INTRODUCTION Contributed by: Maura O’Sullivan, Michael Chernick, Caroline Chapman and John Chua, A&O Shearman
In 2025, the competitive interplay between the broadly syndicated loan (BSL) market and the private credit market continues to shape pricing, covenant struc- tures, and deal flow. Throughout 2024 and into 2025, the supply/demand imbalance in both the BSL and private credit markets has kept significant downward pressure on interest rate margins and overall pricing terms. Borrowers have been able to obtain favour- able pricing and looser covenant terms in both the broadly syndicated and private credit markets. In the BSL market, cov-lite structures remain the norm, with roughly 90% of new deals in the USA featuring them. Direct lending clubs, which help facilitate larger trans- actions when the BSL market is less accessible, are prominent in 2025 and allow private credit providers to pool resources for multi-billion-dollar deals, espe- cially when market volatility restricts BSL access. As competition with syndicated lenders continues, club deals offer sponsors certainty, speed, and flexible structuring, including features such as delayed-draw term loans and payment-in-kind options, making them a preferred choice for large financings that previously would have relied on BSLs or high-yield bonds. In the USA, direct lending made up about 49% of new LBO loan volume in Q2 2025, down from 56% in 2024 and 88% at its 2023 peak. In Europe, most LBOs by number are still funded by direct lenders, though BSL loans tend to be larger on average. With increased competition from the BSL market, private credit providers in both the USA and Europe are seeking alternative structures to maintain returns, for exam- ple, arranging holdco PIK financings in some capital structures. In 2025, the US market for lower-rated borrowers has continued its resurgence, though with some modera- tion compared to the sharp risk-on sentiment seen in 2024. Borrowers with a B- rating or lower from at least one credit rating agency remain a significant portion of refinancings, but their share has stabilised as investor risk tolerance finds a new equilibrium accounted for. In the first half of 2025, B- and lower-rated issuers accounted for approximately 45% of refinancing vol- ume, a slight decrease from the 51% peak in Q2 2024 but still well above the levels seen in 2023.
Syndicated delayed draw term loans (DDTLs) have also become an increasingly prominent feature of US deals and are especially attractive to private equity sponsors pursuing buy-and-build strategies. While DDTLs have long been a staple of private credit, their adoption in the syndicated market has accelerated, with a growing share of large-cap US transactions now including a DDTL component. This shift reflects both the competitive pressure from private credit and the desire of sponsors for greater flexibility and cer- tainty of execution. While DDTLs have been seen in some European BSL deals, they are not as popular as in the USA and have remained the “sweet spot” for the private credit markets. Dividend recapitalisation activity soared in the US market to USD25.3 billion in the first quarter of 2025 alone, more than double 2024 Q4’s USD11.3 billion. The volume of dividends taken out of businesses by private equity sponsors has also risen in Europe, with EUR14.5 billion of total loan issuance supporting divi- dend recaps in H1 2025, compared to EUR8.5 billion during the same period in 2024 (Pitchbook). Further, as private equity sponsors seek alternative exit strat- egies, particularly where their investment time frame is coming to an end, portability features (ie, where a change of control will not trigger an event of default or mandatory prepayment subject to certain conditions) are increasingly making their way into credit docu- mentation. As riskier borrowers have returned to the market, the average leverage ratio for non-investment-grade bor- rowers in 2025 in the USA is 4.9x (through June), up slightly from 4.7x in 2024 (reflecting the full calendar year). While this marks a continued upward trend, lev- erage remains below the 2021 peak of 5.3x, reflect- ing a still-cautious approach by US lenders compared to the pre-pandemic era (PitchBook | LCD). Despite some tightening in credit spreads, high benchmark rates have kept interest costs elevated. Even though interest spreads trended down in 2024, the continued high benchmark rates have led to an average interest coverage ratio of 3.1x (LCD) in 2024 and 3.0x in 2025 (through June). Overall, the 2025 market environment continues to favour borrowers in terms of covenant flexibility and leverage capacity, but the pressure from high rates is placing greater scrutiny on coverage met-
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