-year was 3.45%.

Asset-Based Lending Demonstrates Resilience

Against the backdrop of monetary uncertainty, the ABL sector continued to see structured transactional activity and demonstrated a shift in focus due to macro pressures.

Deal Activity: Kits Eyecare Ltd. announced it had entered into a new, three-year $15 million ABL facility with the Bank of Montreal, effective November 24, 2025. This transaction highlights the continuing role of ABL in providing working capital for vertically integrated middle-market companies.
Collateral Scrutiny: Lenders continued to focus on collateral resilience amid escalating trade tensions that have persisted through the week. For sectors exposed to tariff-impacted imports like manufacturing and retail distribution, advance rates on inventory have been reported to compress to 40-45%.
Underwriting Discipline: To manage risk in tariff-vulnerable sectors, lenders are intensifying field exams, with quarterly cycles becoming standard, and are incorporating dynamic reserves tied to customs valuation adjustments. Total ABL outstandings grew modestly at 3.2% quarter-over-quarter, with some activity buoyed by pivots to domestically-focused sectors like healthcare.

Private Credit and NBFI Scrutiny

The middle market direct lending space continues to grow, but regulatory and market focus on the Non-Bank Financial Institution (NBFI) sector has intensified, suggesting greater future scrutiny.

Bank Exposure: U.S. commercial bank lending to NBFIs has increased by 46% in the last year alone, totaling $1.2 trillion as of late June. These loans now represent 6% of total assets on domestic bank balance sheets, with the largest banks accounting for most of the growth.
Opacity Concerns: The notable growth in bank lending to NBFIs raises “fresh questions related to overall credit fundamentals and market structure”. The opacity of many private credit structures is seen as a significant risk, which has been highlighted by recent bankruptcies involving auto parts suppliers and lenders using questionable accounting practices.

Items to Consider

Navigate Policy Swings: The sharp, frequent shifts in market expectations for a December rate cut—plunging and then soaring within days—warrant stress-testing floating-rate exposures to both an extended high-rate environment and an unexpected dovish cut. Borrowers should use the current rate environment to prioritize term extensions where accessible.
Enhance Collateral Monitoring for Trade Risk: ABL lenders serving clients with complex international supply chains should maintain compressed advance rates and enforce rigorous quarterly field exams. Incorporating dynamic reserves for tariff risk is a prudent structural protection.
Assess Counterparty Risk in the NBFI Channel: Given the significant increase in commercial bank lending to NBFIs, middle market borrowers who rely on non-bank lenders should seek clarity on their lender’s funding sources and stability. Banks should monitor the deterioration in credit fundamentals observed in lower-rated private credit and leveraged loans.