UK Trends and Developments Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
cated loan (BSL) market are becoming increasingly blurred. Direct lending has now cemented its place in the sponsor financing playbook, and private equity sponsors are routinely running dual-track financing processes, having parallel conversations with private credit lenders and underwriting banks for loan and/or high-yield financing. A borrower may now be able to choose between high- yield bonds, leveraged loans and/or private debt – all competing to underwrite the same risk. The sizeable dry powder accumulated by direct lenders has result - ed in both markets often competing to underwrite the same exposures. As the M&A pipeline in 2026 looks to build, both broad - ly syndicated financing and private capital financing will remain highly relevant in the leveraged finance landscape. Some situations will inevitably favour one form of lending over another, whether due to sectoral, geographic, or currency constraints. However, many situations (indeed those involving businesses with more complex capital needs) will require both forms of financing simultaneously, for example by way of multi- tranche senior secured debt, senior bank debt plus private junior debt, and/or equity capital or hybrid- style financings. Convergence of documentary terms As has been the trend for several years, the gap between documentary terms of loans provided by pri - vate credit funds and those financed by the broadly syndicated loan market has narrowed considerably. Historically, convergence has typically been seen on top-tier, large cap deals. However, the trend towards documentary term convergence is also becoming more evident in the mid-market space where private equity sponsors are increasingly likely to run dual track processes, creating increased competition in a space that has historically been serviced by private credit funds and smaller bank clubs. In the leveraged finance market, private credit has increasingly accepted “covenant-lite” structures (with no financial maintenance covenants) and high-yield- style covenant packages, albeit with tighter controls around debt incurrence and value leakage. Private credit funds’ acceptance of these features is now
commonplace, in particular for strong borrowers in robust defensive sectors. There is now tighter align - ment between syndicated pricing and private credit pricing, including as to arrangement fees. Private credit interest rate spreads, while still higher, no longer reflect the more substantial premia seen in past years. That said, as private credit funds hold risk to maturity and typically do not operate an originate-to-distribute model like traditional arranger banks, documentation remains more lender-friendly in certain respects. Key differences continue to revolve around debt incur - rence capacity, dividend and other leakage regimes, call protection and prepayment requirements, as well as the imposition of tighter controls around sponsors’ ability to run liability management exercises. Private credit funds’ closer attention to downside risk is offset by the flexibility offered to sponsors and companies through creative capital solutions, and the ability to offer “payment in kind” (PIK) interest structures. Impact of diversified capital sources The influx of diversified capital sources – including insurance and retail capital – is reshaping the UK and European private credit landscape, fuelling an expan - sion in investment strategies and enabling certain managers to scale to levels unprecedented outside the banking system. Private credit, with its ability to provide assets with long-duration, low volatility and stable yield, naturally attracts insurance capital. Many private credit managers have expanded their deploy - ment capability by bringing in more insurance capital through insurance company ownership, partnership or management arrangements. The retail investor base is another expanding source of capital. Through structures like evergreen funds and European Long-Term Investment Funds (ELTIFs), indi - vidual investors’ access to private credit is growing. The implementation of “ELTIF 2.0”, which broadened the list of eligible assets, has led to a surge in new approvals for private credit ELTIFs, with European semi-liquid funds now managing over EUR20 billion. This diversification of capital sources is expected to continue, providing private credit managers with a more stable and diversified investor base to drive continued growth and innovation.
273 CHAMBERS.COM
Powered by FlippingBook