We demonstrate how private equity (PE) promotes nonbank lending by substituting for bank monitoring. Relative to non-PE-backed loans, PE-backed loans exhibit lower bank monitoring, smaller loan shares retained by lead banks, and larger shares held by nonbanks. The substitution is strongest when sponsors have greater incentives to engage with portfolio firms, is not associated with weaker loan performance, and persists during borrower distress. Our findings suggest that PE sponsors’ active engagement—through monitoring and support in distress—reduces banks’ need for monitoring and information production, enabling them to retain less skin in the game and sell loans to nonbanks.

We examine how debt rollover risk affects firms’ capital structure following aggregate profitability shocks. Exploiting plausibly exogenous variation in perceived exposure to the Covid-19 pandemic, we find firms that are highly exposed to both rollover risk and aggregate shocks significantly raise leverage, compared to less exposed firms. The effect is amplified when regulators provide liquidity support to debt markets. Higher exposure to both risks, and consequent increase in leverage, leads to substantially diminished distance to default. We show the increase in leverage is consistent with standard trade-off theory, suggesting equity-holders tolerate a lower distance to default as long as cash flows received in continuation exceed that received in bankruptcy. Overall, our findings highlight how financial constraints can meaningfully affect firm policies following negative economic shocks.