In the loan markets for distressed corporate borrowers, a few specialized lenders finance a large fraction of loans. Ultra-high yield spreads prevail even after removing the credit- and liquidity-risk component. Borrowers are in desperate need of financing but face limited funding options, while specialized lenders have repeated syndication relations with restrained participation. We develop and estimate a dynamic game-theoretic model, accounting for strategic competition, endogenous collusion capacity, endogenous participation, and latent heterogeneity. Lender market power accounts for 76 - 96% of the risk-adjusted yield spreads, with a significant fraction attributable to collusion. Smaller borrowers are more susceptible to lender market power. Importantly, both specialized lenders and distressed borrowers would be worse off if collusion is completely prohibited, suggesting that vigorous antitrust policies can be efficiency retarding.