INTRODUCTION Contributed by: Maura O’Sullivan, Michael Chernick, Caroline Chapman and John Chua, A&O Shearman
Overview: Investor Demand Drives an Active Market To date in 2025, global leveraged finance activity has been characterised by cautious optimism, under- pinned by the expectation of a gradual reduction of policy interest rates and monetary easing. Market participants are closely monitoring the impact of per- sistent geopolitical tensions and evolving trade poli- cies. The beginning of 2025 saw an increase in M&A- related loan activity compared to H2 2024 as well as sustained high volumes of repricings, refinancings and dividend recapitalisations. However, momentum faded as the year progressed, especially in March, due to increased macroeconomic uncertainty, particu- larly around the potential impact of tariffs and global capital market volatility. The return of protectionist trade measures, particularly in the USA, the potential for retaliatory actions, and the slower than expected reduction in interest rates in 2025 (with central banks (in particular, the US Fed) signalling a “higher for longer” approach) have introduced increased volatility. This environment is expected to keep overall funding costs elevated for borrowers and may limit the pace of new issuance, especially in the context of M&A and leveraged buyout activity, which has yet to fully recov- er to pre-pandemic highs. The macroeconomic and political uncertainties that dampened market activity during the second half of 2022 and throughout 2023 and 2024 have not abated and have now increased post-March 2025 as a result of the adoption of Ameri- can protectionist policies. Debt financing options available to borrowers in 2025 have continued to rebalance with the return of the broadly syndicated market following the slowdown it experienced in the second half of 2022 and in 2023, and the continued expansion and strength of private credit. As a result, borrowers have increasingly sought to capitalise on the competitive tension between the syndicated and private capital markets by opting to run some transactions on a dual-track basis with both syndicated and private credit options. Borrowing costs remain elevated in 2025, and there is still a valuation gap in the M&A market between the prices at which sellers are willing to part with their assets (often purchased at high multiples) and the price at which purchasers are willing to buy. The scarce exit
opportunities for private equity sponsors are apparent in statistics showing that the average hold time for portfolio companies has steadily increased since 2019 (Pitchbook). In response, private equity sponsors have increasingly turned to alternative strategies to gener- ate returns for LPs, with issuances of leveraged loans for dividend recapitalisations remaining at elevated levels in 2025 from 2024. The market outlook currently remains tentatively hopeful, with interest rates expected to come down in the second half of the year, alongside promising signs from private equity sponsors of improved M&A pipe- lines as they look to deploy accumulated dry powder. The secondary loan market remains stable supported In the USA, the first half of 2025 experienced a rise in M&A-related loan issuance, with a more balanced mix between new M&A-related loan issuances and refi- nancing or repricing transactions. Of this, M&A-related loan issuance in the USA reached USD109.9 billion, up 44% from USD76.1 billion in the first half of 2024. US LBO loan issuance alone was USD45.1 billion, a 28% increase from USD35.3 billion in the prior year- to-date period, while non-LBO M&A loans totalled USD64.7 billion, up 58% from USD40.9 billion. Refi- nancing activity in the US markets, however, declined to USD157.8 billion, down 27% from USD217.0 bil- lion in the first half of 2024, reflecting a shift away from the record refinancing and repricing volumes that characterised the prior year. Dividend recapitalisation loan issuance in the USA remains sustained but also moderated, totalling USD38.7 billion, a 14% decrease from USD44.7 billion in the same period of 2024. In the European market, refinancing remained the larg- est use of proceeds in H1 2025, with volume at a simi- lar level to that seen in the same period in 2024. As in the USA, overall M&A-related loan volume has been higher as a percentage of primary issuance – and in Europe at least, we have seen LBO activity represent a higher proportion of overall M&A than it did in the same period last year. In absolute terms, EUR24.6 bil- lion of M&A-related issuance in H1 2025 is more than the market saw in all of 2024 (Pitchbook). by high loan investor demand. Trends in an Uncertain Market
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