UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
1.4 Challenges The return of syndicated markets in 2024 led private credit lenders to reduce pricing to remain competitive, although this may be viewed as a “correction” instead as this debt was priced at all-time highs. In the European large-cap syndicated loan market, covenant-lite structures have become standard, especially in sponsor-led transac - tions. Private credit financings, which tradition - ally include maintenance covenants, are now shifting towards covenant-lite structures, par - ticularly in unitranche and senior direct lending, as private credit funds increase their presence in the large-cap leveraged finance market. This shift highlights private capital providers’ grow - ing influence and adaptability, as they innovate to meet borrowers’ needs and compete in the large-cap market. 1.5 Junior and Hybrid Capital In 2024, there was a resurgence in junior financ - ings and hybrid capital from private credit lend - ers due to the following. • Flexibility: Holdco debt allows for tailored capital structures, balancing debt and equity and accommodating cash flow patterns. • Leverage: placing debt at the Holdco level can prevent over-leveraging the Opco group. • Ratings: maintaining leverage at the Holdco level can improve Opco credit ratings. • Cash flow: Holdco debt (often payment in kind (PIK) debt) aids cash flow management, allowing cash retention for reinvestment and operations. • Exit strategy: Holdco debt can simplify exit strategies, making deals more appealing to buyers.
Private credit lenders also leveraged their com - petitive advantage in transactions involving large sterling tranches, which are more challenging in the syndicated loan market due to their relative illiquidity. However, the resurgence of the syndi - cated loan market has led some private credit lenders to refocus on mid-market strategies, where they continue to provide value and main - tain market presence. In the lower middle market, ongoing bank dis - intermediation is driving a notable trend of col - laboration between banks and asset managers. This collaboration allows for innovative financing solutions and the sharing of expertise, benefit - ing borrowers seeking more tailored and flexible funding options. Whilst there has been certain refinancings of pri - vate credit debt with public debt market prod - ucts, this was not a prominent feature in 2024. 1.3 Acquisition Finance Private credit has been actively used for headline acquisition financing transactions in Europe for the last few years but the reopening of the syndi - cated market led to a healthy mix of both private credit and banks financing acquisitions in 2024. A notable development is the increasing collabo - ration between private credit lenders and banks. Despite competing for market share, both par - ties are finding common ground and working together on deals. One significant feature is the use of holding company (Holdco) financings, where private credit lenders provide financing at the Holdco level while banks syndicate a loan or bond at the operating company (Opco) level. This synergy allows both private credit lenders and banks to leverage their strengths, offering more comprehensive financing solutions to meet the diverse needs of borrowers.
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