Acquisition Finance Market in Review

The German acquisition finance market in 2025, in line with the European market, proved to be robust. While 2025 started with high hopes for a return of M&A, many transactions were sidelined against the backdrop of geopolitical instability and uncertainties regarding trade policies and tariffs, which delayed M&A transactions (particularly large transactions). As a result, refinancings, including amend-and-extends and repricings, accounted for approximately three quarters of total transaction volume in the acquisition finance market.

There continue to be significant differences between the investment-grade and the leveraged finance markets with the former characterised by (bank) relationships and the latter sponsor-driven.

Total European leveraged loan issuance reached EUR355.6 billion in 2025 (up 15.6% year-on-year), while high-yield activity reached EUR134 billion (down 2.7% year-on-year). Germany accounted for roughly 15% of total European volumes. As for the acquisition finance market generally, the leveraged finance market was characterised by more refinancings than new-money financings.

With abundant liquidity, the supply of attractive assets remained limited relative to available capital (with demand continuing to exceed primary loan supply). This imbalance continued to result in compressed spreads and borrower-friendly terms.

Lender Landscape and Financing Structures

Over the past few years, competition between commercial banks and private credit funds has established dual-track processes. Borrowers now often run parallel processes to solicit proposals from bank syndicates and direct lenders. This is particularly pronounced in sponsor-backed mid-cap processes, where borrowers trade off tighter bank pricing against private credit certainty and speed. However, the phenomenon is also present in the large-cap segment (and there are increasingly combinations of bank financings and direct lending).

By the third quarter of 2025, the market was split, with banks re-entering to underwrite large-cap deals and credit funds maintaining dominance where transaction execution was complex or time-critical. Term outcomes remained highly lender- and process-dependent. In the case of large-cap transactions by strong sponsors, institutional demand and CLO liquidity continued to support borrower-friendly terms, while the mid-market (in particular in stressed situations) remained more mixed.

Commercial Terms, ESG and Documentation

Pricing outcomes in 2025 reflected the broader supply and demand dynamic. Average institutional spreads on term loan Bs narrowed by September 2025, reflecting renewed market liquidity. Financing terms remained bifurcated along credit-quality lines: top-tier credits in high-demand sectors continued to attract the most favourable structures and tightest pricing, while lower-growth or cyclical assets transacted at lower leverage and on more conservative terms. Banks and funds increasingly offered hybrid solutions combining unitranche facilities with super-senior revolving credit lines. The German Schuldschein market continued its recovery serving unrated mid-caps.

ESG-linked lending volumes in Europe fell by approximately 30% year-on-year in 2025, the lowest since 2022, and the share of 2025 facility agreements featuring an ESG margin ratchet effective from day one continued to decline. What has remained steady is the proportion of deals containing a framework with a promise to introduce an ESG ratchet in the future, suggesting the market has not abandoned ESG pricing mechanics but has deferred activation.

On documentation, the leveraged finance market in 2025 remained predominantly borrower-friendly, continuing the trends of prior years. EBITDA add-backs, basket capacity and flexible investment permissions continued to feature prominently, though lenders paid greater attention to aggressive adjustments and their cumulative effect. Representations and warranties, EBITDA add-backs and control over value transfers continue to be negotiated, but heightened scrutiny on those points has not translated into a systematic shift in outcomes, and sponsors continue to secure flexible terms in competitive processes.

“Portability” illustrates the extent to which sponsors have used documentation to achieve future optionality. Rare in 2023, portability appeared in a significant number of amendments, repricings and refinancings in 2025, giving sponsors with aged holdings more exit flexibility. Where portability is granted, there are often conditions such as a leverage test (set at or above opening leverage), a 24-month time limit, minimum equity-to-enterprise value thresholds of 35–40%, one-time-use restrictions, buyer whitelisting and minimum assets under management requirements (for sponsor acquirers). In addition, disguised portability, through broad permitted-holder definitions that avoid triggering a change of control, has also appeared in some transactions. The trend has since moderated, with portability becoming less in early 2026.

One exception to the continuing borrower-friendly trend has been the adoption of LME blockers. Following European LME transactions such as Hunkemöller, Selecta, Altice France, and (in Germany) Pfleiderer, lenders have begun to push for LME blockers to be included in new documentation and have largely succeeded in obtaining at least some form of LME protection (a trend that has continued in early 2026). That said, the devil remains in the detail: LME blockers vary considerably in scope, ambition and drafting stringency.

Focus – LME Blockers

Introduction

A prominent topic in the recent leveraged finance landscape has been the evolution of LMEs and the response in loan and bond documentation. What originated in the US has firmly arrived in Europe. Recent European LME transactions, including Hunkemöller, Selecta, Altice France, Victoria and Pfleiderer, demonstrate that borrowers and sponsors are prepared to deploy sophisticated LME structures where covenant capacity permits. The assumption that European markets would remain insulated from LME transactions no longer seems to hold.

LMEs are executed within the boundaries of the existing documentation. The decisive question is therefore how much structural and contractual flexibility is available thereunder and also to what extent borrowers and sponsors are willing to utilise such flexibility. Due to many legacy European sponsor financings having flexible, borrower-friendly covenants, older documentation is likely to offer borrowers, sponsors and dedicated new financing investors paths to provide borrowers with new money and to reorganise their capital structure without going through a formal court process.

