USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
the rise in secured high-yield bond issuances (about 44% of total high-yield bond issuances in 2024 and 42% through June 2025). Although overall high-yield bond issuance declined year-on-year in Q1 2025 in the USA and Europe, the share of secured bonds is increasing. Companies are also issuing shorter matu- rity instruments to reduce future redemption costs if rates fall. Covenant terms and protections in the lever- aged loan market have continued their long-term con- vergence with those of the high-yield bond market, which is demonstrated clearly by the proliferation of “covenant-lite” term loans, which represented approx- imately 90% of all new-money first-lien leveraged loan issuances for 2025 as of July 2025. Certain differences remain between leveraged loan and high-yield bond terms. Loans continue to provide weaker “call” protection in connection with voluntary prepayments. Additionally, in capital structures with both leveraged loans and bonds, lenders typically continue to drive the guaranty and collateral struc- ture and control enforcement proceedings given the increased focus on collateral from a loan perspective. Providers of leveraged loans continue to push to restrict investments in non-guarantor subsidiaries more often than investors of high-yield bonds. Addi- tionally, many loans contain “most favoured nation” (MFN) protections that require an interest rate reset upon the issuance of certain higher-yielding debt, subject to carve-outs which traditionally limit the duration of the MFN and other limitations on MFN as specifically negotiated in the credit documentation. Finally, some loan provisions are more permissive than those found in bonds, such as: • the lack of a fixed-charge coverage governor on the usage of the “available amount” builder basket for restricted payments; • allowing amounts in the “available amount” builder basket to build for positive cumulative consolidat- ed net income in a given period without a corre- sponding deduction for negative amounts in other periods; and • permitting the incurrence of debt by “stacking” based on priority (eg, by first incurring junior lien debt in reliance on a secured leverage ratio and
then incurring first lien debt in reliance on a first lien leverage ratio), rather than the bond standard secured leverage governor applying to all such secured debt, regardless of priority (at least in the case of unsecured bonds). 1.4 Alternative Credit Providers Private debt funds in North America have raised over USD650 billion since 2020, allowing alternative credit providers to gain significant market share in US loan markets. Direct lending (in which loans are made with- out a bank or other arranger acting as intermediary) has expanded rapidly, moving beyond the middle market to finance large, top-tier transactions. Direct lenders now provide anchor orders in syndicated deals, buy second-lien (or otherwise difficult to syn- dicate) tranches, and offer full financing solutions to large companies and private equity sponsors. These lenders are often more flexible, offering higher leverage, committed delayed draw facilities, payment- in-kind interest, and capital for parts of the capital structure that are not readily available in the broadly syndicated market, such as preferred equity, holding company (structurally junior) loans or unitranche facili- ties. They also provide faster execution and greater certainty of terms, as there is no need to obtain rat- ings, no marketing process or modification of loan terms during syndication. In 2023, private credit grew as broadly syndicated loan (BSL) activity slowed, with direct lenders offer- ing flexible solutions. In 2024 and 2025, the BSL mar- ket rebounded with lower spreads but private credit remained robust and continued to attract deal flow, particularly in refinancings and M&A. 1.5 Banking and Finance Techniques Due to competition among bank and non-bank lend- ers to lead financing transactions, documentation flexibility has increased. Private equity sponsors, as recurring customers in the syndicated and direct loan markets with increasing market sway, have been able to push for more aggressive terms in each subsequent transaction. Often, borrowers require lenders to rely on underwritten borrower-friendly loan documenta- tion precedents to ensure that the terms of the new financing are at least as favourable to the borrower as
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