Private Lender Moves Risk Extend-and-Pretend Path to Bankruptcy

Private credit lenders are easing loan terms on existing deals in hopes of staving off costly restructurings, at the risk of an extend-and-pretend dynamic that masks deeper economic strains.

Their effort comes as companies rush to address private credit loans maturing between 2025 and 2027, ahead of a potential tightening in credit markets, and in response to rising defaults and bankruptcy risks driven by tariffs, higher operating costs, and declining revenues.

“Of the debt coming due soon or in the near to medium term, there’s a lot of reluctance in the marketplace from lenders to enter a real messy restructuring unless they absolutely have to,” said Seth J. Kleinman, vice chair of restructuring and bankruptcy practice at Benesch Friedlander Coplan & Aronoff.

Extend-and-pretend refers to creditors extending a loan’s maturity—despite doubts about the likelihood of repayment—to avoid restructuring and give borrowers time for conditions to improve. Economic uncertainty can fuel the practice as companies and lenders hope tariffs will ease or that they can adapt, fending off bankruptcies that could erase lenders’ recoveries.

The private credit market has surged since the 2008 financial crisis to about $2 trillion in 2024, according to data firm Preqin. While the extend-and-pretend practice has existed in the banking sector for a long time, it’s unusual in private credit, said Daniel Alpert, founding managing partner of Westwood Capital and a senior fellow in financial macroeconomics at Cornell Law School.

“The extension of maturities and playing the game of ‘pretend’ is based on the idea that, at some point, the business will improve and enable repayment,” Alpert said. “That’s either going to prove to be a great bet or not.”

The concept is also known as pray and delay, said Mark J. Roe, a Harvard Law School professor, in which companies delay repayment and “pray for some celestial intervention” that turns the business around.

Weighing Risk

The recent, high-profile bankruptcy of auto parts company First Brands, which stunned the private credit market when it filed in September with liabilities exceeding $10 billion, shows that private lenders have to be careful in loosening terms in their deals.

“Lenders also are seeking tighter covenants to make sure they receive robust financial reporting going forward, given some recent cases involving questions about verifying collateral,” said Ingrid Bagby, a partner in Haynes Boone’s restructuring practice group in New York.

Regulators are investigating alleged irregularities in First Brand’s off-balance-sheet financing and approximately $2.3 billion in “vanished” assets.

Some lenders have returned back to basics in their underwriting, Bagby said, and are asking tougher questions to ensure they understand the risks associated with the credit.

“While extending maturities is not always a long-term solution or permanent fix, it does create some optionality,” Bagby said.

Extend-and-pretend could also appear in liability management exercises that delay an expected bankruptcy, Roe said.

While practitioners said LMEs aren’t as common in the private sector, a notable example came last year when tech company Pluralsight completed one of the first major private-loan restructurings. The company cut its debt by $1.2 billion and avoided default after lenders took control.

Assessing Tariffs

At the same time, private lenders are demanding stricter terms in new deals, ensuring adequate collateral and closely monitoring tariffs’ effects.

Agreements are shifting toward sectors more insulated from global trade disruptions, such as health care, or those with government-backed support, like infrastructure projects, practitioners said.

Many lenders have viewed these markets as cleaner opportunities to pursue, said Gabriel Yomi Dabiri, global head of private credit and direct lending at Squire Patton Boggs. Those borrowers could obtain credit more easily or on better terms, he said.

Tariffs and a slowing economy are limiting options for private lenders. While there’s rising interest in technology and asset-light businesses, many lenders risk crowding into that space.

As of August, private credit deals were concentrated in cyclical and service sectors, led by consumer discretionary at 20% percent and followed by industrials and information technology, according to Preqin data.

Some industries, such as exports, auto parts, and construction, have attracted more lender scrutiny.

Hospitality, construction, and real estate—industries that rely heavily on immigrant labor—are also affected, Dabiri said.

“Lenders that once viewed sectors like hospitality as easier to lend into appear to be taking a second look now or include additional protections in their documentation if they extend a loan, since the terms may not be as favorable as they would have been before this year,” Dabiri said.

Avoiding Bankruptcy

The US avoided a wave of bankruptcies—even during the pandemic—due to an inflow of money, and even the 2008 financial crisis produced fewer bankruptcies than expected, Alpert said.

“The question this time is whether we’re at the end of our rope in the ability to remediate troubled credits,” Alpert added. “Is ‘out of bankruptcy’ running its course, and we don’t really have other agents to turn to?”

Kleinman said the maturity wall for loans is still looming and, while some maturities are being pushed out, many will eventually need to be addressed.

“This year has been one of the most active bankruptcy filing markets,” Kleinman said. “I do think we’re starting to see the impact of future debt coming due, not being able to negotiate around it, and actually having to file.”