LMEs encompass a broad range of techniques. These include:

• drop-down transactions, in which valuable assets are transferred to unrestricted subsidiaries;
• non-pro-rata uptier transactions and priming exchanges, where participating lenders receive new debt ranking ahead of the debt held by non-participating lenders;
• pari-plus and double-dip structures, which use intercompany claims, guarantees or similar arrangements to give new-money providers more than one route to recovery against the same asset pool (the validity of a double-dip structure in German insolvency proceedings has recently been acknowledged by a non-final judgment of a German court of first instance); and
• super-senior layering or structural priming through non-guarantor (unrestricted) subsidiaries, where additional debt is introduced at a level in the group structure that gives it effective priority over the claims of existing lenders.

Against this backdrop, lenders have started to focus on including restrictions (LME blockers) in leveraged financing documentation to protect their position in a downside scenario.

The rise and limits of LME blockers

In response to the emergence of LMEs, lenders in the US have developed a family of LME blockers protecting against specific structural pathways used in earlier deals. The most common blockers (often named after prominent LME transactions) fall into the following categories.

• A first category addresses asset leakage risk. At the narrower end, so-called J. Crew-style protections restrict transfers of material IP outside the restricted group. In businesses where key value is not concentrated in IP, such protections can leave significant room for value leakage. More comprehensive examples extend these restrictions to a broader set of material assets and to a broader category (eg, non-guarantor restricted subsidiaries in addition to unrestricted subsidiaries) of entities (so-called Pluralsight blockers).
• A second category aims to protect the guarantee and collateral package by restricting the release of guarantees and security granted by guarantors and security grantors that subsequently become non-wholly owned (so-called Chewy blockers).
• A third category of blockers targets priming and uptiering risk for lenders, including the voting mechanics that can enable them. Serta blockers provide that transactions that constitute priming require all-lender consent or at least consent by all affected lenders. Additional protections constrain pari-plus and double-dip structures built on intercompany claims and seek to prevent the circumvention of required-lender thresholds.
• A fourth category aims to preserve payment waterfall outcomes and equal treatment. Some provisions further restrict selective exchanges into structurally or contractually senior debt unless offered on a pro rata basis to all lenders. In addition, so-called open market purchase exceptions, that is provisions permitting non-pro-rata acquisitions of debt in the secondary market, are limited to reduce the capacity for selective buybacks as a route to implement non-pro-rata exchanges.
• Most recently, omni (or Total LME) blockers have emerged in individual transactions, trying to broadly restrict any non-pro-rata liability management transactions unless approved unanimously. However, these (catch-all) provisions that target outcomes, not specific measures, are much less frequent than targeted, precise provisions.

More recently in the US loan market, LME blockers may be embedded as “sacred rights”, such that they cannot be amended without all lender or all affected lender consent (otherwise, the LME blockers could be amended with lower majority thresholds). However, the effectiveness of any LME blocker is highly drafting-sensitive and borrowers may look to utilise other flexibilities in the existing documentation. Differences in definitions, carve-outs for permitted indebtedness or refinancing debt, or blockers that apply only to limited categories of transactions can lead to materially different outcomes in terms of the flexibility that the documentation permits for implementing LME transactions.

European documentation has begun to import these concepts to the point that lenders now increasingly expect some form of LME protection in the documentation. Leveraged loan documentation (including facilities and intercreditor agreements) now frequently contains LME blockers as well as additional sacred rights, whereas high-yield bonds typically retain greater covenant flexibility and show lower uptake of loan-style blocker protections. This divergence between the loan and bond markets may be a reason why recent European LMEs have tended to arise in bond-heavy capital structures rather than in syndicated loans. The Pfleiderer drop-down LME transaction, which occurred within a year of a significant documentation tightening, is a reminder that bespoke LME transactions may (and are likely to) continue to be possible despite more restrictive covenants.

Governing law – does it matter?

The inclusion of LME blockers in the documentation takes place regardless of the governing law. Large-cap German leveraged loan agreements are commonly documented under English law (although there are transactions governed by German law), whereas high-yield issuances are mostly documented under New York law. Mid-market domestic loan transactions are more frequently governed by German law, particularly where the lender base is relationship driven.

Given the recency of the phenomenon, no German case law on LMEs or LME blockers is available yet. As a general matter, German contract law is construed considering aspects beyond the strict wording of the agreement such as the intent of the parties. Consequently, differences in the interpretation of LME blockers may evolve in different jurisdictions over time but these are expected to be limited. Rather, the decisive factors will remain the flexibility under general covenants, amendment thresholds, collateral scope and the specific drafting of applicable LME blockers.

Outlook

At the start of 2026, market sentiment was broadly optimistic. Several structural catalysts pointed towards a meaningful recovery in deal activity: more stable financing conditions and greater predictability in funding costs were expected to unlock larger LBO structures; corporates were anticipated to continue divesting non-core divisions, feeding a pipeline of carve-outs and mid-market transactions; and the large number of PE-owned German companies held for extended periods were widely expected to drive secondary buyouts and recapitalisations.

That picture has become considerably more uncertain. What market participants have described as an AI scare triggered a sharp sell-off in technology credits in early 2026, as concerns mounted over the impact of AI on software sector revenues, causing several leveraged finance transactions to be pulled or postponed and prompting investors to reassess the credit quality of a segment that had until recently commanded premium valuations. This development turned into broader uncertainty about private capital as an asset class and the lending discipline of (some) private debt providers in particular.

The outbreak of the conflict in the Middle East compounded that volatility, rattling European leveraged finance primary markets and raising broader concerns about inflation, interest rates and energy costs. These developments weighed on primary activity, with Q1 2026 issuance falling materially short of the prior-year period as the Iran-related energy shock curtailed appetite for opportunistic transactions. The near-term and mid-term outlook will depend heavily on how the geopolitical situation develops.