Institutional lending in 2024 was up overall compared to 2023, with refinancings as the primary driver of volume. Refinancing activity set records in the second and fourth quarters of 2024. On the other hand, M&A activity remained relatively muted in 2024 compared to the highs of 2021 due to a confluence of factors. The ongoing war in Ukraine and related sanctions, ongoing conflicts in the Middle East, continued asset valuation mismatches, increased regulatory scrutiny, as well as general economic and political uncertainty all played significant roles in contributing to the subdued M&A environment.

Although 2024 did not set records for M&A activity, the authors saw a resurgence in activity and optimism. Overall, 2024 greatly surpassed 2023 in terms of M&A financing activity, almost doubling 2023’s numbers. Some market participants are forecasting further growth in M&A activity for 2025. This optimism is partly attributed to the Federal Reserve’s rate cuts during three consecutive meetings in the final months of 2024. The stabilisation or further reduction of interest rates and inflation could potentially stimulate increased activity in 2025. There is also speculation that leveraged buyout activities may rise if policies favourable to dealmaking are enacted under the new US presidential administration. Additionally, many market participants expect an increase in M&A deal flow in 2025 as private equity firms seek opportunities to exit investments and deploy fresh capital.

The “large cap” broadly syndicated loan (BSL) market is typically arranged/underwritten by a commercial or investment bank or banks and the loan products being underwritten by such banks (more commonly, a “term loan B”) are typically sold or syndicated to many institutional investors such as mutual funds, structured finance vehicles (ie, CLOs), hedge funds and pension funds but the cash flow revolvers committed alongside such term loan Bs are typically held by commercial or investment banks that are arranging such debt. Pro rata facilities (revolving credit facilities paired with an amortising term loan (“term loan A”), with each lender holding a pro rata share of both facilities) and asset-based loans (ABLs) are typically provided by commercial and investment banks. Direct lending is typically provided by non-bank asset managers/institutional investors (some with multiple lending vehicles, business development companies, private debt funds, or MM CLOs and insurers).

While the number of institutions funding the broadly syndicated market has decreased in the past few years, CLO issuances dramatically increased in 2024 (USD155.9 billion per LFI) compared to 2023 (USD89 billion per LFI) setting a new record for issuances. This is believed to be one of the drivers of the 2024 refinancing flurry as supply could not keep up with demand since CLOs are one of the largest holders of loans in the syndicated loan market. The direct lending market has also continued to see more activity than the broadly syndicated market. Private credit lenders continue to expand their portfolios looking into varying opportunities such as refinancings of lower grade credits from the BSL market and trying to take market share of asset-based financings. While the pro rata market saw increased activity in 2022, that volume has since returned to a normal level in 2024 after the decrease in 2023.

The trend of a growing direct lending market is likely to continue, as direct lenders continue to provide structures and terms not as readily available in the BSL market (such as recurring revenue loans for companies with low or no EBITDA, delayed draw term loans, PIK (payment-in-kind) interest loans, etc). Notably, even large institutional and commercial banks are trying to enter the direct lending market, as many have created (or have plans to create) their own direct lending arms (either through their own balance sheets or through their asset management teams) and have partnered with existing players to increase their viability in the direct lending market.

The ongoing war in Ukraine and ongoing conflict in the Middle East have caused political and economic instability that have reduced lending activity in the global financial system, including M&A deals in the United States, as discussed in 1.1 Debt Finance Market Performance.

It remains too early to determine the impacts of the change in US presidential administration and what the related changes in US regulatory and tax policies will have on financial markets, and any further impact due to the ongoing conflicts in the Middle East and Ukraine. Such conflicts, if continued or prolonged, could affect the global supply and demand of certain resources, the geopolitical and security situation in the region (including the implementation of sanctions and military spending), as well as the flow of trade routes and investment throughout the world, including the US, and add to the general uncertainty in the world that affects markets.

The US market tends to see a broad spectrum of financings available, including but not limited to investment-grade debt financings, project financings, asset-based financings, leveraged financing transactions, securitisations, corporate bonds, municipal bonds, leasing transactions, bridge facilities, mezzanine facilities, convertible debt, liability management transactions, incremental financings and Debtor-In-Possession financings.

Leveraged finance transactions are financial transactions that involve the use of borrowed funds to finance the acquisition, recapitalisation, or expansion of a company or an asset. The term leveraged finance encompasses a range of debt instruments and markets, such as leveraged loans, high-yield bonds, mezzanine debt, and distressed debt. Leveraged finance transactions are often used by private equity firms, corporate borrowers, or financial sponsors to pursue strategic objectives. Leveraged finance transactions can also be used by distressed or restructuring companies to restructure their balance sheets, reduce their debt burden or avoid bankruptcy.

Leveraged finance transactions are typically structured as a combination of one or more of the following: senior secured bank loan facilities, senior secured or unsecured debt securities, subordinated or junior debt securities (less common recently), and equity or equity-linked instruments. The senior secured bank loan facilities usually consist of a revolving credit facility (which may be a cash flow or asset-based facility) provided alongside a term loan facility (typically a term loan B). The other debt provided in the capital stack often offers higher returns but lower priority in terms of payment and/or security than the senior secured bank loan facilities.

The most common forms of bank loan facilities in the US are as follows.

