INTRODUCTION Contributed by: Maura O’Sullivan, Michael Chernick, Caroline Chapman and John Chua, A&O Shearman
rics and underlying credit quality. In Europe, first lien debt is on average levered at 4.71x, but transactions with leverage of 6x or higher represented the lowest percentage of deals since 2016 (LCD). Liability management transactions (LMTs) remain a prominent feature of the US leveraged finance land- scape, as borrowers continue to grapple with elevated borrowing costs, ongoing liquidity concerns and a looming maturity wall, particularly among lower-rat- ed issuers. In the USA, the pace of LMTs – including uptiering, drop-downs, and double-dip structures – has remained robust, with market participants expect- ing distressed LMTs to at least match, if not moderately exceed, the record-setting pace of 2024. This ongoing activity is driven by constrained exit opportunities for sponsors and the need for flexibility in managing capi- tal structures (PitchBook | LCD; Creditor Rights Coali- tion). In Europe, although there are examples of LMTs, they remain relatively rare and the ability to execute such transactions out of court varies depending on the jurisdiction and legal framework. Lenders are increasingly adding protections in docu- ments to address risks from looser terms and cove- nants. Co-operation agreements have become a com- mon tool for lenders to minimise the risk of LMTs, but borrowers are attempting to push back by including anti-cooperation language in documents, which is, in turn, strongly resisted by lenders. Legal developments in case law have not slowed the momentum of LMTs as once previously thought. For example, the Fifth Circuit Court of Appeals ruling in Serta Simmons, in December 2024, finding the 2020 up-tiering transac- tion was not a valid “open market purchase” under the credit agreement and that related indemnities in the Chapter 11 plan were not permitted, has caused par- ties to pivot to other provisions but has not stopped uptiering transactions (eg, Better Health). According to reporting as of this date, LMTs are on pace to sur- pass last year. In 2025, sustainability-linked leveraged loan facilities continue to grow and tie the interest margin charged to compliance with certain key performance indica- tors (KPIs). Global issuance of sustainability-linked leveraged loans in 2025 remains robust but did not surpass the record Q1 volumes achieved in 2024.
Standard practices emerging include independent third-party verification of compliance with KPIs and fixed timeframes for KPI implementation when flex- ible ESG amendment features are included (where KPIs are set at a later date following closing). Pricing structures tied to KPIs allow for both margin increase and decrease. Advisory bodies such as the LMA and LSTA have helped guide developments in standard provisions with updates to their sustainability princi- ples and guidelines. In Europe, where leveraged loan margin ratchets based on ESG KPIs have been estab- lished for longer than in the USA, H1 2025 saw a nota- ble drop in the issuance of qualifying sustainability- linked loans compared to the same period in 2024. It is important to note, though, that the majority of Euro- pean leveraged loans featuring these margin ratchets would not have satisfied the criteria for sustainability- linked loans as set out by the LMA. However, if we look at green loans (which have a specific ESG-related purpose) and qualifying sustainability-linked loans in Europe, issuance for 2024 had increased 26% on the preceding year (AFME). Conclusion Over the past year, the leveraged loan market has experienced a significant resurgence in activity fuelled by robust investor demand and record CLO issuance. Despite this momentum, the pace of new-issue activ- ity – particularly for M&A and LBO financings – remains measured despite the initial spurt from the start of 2025, constrained by persistent macroeconomic uncertainty, elevated borrowing costs, and limited exit opportunities for private equity sponsors. The imbalance between strong demand and limited net supply has resulted in increasingly borrower-friendly terms for those transac- tions that do reach the market, while refinancing and opportunistic transactions continue to dominate overall volumes. Looking ahead, there is cautious optimism that, should macroeconomic conditions remain stable, and interest rates continue to ease, M&A activity will accelerate, narrowing the valuation gap between buy- ers and sellers and unlocking a new wave of primary issuance. For borrowers facing high debt service costs, the prevalence of liability management transactions and creative refinancing solutions is expected to persist as companies seek to manage upcoming maturities and optimise capital structures in a competitive, evolving market landscape.
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