SPECIAL SITUATIONS
2025 Year-in-Review
2025: Kicking the Can Down the Road
In 2025, most distressed companies didn’t fix their problems, they merely delayed them. The market postponed tough decisions rather than addressing root causes, often destroying long-term equity value in the process.
Most new credit activity during the year stemmed from existing borrowers seeking to reduce interest expense or extend deadlines (or both), often without addressing the borrowers’ underlying sources of stress. At the same time, prior years’ loosened underwriting standards meant many borrowers entered 2025 with fewer early-warning signs and left lenders with fewer tools to intervene early before problems became acute.
As a result, many middle-market borrowers can’t access the credit markets anymore. They’re stuck with ongoing financial problems, and their current lenders don’t want to realize significant markdowns on these troubled loans.
Temporary Fixes
One popular band-aid was Payment-In-Kind (PIK) interest, which lets borrowers add interest to their loan balance instead of paying cash. While marketed as a bridge through short-term troubles, PIK structures have often had the opposite effect: quietly compounding leverage, inflating debt balances, and eroding residual equity value. What appeared to be flexibility was increasingly proving to be a structural accelerant of distress.
These trends created a growing number of “zombie companies”: businesses servicing near-term obligations only through financial mechanisms and accommodations, not through generating operational changes or affecting sustainable cash flow. Many lenders chose to delay a decision in 2025, hoping for better conditions to appear.
Some companies pursued complex debt restructurings outside bankruptcy. Most proved temporary—a significant number eventually ended up in bankruptcy court anyway.
The Lesson for 2026
Avoiding hard decisions doesn’t eliminate risk—it concentrates it, usually at shareholders’ expense. As financial stress builds, the line between flexibility and fragility grows dangerously thin.
For 2026, act early. Successfully navigating distress requires honest assessment and expert guidance well before mounting debt and delayed decisions eliminate your options. Companies need experienced partners before it’s too late.