• Term loan A (TLA), which is an amortising loan typically with a maturity of five years (but may be as long as seven years) and a floating interest rate typically based on SOFR or another benchmark plus a margin. TLA are typically provided and held by commercial or investment banks.
• Term loan B (TLB) and unitranche loans, which are the most common form of term loans in the US market, are minimally amortising loans (generally 1% per year) with a bullet payment due at maturity which is typically seven years. Both usually have a floating interest rate typically based on SOFR or another benchmark plus a margin. Both are typically provided to non-investment grade borrowers and TLBs are typically arranged by commercial or investment banks and syndicated/sold to the institutional loan market while unitranche loans are provided directly by direct lending or credit funds and are typically not syndicated or more broadly distributed.
• Delayed draw term loan (DDTL), which is a commitment to provide a term loan that allows the borrower to draw down the loan amount in either single or multiple draws as a single fungible tranche or multiple tranches over a specified period (usually 24 months or less, however, syndicated TLB DDTLs will typically have a shorter commitment period), subject to certain conditions and fees. DDTLs typically have maturity and amortisation terms that are similar to any existing term loan facility and are usually provided to fund future acquisitions or to finance contingent or future expenses, such as earn-outs, escrows, or capital expenditures. Once drawn, DDTLs may not be reborrowed. DDTLs are most commonly provided by direct lenders, but may also be provided in the BSL market.
• Revolving credit facility (RCF), a senior loan facility that allows the borrower to draw down up to a certain committed limit and repay funds (without penalty) and such amounts may be reborrowed, usually for working capital or general corporate purposes. RCFs have no amortisation and maturities depend on the market and use, but may be 364 days to six years (most commonly five years when accompanied by a term loan in the leveraged finance market). RCF interest rates vary according to the borrower’s credit rating or debt profile based on leverage or otherwise. Historically, RCFs were typically provided and held by commercial or investment banks but today non-bank direct lenders have increasingly provided RCFs.

The main advantages and disadvantages of syndicated bank loans versus debt securities in the US are as follows.

• Traditionally, loan documents contained numerous protections for lenders that would not be in high-yield debt securities. As the market evolved and term loans became broadly syndicated, loan documentation terms in the BSL space converged with the terms found in high-yield debt securities. However, certain advantages and disadvantages remain as terms collide.
1. High-yield debt securities are typically fixed rate products versus loan facilities which are generally floating rate products.
2. High-yield debt securities generally have a longer life span (eight–ten years) than loan facilities.
3. High-yield debt securities must adhere to federal and state securities laws and regulations, whereas loans are not classified as “securities” and therefore are not subject to the same legal and regulatory requirements, including disclosure. Whether loans are “securities” was recently under dispute in the Kirschner case in 2023, where the United States Court of Appeals for the Second Circuit issued a decision affirming the position that syndicated bank loans are not “securities” subject to securities regulation. In 2024, the US Supreme Court denied the petition for certiorari, which leaves the Second Circuit’s decision in place. Since loans are not securities requiring the same level of disclosures, they may be executed more easily compared to high-yield debt securities. If a potential issuer does not have any other public securities, it will take significant time and resources to prepare all the SEC compliant disclosures. Many high-yield issuers have existing public securities which can reduce the need to re-create some disclosures and reduce execution risk.
4. Loans are more responsive and adaptable to changing market conditions than high yield debt securities, as they can be repriced or refinanced more easily and frequently and can benefit from lower interest rates if the borrower’s credit quality improves. High-yield debt securities frequently include stringent prepayment restrictions or costly call protection features. In contrast, syndicated bank loans typically offer less robust call protection, often as brief as six months, which is commonly termed “soft call” and generally pertains to repricings or refinancings of syndicated term loan facilities. Conversely, high-yield debt securities and many unitranche loans incorporate “hard call” protections, which prevent the issuer/borrower from “calling” or prepaying the securities/loans for a specified period of years without paying a premium.
5. Debt securities may also be convertible into other securities, such as equity.

The types of investors that typically participate in bank loan facilities and/or debt securities financings are as follows.

• Commercial and investment banks are financial institutions that provide banking services and lend money to businesses and individuals. Commercial and investment banks typically participate in TLA and RCF bank loan financings, as they seek to earn interest income and fees, and to maintain or establish relationships with corporate borrowers and sponsors. Commercial and investment banks may also participate in debt securities financings, either as underwriters, arrangers, or investors, depending on their risk appetite and regulatory constraints.
• Institutional investors are entities that invest large amounts of money on behalf of others, such as pension funds, insurance companies, mutual funds, hedge funds, private equity funds, or asset managers. Institutional investors typically participate in both syndicated bank loan and debt securities financings, depending on their investment objectives, strategies, and criteria.
• Direct lenders are typically non-bank financial institutions that provide debt financing to leveraged buyouts (LBOs), acquisitions, refinancings, recapitalisations, and growth capital needs of middle-market and lower-middle-market companies.

The main types of documentation used for debt finance transactions in the US are as follows.

