Debt financing – Prospects for 2026

General economic overview

Our 2025 publication foreshadowed a recovery that was "unlikely to be felt until 2026". That prediction proved correct in its essence, though the 2025 downturn was deeper than we expected with year-on-year GDP contracting 1.1% in Q2 2025 and the unemployment rate hitting 5.4%. GDP rose 0.9% in the September 2025 quarter and a further 0.2% in the December 2025 quarter, with most industries recording an increase in economic activity and GDP now having risen in three of the last four quarters. While the Middle East conflict is likely to stunt economic growth, realistic scenarios have so far shown some increase continuing in 2026.

The agricultural sector has been a standout performer, with high commodity prices for dairy, meat and horticulture, which have provided particular benefit to the South Island. However, rising diesel and fertilizer costs will put pressure on margins in the primary sector.

Cost-of-living pressures continue to afflict retail and hospitality, particularly in Auckland and Wellington. The forecast increase in net migration, however, might assist these sectors, especially in Auckland, as well as the struggling residential property market.

Interest rates stable for now

Interest rates have been the defining variable in New Zealand's recent economic trajectory. The Reserve Bank's aggressive easing cycle – cutting the OCR from 5.5% in August 2024 to 2.25% in November 2025 – has been the principal policy lever deployed to support the economy through the downturn.

The Reserve Bank held the OCR steady at 2.25% on 18 February 2026, as widely anticipated. Despite December 2025 quarter inflation data showing annual inflation at 3.1% - above the upper limit of the Reserve Bank's 1-3% target range – the announcement struck an undeniably dovish tone.

The Reserve Bank was confident (pre-Iran) that inflation was well under control and should fall to around 2% over the next 12 months. The expectation was that the OCR would stay at its current level for most of 2026, with a small 0.25% increase to come either late 2026 or early 2027 – depending on how the data plays out.

Some commentators are picking two increases, but that will depend on how the Iran war develops over the next couple of months and the resulting input cost pressures.
This has significant implications for debt financing strategy. Borrowers who have been waiting for the bottom of the rate cycle to lock in fixed-rate funding may find they have already missed the optimal window. 

For borrowers, the strategic imperative is to assess current funding arrangements and consider whether to extend maturities at prevailing rates before the hiking cycle begins. For lenders, the hopefully improving economic outlook and the prospect of rising rates should support a modest improvement in margins.

Bond market outlook

New Zealand's debt capital markets face another mixed year in 2026, though conditions have improved relative to 2025. Government bond issuance remains elevated, with net core Crown debt expected to peak at 46.9% of GDP in 2027/28 before declining.

For corporate issuers, maximising flexibility to head to market has been a key theme this year.  With a limited supply of new issuance the investor demand is there, but volatility from international geopolitics, rising oil prices and tariffs means that market conditions can - and frequently do - change dramatically from one day to the next.

The Australian market remains an attractive option for rated issuers, potentially limiting both supply and demand for non-government highly rated issuance in New Zealand.

Private credit – still on the rise but facing some head winds

Private credit continues its rise as a significant force in New Zealand and Australian debt markets, although recent US developments have put some clouds on the horizon. Investors have been rattled by Blue Owl Capital’s throttling of redemptions, some seeing it as a portent of the default risks created by the technology sector’s over exposure to AI disruption and an AI bubble.

Some Australian commentators have also been flagging contagion risk. Data centres have been a big focus for private credit, so if an ‘AI bubble’ does eventuate, there will likely be consequences for Australian private credit.
The Australian Securities and Investments Commission (ASIC) launched a review of private credit in early 2025, followed by surveillance reports in November. The direction of travel appears to be towards stronger conduct expectations, more consistent disclosure requirements, closer scrutiny of conflicts and valuations, and a progressive shift to recurrent fund-level reporting.

However, ASIC has acknowledged the value of private credit to the market as a driver of increased competition and a source of debt capital for borrowers that might not otherwise have access. Steps taken by ASIC may limit any panic spreading from the US.

