USA Trends and Developments Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
dinate it to the new debt and, often, strip the covenants that had previously restricted the borrower thereunder. If permitted by the credit agreement, this may be done by means of pri- vately negotiated purchases between the bor- rower and the participating lender, meaning that not all existing lenders have the opportunity to participate in the exchange. This runs contrary to the general rule in credit agreements that pay- ments by a borrower are made on a pro rata basis to existing lenders. In response, lenders have looked to block these uptiering transac- tions by requiring that all lenders be given an opportunity to participate in any transaction, or consent to any amendment, that has the impact of subordinating the existing debt or altering the pro rata sharing provisions therein. Lenders have also found creative means to pro- tect themselves in a potential downside scenar- io, particularly when lending to distressed bor- rowers, by taking actions that would maximise their recovery in bankruptcy. One such means of protection is “double dip” loan, pursuant to which lenders provide a borrower with one loan that has multiple claims against the company. This is effected by the incurrence of a new loan at an unrestricted or non-guarantor restricted subsidiary, which is secured by assets already pledged to support the existing debt, creating the first claim which is pari passu to the exist- ing debt. The proceeds of the new loan are then used to fund an intercompany loan, which is also pledged to support the new debt and cre- ates the second claim on the same loan, giving the new lenders two distinct rights to recover in bankruptcy in the event lenders recover less than 100% of the amount to which they are enti- tled. In response to these double dip transac- tions, lenders have sought to include provisions in debt agreements that require any intercom- pany debt owed to non-guarantor subsidiaries
to be subordinated to existing debt, which would ensure that any recovery under the “second dip” intercompany loan occurs only after recovery by the existing lenders in respect of existing debt. As borrowers continue to explore various means to incur comparatively low-cost capital and manage their debt loads within the parameters of their existing debt instruments, the different structures of LMEs, and the blockers designed in response to them, are expected to continue to evolve. Outlook Although acquisition financing and the M&A market remained somewhat muted in 2024, both showed signs of recovery compared to 2023. The early months of 2025 have showed signs of continued improvement, with a year-over-year increase in billion-dollar-plus deal activity. Many commentators predicted that M&A volumes would surge in the US in 2025, amidst declining interest rates and a less onerous regulatory frame- work. However, market volatility has depressed deal activity, and companies are generally tak- ing a cautious approach to transactions amidst a challenging macroeconomic and geopolitical environment. There remains optimism for contin- ued recovery in M&A and acquisition financing activity, but activity is unlikely to surge unless and until there is more predictability and less volatility in the macroeconomic environment. Sources The following sources were used in the prepara- tion of this chapter of the guide: • KBRA Direct Lending Deals; • Refinitiv, an LSEg, Business; • Leveraged Commentary & Data (LCD);
• LSEg, LPC; and • Deal Point Data.
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