• A commitment letter, which is a signed agreement between the borrower and lender(s), the lead arranger(s) or underwriter(s) of the financing, that specifies the committed amounts, facility types, transaction structure, pricing, fees, covenants, and other key terms of the financing, as well as the conditions precedent to closing and funding.
• A term sheet, which may be attached to the commitment letter, summarises the main terms and conditions of the financing, such as the amount, type, structure, pricing, fees, covenants, and other key terms of the financing, in a more concise and standardised format.
• A fee letter, which is a separate and confidential letter that details the fees and expenses payable by the borrower to the lender(s), lead arranger(s) or underwriter(s) and other lenders or agents involved in the financing, such as the arranger/underwriting fee, the original issue discount and the agency fee. The fee letter in a syndicated transaction may also include market flex provisions, which allow the lead arranger or underwriter to increase pricing, or change certain terms of the credit agreement, based on the market conditions and the demand for the debt to ensure a successful syndication of the TLB loans by the underwriting banks.
• Engagement letters and highly confident letters are similar to commitment letters in that they are signed agreements between the borrower and the lead arranger or underwriter, however, they do not provide a binding commitment on the part of the arranger or underwriter to arrange or underwrite the financing; they are not commitments to extend credit. Both will be signed before a proposed financing and include the proposed amounts, facility types, transaction structure, pricing, fees, covenants, and other key terms of the proposed financing, as well as the conditions precedent to closing and funding.
• Credit agreements/loan agreements are the main contract between the agents (if any), lenders and the borrower(s) that set out the terms and conditions of the bank loan facilities, such as the amount, interest rate, maturity date, repayment schedule, fees, covenants, events of default, remedies, and representations and warranties. Unlike a commitment letter, which is a commitment to lend, once a credit agreement is entered, typically funding has already happened simultaneously with closing or is expected to happen shortly after entry into such agreement.
• Indenture is the main contract between the issuer of debt securities and the trustee for the debt holders with terms and conditions similar to that of a credit agreement.
• Offering memorandum or prospectus is the main disclosure document provided to prospective investors in connection with debt securities. Similar to a term sheet but more detailed, it provides information on the issuer, the offering, material terms (including covenants and events of default) and risks.
• Security, collateral and pledge agreements, for secured debt, are contracts that grants the lender(s) or holder(s) a lien over the borrower’s or other obligors’ assets or property as collateral. Such agreement may specify the type, scope, and priority of the security interest, as well as the rights and obligations of the parties regarding the enforcement, maintenance, and release of the collateral. The security agreement may be part of the loan agreement or a separate document. Depending on the type of collateral contemplated, additional agreements may be needed for perfection.
• Guarantee is a contract that obliges a third party, such as a parent company, a subsidiary, affiliate or a co-borrower, to repay the loan or perform the obligations of the borrower, in case the borrower fails to do so. The guarantee is typically joint and several and may be full or partial, unconditional or conditional, and may cover the principal, interest, fees, or other liabilities of the loan. The contract will also typically require guarantors to waive certain common law and statutory defences. The guarantee may be part of the loan agreement or a separate document.
• Intercreditor agreement is a separate contract that governs the rights and obligations of multiple lenders or creditors who have lent money to the same borrower or have claims over the same collateral. Intercreditors are discussed in detail in 6. Intercreditor Issues.

The biggest difference in the types of lenders that will affect the terms of the loans will be if the loan is a syndicated bank loan or a direct lending facility. In a syndicated bank loan facility, a large diverse group of lenders purchase portions of the debt from the arranger(s) to become lenders under the agreement, whereas in direct lending facilities large asset managers directly provide the loans and typically hold onto the debt across their various investment funds. These differences will lead to differences in the terms of the actual loans.

Pricing and Fees

Syndicated bank loans typically have lower interest rates and fees than direct lender loans. Syndicated deals also have the option to flex their pricing higher if needed by the underwriting banks in case of changes in the demand for the debt in the market. Direct lending financings may have higher average interest rates and fees, reflecting the fact that direct lenders may be willing to lend to riskier companies (at a higher interest rate). Commercial and investment banks may pass on arranging financing for such riskier companies out of concern that there will not be enough interest from the market to fully syndicate the loans. Syndicated bank loans also need to be rated by third-party credit ratings agencies and if the applicable credit ratings agencies do not have a favourable outlook on the borrower, then that could also suppress demand for the loans in the syndicated loan market.

Structure

Many syndicated bank loan facilities utilise EBITDA-based financial metrics as a way to measure the ability of a borrower to take on leverage, access certain other negative covenants and to determine compliance with the financial covenant (if there is one). Alternatively, direct lending facilities can be structured to use other metrics (eg, recurring revenue-based financial metrics) to measure the health of a borrower and its access to certain negative covenants. However, commercial and investment banks are working with investors to get into the market for recurring revenue-based facilities as well. Non-bank direct lenders may also offer higher leverage and more flexible terms in part as they are subject to less regulatory scrutiny.

Terms

Syndicated bank loan facilities can attempt to “clear the market” (ie, sell down the entire term loan to lenders in the market) with aggressive terms and then scale them back via “flex” mechanics if the market for such terms does not exist. This flexible model allows for the potential for syndicated bank loan facilities to include aggressive terms, to the extent the market is willing to accept them. Direct lenders may provide better speed and certainty of execution, as they do not require the time necessary to complete a syndication or the “flex” rights required by BSL underwriting banks. Direct lending facilities are directly negotiated between the lenders and the borrower(s), with the lenders typically intending to hold onto the debt for the life of the loan. This “originate to hold” model will often times result in direct lenders demanding more robust lender protections in the terms of the credit agreement.

There are many US-specific terms that need to be included in cross-border loan documentation (i) where there is a US obligor, (ii) when any obligor has a presence or assets in the US, and/or (iii) under certain other circumstances when there are US lenders in the syndicate regardless of the governing law of the actual credit agreement. Some of these terms are listed and described below.

