Acquisition Finance Market in Review

The German acquisition finance market in the first half of 2026, in line with the European market, proved to be resilient. While the year again started with hopes for a return of M&A, a sequence of exogenous shocks (a sell-off in software stocks in February and the outbreak of the conflict in Iran a few weeks later) repeatedly interrupted issuance windows. Their principal effect was on deal timing rather than on transaction viability. Where issuers launched into a favourable window, transactions generally proceeded without changes to terms or documentation. Refinancings, including amend-and-extends and repricings, accounted for the bulk of transaction volume, at 78% of first-quarter loan issuance and, together with maturity extensions and dividend recapitalisations, 90% in the second quarter. The first quarter was weak for European primary issuance, with approximately USD83 billion of leveraged loans and USD25 billion of high-yield issuance, whereas the second quarter was stronger at approximately USD100 billion and USD53 billion, respectively, with the two-week ceasefire announced on 7 April 2026 temporarily easing geopolitical tensions.

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 USD183 billion in the first half of 2026 (up 16% year-on-year), while European high-yield issuance was 9% below the prior-year period. As for the acquisition finance market generally, the leveraged finance market was characterised by more refinancings than new-money financings.

Leaving aside AI-related investments, the supply of attractive assets remained limited relative to available capital (with demand continuing to exceed primary loan supply). That imbalance has increasingly ceased to translate into uniformly compressed spreads or borrower-friendly terms across the board, with stronger borrowers continuing to secure flexible terms while weaker credits face tighter constraints.

Lender Landscape and Financing Structures

Over the past few years, competition between commercial banks and private credit funds has often led to dual-track processes (at least at the outset). 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).

This competitive dynamic continued in the first half of 2026. European direct lending reached EUR63.2 billion, although activity slowed in the second quarter as the broadly syndicated loan market regained momentum, particularly for larger transactions. Credit quality also increasingly shaped process outcomes, with weaker credits typically facing longer execution periods and more extensive diligence. Term outcomes remained situation-dependent, with the mid-market, particularly in stressed situations, remaining more mixed.

Commercial Terms, ESG and Documentation

Pricing outcomes in the first half of 2026 continued to reflect the broader supply-and-demand dynamic, with institutional term loan B spreads in Europe tightening further to multi-year lows by the end of the second quarter. Financing terms remained bifurcated along credit-quality lines. Weaker or more cyclical credits transacted at lower leverage and on more conservative structural terms. Banks and funds continued to offer hybrid solutions combining unitranche facilities with super-senior revolving credit lines. The German Schuldschein market strengthened, with approximately EUR8.5 billion issued in the first half of 2026, almost 10% more by volume than in the prior-year period.

ESG-linked lending remained under pressure in 2026. European sustainability-linked and green loan issuance declined further in the second quarter, with market observers reporting sharp year-on-year falls of up to 49%, extending the downtrend already visible in 2025.

On documentation, the leveraged finance market remained borrower-friendly in the first half of 2026. EBITDA add-backs, basket capacity and flexible investment permissions continued to feature prominently. Day-one debt-incurrence and value-leakage capacities increased relative to 2025, partly reflecting the growing use of multi-toggle provisions that allow unused capacity under different covenants to be used interchangeably. Representations and warranties, EBITDA adjustments and control over value transfers continued to be negotiated, but heightened scrutiny on those points did not translate into a systematic shift in outcomes.

“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 to 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. After moderating in late 2025 and early 2026, change-of-control portability returned in the second quarter of 2026.

An exception to the continuing borrower-friendly trend has been the adoption of LME blockers. Following European LME transactions such as Hunkemöller, Selecta, Altice France, Aston Martin, Lipton Teas and, in Germany, Pfleiderer, core LME protections have become a frequent feature of new European leveraged loan documentation (certainly in documentation following a prior LME transaction or, more generally, in a more stressed or distressed situation). That said, the devil remains in the detail: LME blockers continue to 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 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 key questions are how much structural and contractual flexibility is available thereunder and to what extent borrowers and sponsors are willing to utilise this 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.

Creditor co-operation agreements (“Co-ops”) have emerged as another feature in this context. However, Co-ops have themselves become litigation targets, including on antitrust grounds in the US. Conversely, European lenders have resisted borrower attempts to restrict creditor co-ordination through finance documents (eg, in the form of “anti-Co-op” or “disqualified counsel” provisions which have frequently been resisted by creditors).

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 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 exchanges into structurally or contractually senior debt unless offered on a pro rata basis to all lenders. In addition, open market purchase exceptions, that is provisions permitting non-pro-rata acquisitions of debt in the secondary market (with the term “open market” itself having been the subject of litigation), are limited to reduce the capacity for non-pro-rata buybacks as a route to implement non-pro-rata exchanges.
• 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). The effectiveness of any LME blocker is highly drafting sensitive and borrowers may look to utilise other flexibilities in the 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 (certainly in more stressed situations). In the first half of 2025, EMEA loans included J.Crew-style blockers in roughly 76% of transactions, Chewy-style protections in roughly 78% and anti-Serta provisions in roughly 90%. 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.

Governing law – does it matter?

Whether LME blockers are included in the documentation does not depend on 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, and 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 German contract law is construed considering aspects beyond the strict wording of the agreement, such as the intent of the parties, differences in the interpretation of LME blockers may evolve across jurisdictions over time, although these are expected to be limited. The decisive factors will remain the flexibility under general covenants, amendment thresholds, collateral scope and the specific drafting of any 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.

The picture clouded in the first quarter but has since largely stabilised, though key risks (notably geopolitical developments and AI-related credit differentiation) continue to shape sentiment.

The recovery is expected to continue into the second half of 2026, with a healthy pipeline of refinancings and selective new-money financings. Fitch has raised its forecast for European leveraged-loan defaults in 2026 to between 4.0 and 4.5%, reflecting increased credit differentiation rather than broad market deterioration. Weaker or more cyclical credits, in particular in Germany against the backdrop of elevated corporate insolvencies, are likely to remain under pressure. LME activity and litigation can be expected to continue.