Private credit has not run as hot or spread as broadly in New Zealand as it has in Australia and globally, so if a meltdown eventuates, it’s likely to have less of an impact here. A global chill on private credit does mean that new lenders are less likely to dip their toes in here.

For borrowers, private credit offers several advantages over traditional bank lending: flexibility on structure, covenants, and payments, and a willingness to lend into sectors or situations where banks have become more conservative. Pricing remains at a premium to bank debt, and borrowers must carefully assess the trade-offs between cost and flexibility.

Bank lending: capital strength, access, and scrutiny

New Zealand's major banks enter 2026 in strong financial condition. Credit growth has recovered as interest rates have fallen, and banks remain well funded, with annual growth in system-level deposits exceeding lending growth since mid-2023. Domestic and offshore wholesale funding conditions remain favourable, with investment-grade credit spreads for financial institutions at historically low levels. 

For top-tier borrowers with strong credit profiles, access to debt remains excellent and in the face of global uncertainty are likely to recall the lessons of 2008 and seek to maintain strong core bank relationships. Banks are competing hard for quality credits and, for the right sponsors and transactions, terms have become more borrower-friendly: higher leverage, more cov-lite/cov-loose deals, and generally more flexible terms and conditions.

We’ve seen continued growth in the use of Asia Pacific Loan Market Association (APLMA) standard terms and harmonisation with the Australian market, particularly with wider lending by overseas banks into New Zealand. 

Increased scrutiny for struggling borrowers

While top-tier borrowers enjoy favourable conditions, borrowers in distressed or vulnerable sectors face a markedly different environment. Company liquidations hit 2,867 in 2025 (the highest since 2010) with construction, hospitality, retail, and transport bearing the brunt. Inland Revenue has increased its enforcement activity, referring 650 cases to court for liquidation in the year to June 2025, a 49% increase from the prior year.

Conditions remain particularly difficult in the consumer and property sectors. For borrowers experiencing stress, lenders are applying heightened scrutiny. Tighter covenants and requirements for equity injections are increasingly common. 

We have also observed a notable increase in the appointment of independent advisers, particularly Investigative Accountants, as lenders seek greater oversight and information before committing to further support. These steps allow lenders to better understand a borrower's position, preserve value, and maintain optionality - often resulting in better outcomes for all stakeholders than a rushed enforcement process.

Liability management exercises (LMEs) have featured more prominently during initial phases of financial distress, with markets embracing more assertive techniques as stakeholders continue to test the limits of credit documentation. We have seen increased creativity in insolvency and restructuring transactions, particularly in the US and UK, where borrowers have used loopholes in loan documentation to restructure their balance sheets through asset dropdowns and 'up-tiers'.

While these moves have yet to be seen in New Zealand, local lenders are continuing to focus on provisions that prevent such restructures - known as J.Crew, Serta and Chewy blocker clauses.

Early discussions with lenders remain the best way to deal with distress. Borrowers experiencing pressure should engage proactively, consider whether current covenant calculations are still working for them, and assess whether diversifying funding sources might reduce concentration risk.

Conclusion

The debt financing outlook for 2026 has the potential to be sunnier than it has been for several years. The economy is emerging from a deep cyclical downturn, interest rates have stabilised at supportive levels, and business confidence has rebounded strongly.

However, risks remain. Inflation persistence, global trade and geopolitical volatility, structural constraints on productivity and growth, and election-year uncertainty all have the potential to affect the recovery.

Funding diversification is becoming increasingly important in this environment. We are seeing bonds pick up as a source of funding, and the decrease in the USPP market has coincided with longer bank terms becoming available. For borrowers with strong credit profiles, conditions are attractive and competition among lenders remains fierce – but reliance on a single funding source or lender relationship creates concentration risk. Exploring alternative sources – including bonds, private credit and diversified bank relationships – may provide flexibility and resilience.

Thank you to Jack Morgan and Hayden Reyngoud for their assistance in preparing this publication.