• US tax withholding and reporting requirements – depending on the status and location of the borrower, the lender, and any guarantors or collateral providers, the loan documents may need to address the potential withholding and reporting obligations under US federal, state, and local tax laws, as well as any applicable tax treaties or exemptions.
• US sanctions and anti-money laundering compliance – the loan documents may also need to include representations, warranties, covenants, and events of default related to the compliance of the parties and the transaction with US sanctions and anti-money laundering laws and regulations, such as those administered by the Office of Foreign Assets Control (OFAC), the Financial Crimes Enforcement Network (FinCEN), and the Department of Justice (DOJ). The loan documents may require the parties to confirm that they are not subject to or involved in any sanctions or prohibited activities, to disclose any relevant ownership or control information, to conduct due diligence and screening on their counterparties and transactions, to report any suspicious or unlawful activity, and to co-operate with any investigations or inquiries by the authorities.
• US bankruptcy and insolvency considerations – the loan documents may also need to address the potential impact of US bankruptcy and insolvency laws and proceedings on the rights and remedies of the parties, especially if the borrower, or any guarantors, collateral providers or other obligors have assets, operations, or creditors in the US. US bankruptcy and insolvency considerations are discussed in greater detail in 8. Lenders’ Rights in Insolvency.
• Automatic acceleration – the loan documents should explicitly state that if an event of default consisting of a US obligor bankruptcy or insolvency occurs or any obligor files under the US federal Bankruptcy Code (the “Bankruptcy Code”), all commitments under the documents are immediately cancelled and all amounts outstanding are immediately due and payable to preserve the secured creditors’ claim for the full amounts under the loan documents. Without an automatic acceleration provision, in the context of a US bankruptcy proceeding, lender’s claims may be impacted due to the application of the automatic stay under the Bankruptcy Code.
• ERISA – ERISA provisions are needed in US credit agreements to ensure that the borrower and its affiliates comply with ERISA and do not incur any liabilities or penalties that could adversely affect their financial condition, ability to repay the loan, or the lender’s security interest in the borrower’s assets.
• Margin regulations and the investment company – these provisions are needed to protect the lenders from the risk of violating strict regulations and restrictions on the activities, capital structure, governance, and disclosure of certain companies. These provisions are discussed in detail in 9.1 Tax Considerations. There are stringent penalties (including possible rescission) for non-compliance.
• Waiver of trial by jury – these provisions waive the right of the parties to a jury trial in any litigation or dispute arising out of or relating to the credit agreement, and consent to a bench trial or arbitration instead, to avoid the costs, delays, and uncertainties of jury trials that is protected by law if not waived.

Lenders generally seek to obtain a security interest in all or substantially all of the assets of the borrower and the guarantors, to the extent legally and practically feasible. This may include tangible assets (real estate, equipment, inventory, and accounts receivable), as well as intangible assets (intellectual property, contracts, securities, bank accounts, and general intangibles). However, some assets may be excluded or limited from the security package for various reasons, such as legal restrictions, contractual prohibitions, tax implications, cost-benefit analysis, or administrative burdens. Some types of assets that are often excluded or limited as collateral in large cap loans are as follows.

• Equity interests in foreign subsidiaries, which may trigger adverse US tax consequences if pledged in excess of 65% of the voting stock.
• Assets of foreign subsidiaries (depending on where the value is within the credit group structure) due to costs and administrative burdens to create security in non-US jurisdictions.
• Equity interests in regulated entities, such as banks, insurance companies, or utilities, which may require prior approval or consent from the relevant regulators or authorities.
• Real estate located in certain jurisdictions, which may impose significant recording taxes or fees on the creation or enforcement of mortgages or deeds of trust.
• Leasehold interests in real estate, which may require the consent of the landlord or the satisfaction of certain conditions under the lease agreement.
• Commercial tort claims, which may require the specific identification and description of the claim and the parties involved, and the consent of the adverse party or the court.

Lenders will obtain a security interest in the assets of the borrower and the guarantors by entering into one or more pledge and security agreements that grant the lenders, or their agents, the right to enforce the security interest and sell or dispose of the collateral upon the occurrence of an event of default under the loan and security documents. The most common and comprehensive type of security interest in the United States is a security interest governed by the Uniform Commercial Code (UCC), as it covers most types of personal property (ie, movable or intangible assets). The UCC is a set of model laws adopted, with some variations, by all 50 states and the District of Columbia. Given the widespread adoption of the UCC and relatively consistent provisions therein, it has become common for lenders to demand “all assets” liens to secure the obligations of their loans. There will be negotiated exceptions to what constitutes “all assets”, but the key point is that under the UCC it is not very difficult for lenders to get a lien on substantially all the assets of the borrower or obligors, especially when compared to other countries. A security interest is created by a pledge and/or security agreement that describes the collateral and the secured obligations, the description of the collateral in the security agreement cannot be super generic and must satisfy other requirements of the UCC. The pledge and/or security agreement is signed by the borrower or the guarantor(s) as the grantor(s)/pledgor(s). A security interest is typically perfected by filing a UCC-1 financing statement with the secretary of state or other designated office in the state where the grantor is located (for most types of collateral) or where the collateral is located (for some other types of specific collateral). A security interest may also be perfected under the UCC by other methods, such as possession or control, for certain types of collateral, such as certificated securities, instruments, or deposit accounts. A new UCC provision relating to security interests in certain digital assets is currently being adopted and enacted by the states. This provision introduces the concept of a “controllable electronic record” and requires perfection by control for such assets. However, it has not yet become law in all US states.

Agent and trust concepts are important for debt financing transactions involving multiple lenders/holders, as they allow one party to act on behalf of the others and hold the security interests or collateral for their benefit. This can simplify the administration and enforcement of the debt documents. In the US, it is common to use an agent and/or trustee in such debt financing transactions. Often, a bank or other financial institution acts as an agent to manage the loan and collateral on behalf of the lenders. This includes handling payments, maintaining records, communicating with the borrower, and holding and managing the collateral and any related processes. Other than some agency-related provisions in the loan and security documents, no additional structuring is necessary for there to be an agent and/or trustee for lenders on a US transaction.

Parallel debt is not a required feature of domestic debt financing transactions in the United States, but can be used in certain cross-border contexts; it is a mechanism that creates a separate and independent debt obligation from the borrower and the obligors to the agent or trustee, equal to the aggregate amount owed to the lenders. Parallel debt can be used in cross-border transactions where the applicable jurisdiction does not recognise trusts or where the local law does not recognise or permit the agent or trustee to act on behalf of the lenders.

Restrictions on upstream security are limitations on the ability of a subsidiary to provide security or collateral for the debt obligations of its parent or affiliates. These restrictions may arise from the subsidiary’s organisational documents, contractual covenants, fiduciary duties, or statutory or common law rules. For example, fraudulent transfer laws discussed in further detail below may invalidate or challenge upstream security. Therefore, debt financing transactions involving upstream security may require careful structuring, valuation, and disclosure to avoid potential legal risks or liabilities.

Financial assistance and corporate benefit – generally, in the US there are no federal financial assistance or corporate benefit tests that must be satisfied before guarantees and security can be granted that are similar to those under the laws of certain European countries. However, under US law a transfer or obligation could be avoided if it constitutes a fraudulent transfer. A fraudulent transfer is a conveyance that has the effect of improperly placing assets beyond the reach of creditors, whether due to actual wrongful intent or because the transferor has received inadequate value in return. In certain cases, obligations may also constitute, and be avoided as, fraudulent transfers. Fraudulent transfer laws exist under both Section 548 of the Bankruptcy Code and the laws of many states, which may apply in bankruptcy proceedings, if applicable, by virtue of the provisions of Section 544(b) of the Bankruptcy Code. Under the Bankruptcy Code, the look-back period is two years from the petition dates, while under state law, the applicable statute of limitations for a fraudulent transfer claim is generally either four or six years, depending on the state.

Guarantee fees are not common in US leveraged finance transactions.

Intercreditor arrangements are agreements among different classes or groups of creditors that have claims on the same borrower or collateral, which establish the relative rights, priorities, and remedies of each creditor in case of default, bankruptcy, or enforcement. Intercreditor arrangements play an especially important role in complex financing transactions that involve multiple layers of debt. The most common form of intercreditor agreement is between senior lien creditors and junior lien creditors (or, in each case, an agent or trustee acting on behalf of such group of creditors), although the intercreditor required will depend on the debtor’s capital structure. This is primarily because secured debt obligations are most often “senior” debt obligations (ie, not payment subordinated obligations).

Intercreditor arrangements can help facilitate debt financings in various ways such as the following.

• Documenting the respective lien priorities when one lender or group of lenders (the second lien lenders) agrees that their lien on property that is shared collateral with the other lender or group of lenders (the first lien lenders) is subordinated to the lien of the first lien lenders.
• In rare instances in US financings, the intercreditor agreement may also include payment subordination provisions, where the subordinated lender or lenders agree after an event of default to defer all or some forms of payment until the senior lender or lenders have been fully repaid. When the source of payment is the proceeds from a sale of common collateral, the effect of the lien subordination provisions is that the second lien loan is junior in right of payment to the first lien loan – but this is intended to be only with respect to proceeds of collateral.
• Including waterfall provisions which set out the order of distribution of the proceeds (eg, amounts received in connection with an enforcement action, of common collateral between the first lien and second lien lenders).
• Documenting which party has the right to control the negotiations when enforcement scenarios or possible remedies under the loan documents are relevant via the standstill provisions. Standstill provisions include a period during which certain lenders agree to refrain from exercising their subordinated interests (lien or payment). This gives the senior lenders exclusive right to control the use and enforcement of collateral during this period.
• Enabling creditors to negotiate and agree on intercreditor issues in advance.

Contractual subordination provides for contractually agreed priority among the various classes of lenders based on the terms and conditions of the intercreditor agreements that the various classes of lenders enter into and negotiate the exact terms of the subordination. US bankruptcy courts will generally honour a properly executed subordination agreement (ie, intercreditor agreements).

Legal subordination is based on the statutory or judicial rules that govern the bankruptcy or insolvency proceedings of the debtor.

Structural subordination is another way the priority of claims is determined in a bankruptcy or default. Structural subordination refers to the situation where a subsidiary also has its own secured obligations separate from the obligations of a parent obligor. In a bankruptcy or default scenario, the direct secured creditors of the subsidiary have a more senior claim against the collateral of that subsidiary, vis-à-vis the secured creditors of the parent even if the secured creditors of the parent had a perfected security interest first.

The process for enforcement of security will vary depending on the collateral, terms of the security agreement, governing law, nature and extent of the default, availability and cost of judicial remedies and strategies and preferences of the secured parties and the debtor. One possible general outline of some common steps and considerations is as follows.

• Notice of default and acceleration – the secured parties, usually acting through an agent or trustee, would notify the debtor of the occurrence of an event of default under the loan agreement and the security agreement, and demand payment of the outstanding debt, interest, fees, and expenses. The secured parties may also declare the debt to be immediately due and payable (acceleration), unless the default is cured within a specified grace period or waived by the required lenders.
• Negotiation and forbearance – the secured parties and the debtor may attempt to negotiate a restructuring, refinancing, or workout of the debt, or agree to a temporary suspension or modification of the enforcement rights of the secured parties (forbearance), in exchange for certain concessions or conditions from the debtor, such as additional collateral, higher interest rates, or operational or financial covenants. The negotiation and forbearance process may be formal or informal, and may involve the participation of other creditors, equity holders, or third parties.
• Enforcement of security – if the negotiation and forbearance process fails, or is not pursued, the secured parties may proceed to enforce their security interests in the collateral, through judicial or non-judicial means, depending on the type and location of the collateral, the terms of the security agreement, and the governing law.
• Bankruptcy – the debtor may become subject to a US bankruptcy proceeding under Chapter 11 or Chapter 7 of the Bankruptcy Code, either voluntarily (ie, it files a petition itself) or involuntarily (ie, qualifying creditors file a petition against it). Among other things, such a proceeding provides an environment for the debtor to reorganise or liquidate its business and assets, protected by the provisions of the Bankruptcy Code and under the supervision of a bankruptcy court. Upon the filing of a voluntary or involuntary petition, an automatic stay takes effect to broadly enjoin actions that may be taken against the debtor or its property, including any enforcement actions by secured parties or other creditors. The automatic stay purports to have worldwide effect, which in practice has required all creditors to proceed under the Bankruptcy Code rules overseen by a US bankruptcy judge.

The party seeking to enforce a foreign judgment must first determine whether the jurisdiction where the judgment was issued has a treaty or agreement with the jurisdiction where the judgment is to be enforced, or whether the judgment falls under a multilateral convention or instrument. Such treaties, agreements, or conventions may provide for the automatic recognition or simplified enforcement of foreign judgments.

If there is no applicable treaty, agreement, or convention, or if the foreign judgment does not meet the requirements for recognition or enforcement under such instruments, the party seeking to enforce the foreign judgment must initiate a separate legal action in the jurisdiction where the judgment is to be enforced, and prove that the foreign judgment meets the criteria for recognition and enforcement under the domestic law of that jurisdiction.

The party seeking to enforce the foreign judgment may also have to comply with certain procedural requirements, such as serving the judgment debtor with notice of the enforcement action, obtaining a domestic court order or decree recognising or registering the foreign judgment among others.

Once the foreign judgment is recognised or registered by the domestic court, the party seeking to enforce the foreign judgment can proceed to execute the judgment against the assets or income of the judgment debtor, subject to any defences, exemptions, or limitations that the judgment debtor may raise or invoke under the domestic law of the enforcing jurisdiction.

There are various rescue and reorganisation procedures (other than insolvency proceedings) available in the United States that may affect lenders’ rights to enforce a loan, guarantee or security. Some common ones are the following.

• Out-of-court workouts are voluntary agreements between the borrower and some or all of its creditors to restructure the debt, reduce the interest rate, extend the maturity, exchange debt for equity, or otherwise modify the contractual obligations, without involving a court or formal insolvency proceeding. Out-of-court workouts may benefit both parties by avoiding the costs, delays and uncertainties of litigation or bankruptcy, preserving the value of the business and maintaining the relationship between the borrower and the creditors. However, they may also pose some challenges, such as the need for unanimous or near-unanimous consent of the creditors, risk of holdout or dissenting creditors, potential for fraudulent transfer or preference claims and lack of a binding effect on non-participating creditors or third parties. Certain liability management transactions can fall under the category of out-of-court workouts if the reason for entry into such transaction was to avoid or delay bankruptcy.
• Forbearance agreements are contracts between the borrower and one or more of its creditors, usually secured lenders, whereby the creditors agree to temporarily refrain from exercising their rights and remedies against the borrower, such as accelerating the debt, foreclosing on the collateral or filing an involuntary bankruptcy petition, in exchange for certain concessions or conditions from the borrower, such as providing additional collateral or guarantees, paying interest or fees, curing defaults or implementing operational or financial improvements. Forbearance agreements may provide the borrower with some breathing room to negotiate a longer-term solution with its creditors or to pursue a sale or refinancing of its assets or business. However, they may also entail some risks, such as the possibility of defaulting on the forbearance terms, losing the protection of the automatic stay or other bankruptcy benefits or facing increased leverage or demands from the forbearing creditors.
• Prepackaged or pre-negotiated bankruptcy plans are plans of reorganisation or liquidation that are negotiated and approved by the borrower and some or all of its creditors before the borrower files for bankruptcy under Chapter 11 of the Bankruptcy Code, or shortly thereafter. Such plans may offer some advantages over conventional bankruptcy proceedings, such as reducing the time, cost and uncertainty of the process, preserving the value of the business and enhancing the chances of confirmation and feasibility of the plan. However, they may also involve some challenges, such as the need for sufficient creditor support, risk of non-compliance with the bankruptcy rules and requirements, potential for objections or litigation from other creditors or parties in interest and lack of a discharge or release for the borrower or the creditors.

The main insolvency regime is the Bankruptcy Code, which provides for different types of proceedings depending on the debtor’s situation and objectives. The principal types of Bankruptcy Code proceedings for corporate obligors are Chapter 7 (which provide for the liquidation of the debtor) and Chapter 11 (which, although commonly used for reorganisation, can also be used to achieve a more orderly liquidation than Chapter 7). In either case, the Bankruptcy Code imposes an automatic stay upon the filing of the bankruptcy petition; a broad injunction with purported worldwide effect which generally prevents lenders and other creditors from taking any action to enforce their claims or exercise their remedies against the debtor or its property, unless they obtain relief from the stay from the bankruptcy court.

Lenders’ rights to enforce a loan, guarantee or security in insolvency depend largely on the nature and validity of their claims and the priority and perfection of their liens. Generally, secured creditors are entitled to receive the value of their collateral, although the form of that value under a Chapter 11 plan can vary, and have a right to receive adequate protection against the diminution of their collateral value during the bankruptcy case. Unsecured creditors have a right to receive at least as much as they would in a liquidation under Chapter 7, and usually, to vote on any plan that may impair their claims. In any event, creditors may face significant delays, discounts and uncertainties in recovering their claims in bankruptcy, and may be subject to cramdown or subordination in some cases.

Guarantees are generally enforceable in bankruptcy, subject to the automatic stay and any defences or limitations that the guarantor may have under applicable law or contract.

Claw-Back Risks

Lenders may face claw-back risks in insolvency if they have received payments or transfers from the debtor or a guarantor that are deemed to be preferential, fraudulent or otherwise avoidable under the Bankruptcy Code or applicable state law. Generally, a preference is a transfer made by the debtor to or for the benefit of a creditor, on account of an antecedent debt, within 90 days before the bankruptcy filing (or one year for insiders), that enables the creditor to receive more than it would in a Chapter 7 liquidation. A fraudulent transfer is a transfer made, or obligation incurred, by the debtor or a guarantor with actual intent to hinder, delay or defraud creditors, or for less than reasonably equivalent value, while the debtor or guarantor was insolvent, undercapitalised or unable to pay its debts as they became due. The Bankruptcy Code provides for a two-year look-back period for fraudulent transfers, but state law may extend the period to four years or longer.

If a payment or transfer is found to be avoidable, the lender may be required to return the amount or value received to the debtor’s estate or the trustee and may lose any lien or security interest that was granted or perfected in connection with the payment or transfer. The lender may have certain defences or exceptions to avoidability, such as the ordinary course of business defence, the contemporaneous exchange for new value defence, or the subsequent new value defence for preferences, or the good faith and reasonably equivalent value defence for fraudulent transfers.

Equitable Subordination

Equitable subordination is a doctrine that allows the bankruptcy court to subordinate the claim or lien of a creditor to the claims or liens of other creditors, based on the equitable principles and the facts and circumstances of the case and is typically invoked against creditors who have engaged in some form of misconduct, such as fraud, breach of fiduciary duty, insider dealing, unfair advantage, or control or domination of the debtor. The burden of proof is on the party seeking subordination.

Order of Payment

The order of payment in insolvency generally follows the principle of absolute priority; creditors with higher priority claims or liens are paid in full before creditors with lower priority claims or liens receive any distribution. The Bankruptcy Code establishes a hierarchy of claims and liens, which may vary depending on the type of proceeding and the terms of the reorganisation plan. Generally, the following order of priority is observed.

• Secured creditors – creditors who have a lien on the debtor’s property or assets, such as a mortgage or a pledge. They have the right to foreclose or repossess the property or assets if the debtor fails to pay them, or to receive the proceeds from the sale of the property or assets in a bankruptcy liquidation. Secured creditors are usually paid first, unless their liens are avoided or invalidated by the bankruptcy court for some reason.
• Administrative creditors – creditors who provide goods or services to the debtor after the filing of the bankruptcy petition, such as lawyers, accountants, or utility providers. They have the right to be paid in full from the debtor’s estate or income, as they are essential for the continuation or reorganisation of the debtor’s business.
• Priority unsecured creditors – creditors who have unsecured claims that are given special priority by the Bankruptcy Code. They have the right to be paid in full from the debtor’s estate or income, before the general unsecured creditors, as they are deemed to have a social or public interest.
• General unsecured creditors – creditors who have unsecured claims that are not given any priority by the Bankruptcy Code. Such creditors are entitled to payment after senior claims are paid in full.
• Shareholders and other interest-holders of the debtor – holders of the most risky and speculative investments (equity), have the right to share pro rata in the remaining assets or income of the debtor, after creditors are paid. Shareholders or interest-holders often receive nothing in a bankruptcy case.

Registration Requirement

Generally, if US debt obligations are not in registered form, the borrower and lenders can face adverse tax consequences, including excise tax, denial of interest deductibility and unavailability of the “portfolio interest” exemption from interest withholding, discussed below. As such, credit agreements with US borrowers generally require the borrower or agent to maintain a register of all lenders, where interests in the loan can only be transferred if such transfer is reflected in the register. Credit agreements also often require lenders to maintain a register of participations.

Withholding Tax

Interest payments to US lenders are generally not subject to withholding if the lender provides an IRS Form W-9 and is not subject to backup withholding. Interest payments from US borrowers to non-US lenders are generally subject to 30% US federal withholding tax unless an applicable exemption applies, or the amount is reduced by a double taxation treaty between the US and the lender’s jurisdiction (a Tax Treaty). Interest payments to non-US lenders are not subject to withholding if the “portfolio interest” exemption applies. To be portfolio interest eligible, the debt obligation must be in registered form, the lender cannot be a bank lending pursuant to a loan agreement interested in the ordinary course of its trade or business, the lender cannot be a 10% shareholder of the borrower (including through attribution), the lender cannot be a “controlled foreign corporation” that is related to the borrower, and the interest cannot be “contingent interest” (which generally refers to interest that is contingent based on the financial performance or similar metrics of the borrower). As such, non-bank lenders are often able to use the portfolio interest exemption. Bank lenders typically need to use an applicable Tax Treaty.

Qualifying Lender Provisions

US loans commonly use Loan Syndications and Trading Association (LSTA) style credit agreements, which typically do not have a “qualifying lender” provision. Instead, they include an “excluded taxes” mechanism from a general tax gross-up obligation. Generally, withholding taxes imposed pursuant to law in effect on which a lender joins a loan agreement are excluded taxes, and thus not eligible for gross-up protection, but lenders do receive gross-up protection for changes in law after they have joined the loan agreement. Credit agreements also include other customary carve-outs to gross-up protection, including for net income taxes (and certain similar taxes) imposed by the lender’s jurisdiction, failure to comply with tax forms requirements, and FATCA withholding.

Controlled Foreign Corporation Limitations

In certain circumstances, if non-US subsidiaries of a US borrower provide a guarantee to the US borrower, or the US borrower pledges assets of the non-US subsidiary or voting stock of the non-US subsidiary in excess of 65% of the total voting stock of such non-US subsidiary, this can create adverse tax consequences to the US borrower. As such, credit agreements sometimes limit guarantees from non-US subsidiaries of US borrowers and include carve-outs on pledges of the stock and assets of such non-US subsidiaries to prevent the potential adverse tax consequences. The Tax Cuts and Jobs Act of 2017, and subsequent regulations, have limited the circumstances in which these adverse tax consequences are triggered, which may have an impact on a US borrower’s ability to provide such credit support.

Fungible Incrementals

For US federal income tax purposes, if the “issue price” of a debt instrument is below its principal amount by more than a de minimis threshold, it is considered issued with “original issue discount” (OID) and the lenders must accrue the OID ratably over the life of the instrument. Two loans cannot trade fungibly if they have different amounts of OID. Special rules govern when an incremental loan is deemed to have the same amount of OID as an existing loan, thus permitting the incremental and the existing loan to trade fungibly.

Stamp Taxes

There is no US federal stamp tax on loans.

State and Local Tax Considerations

US state and local tax considerations may also apply.

Loans or Securities

Commercial debt finance is loosely divided between debt instruments treated as “loans” and those, such as bonds, that are treated as “securities”. Whether a promissory note represents an interest in a “loan” or a “security” is important to the regulation of how such interests are arranged and distributed and to the applicability of a reduced standard of fraud under the US securities laws.

Regulation of Bonds or Other Securities

Any offering of bonds or other debt “securities” in the US is subject to compliance with the Securities Act of 1933 (and applicable state blue sky laws), and any person engaged to offer the securities on behalf of the issuer (or an affiliate of the issuer) is, unless eligible for an exemption, subject to registration as a broker-dealer under Section 15(a) of the Exchange Act of 1934.

Regulation of Loans

Origination of commercial loans that are not securities is not subject to extensive regulation under US federal law, but is regulated by many states. All the states permit state-chartered banks, national banks or life insurance companies with a licensed presence in the state to originate commercial loans to businesses located in the state; and some states permit any bank organised or licensed under US law to originate commercial loans to businesses in the state. Some states (eg, California) require non-bank lenders to obtain a licence to originate commercial loans therein. Other states (eg, New York) permit non-bank lenders to make loans above a certain size without being licensed but may require non-bank lenders to make certain prescribed disclosures to commercial borrowers.

In many cases, a business located in a particular state may, on a reverse solicitation basis, deal with a lender in another state or offshore without the transaction being subject to regulation by the state in which the business is located. In contrast, solicitation by out-of-state lenders of prospective borrowers in a state may subject such lenders to regulation by the state in which the borrower’s business operates.

State Usury Laws

States regulate the rate of interest that may lawfully be paid on loans. Such limits in many cases prohibit or limit compounding of interest and are often subject to exceptions and limitations.

Investment Company Act

Commercial loan notes are “securities” for purposes of the Investment Company Act of 1940 (“1940 Act”), which defines what constitutes an “investment company” based on tests that focus on an issuer’s securities activities. In any transaction in which an issuer or borrower issues notes or securities (including loan notes or a guarantee of the obligations of others) to a US person in the US, it is customary to confirm that none of the issuer, any borrower or guarantor (nor any of their subsidiaries) are investment companies within the meaning of the 1940 Act. Any company that is required to be, and is not, registered as an investment company faces serious consequences, as do parties that deal with them. Under Section 47 of the 1940 Act, any contract made or whose performance involves a violation of the 1940 Act is unenforceable by either party (or by a non-party in certain situations), unless a court finds that enforcement would produce a more equitable result than non-enforcement and would not be inconsistent with the purposes of the 1940 Act.

Margin Regulations

Regulation U promulgated by the Board of Governors of the Federal Reserve System, applies to lenders that are banks and non-banks (other than broker-dealers) and provides that no lender, with limited exceptions, may extend any “purpose credit,” secured directly or indirectly by “margin stock,” in an amount that exceeds the maximum loan value of collateral securing the credit. “Purpose credit” is any credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock, and “margin stock” is defined broadly to include equity securities traded on a US exchange or OTC securities subject to an NMS designation plan, securities convertible into margin stock and securities issued by certain investment companies. Syndicated and direct lender credit agreements often contain representations from the borrower related to Regulation U, including a representation that the proceeds of the credit will not be used to purchase or carry margin stock.

AML/CFT Considerations

FinCEN addresses money laundering and other forms of illicit finance, including terrorist financing. Banks and broker-dealers are among the lenders subject to FinCEN’s “know your customer” rules, which require all federally regulated financial institutions to perform customer due diligence to identify and verify those with significant control and significant beneficial ownership of their “legal entity customers” and, in appropriate cases, to submit “suspicious activity reports” to law enforcement authorities. Direct lenders also implement similar “know your customer” policies and procedures to address concerns over money laundering and other forms of illicit finance.

Liability Management Transactions or Exercises

This is the general name used to describe ways borrowers optimise their capital structure and raise liquidity from all or a subset of their existing lenders or new lenders by issuing new debt that favours one group of lenders in certain ways or gives a subset of existing lenders, or new lenders, a direct claim to more valuable assets than the existing lenders. The two most common methods for structuring liability management transactions are “Drop-Down Transactions” and “Uptiering Transactions”. Drop-Down Transactions generally involve the transferring of assets that constitute part of the secured lenders’ collateral from entities that are guarantors to those that are not. These transferred assets are then used as collateral for securing new debt. Uptiering Transactions generally involve a majority group of the existing lenders providing a new priming tranche of secured debt that is senior in payment or lien priority to the existing debt of the lenders via amendments to the terms of the existing agreements to permit such debt. Recently, many transactions have included all or almost all existing lender participation with varying levels of economics and seniority in new debt tranches. Lenders that may not have participated in prior transactions are joining uptiering transactions to not be left behind in a stub piece of debt with the lowest priority and documentary protection.

Dual-Track Financings

Another trend that continued in 2024 is private equity sponsors running dual-track processes to put together financings for bids in connection with acquisitions. In practice, this means private equity sponsors are negotiating with a group of investment and commercial banks as to who will be the lead underwriter and arranger on a syndicated loan facility to finance an acquisition, and at the same time negotiating with a group of direct lenders as to who will be the lead left arranger or lender on a direct lending facility to finance the same acquisition. This dual-track structure allows the private equity sponsor to explore which option (syndicated versus direct lending) is willing to provide the most favourable terms, and even quickly pivot from one option to another as market conditions change.