The Latest in US Leveraged Finance

New York City is the financial capital of the United States and the world’s premier hub for global financial transactions. Given this, New York remains the key US market for borrowers and lenders seeking leveraged loans and investments, and the quality and volume of deals undertaken here typically set the market for the rest of the US. This article provides a high-level overview of the general macroeconomic conditions and related events that helped to shape the New York financing markets and, in turn, leveraged and other financing activity and structures in the US over the last 15 months, largely with a focus on the private equity sponsor perspective.

Macroeconomic conditions in 2024

2024 saw a number of macroeconomic factors affecting financing markets. On one hand, 2024 saw a continuing stabilisation of the US inflation rate and an easing of interest rates, which contributed to positive market sentiment. The US Federal Reserve Board made three successive rate cuts in the latter part of 2024, cutting rates by 50bps in September 2024, 25bps in November 2024 and a further 25bps in December 2024. The US Bureau of Labor Statistics reported the monthly Consumer Price Index hovering between 2%-3% throughout 2024, still meaningfully higher than the US Fed’s target rate of 2%, but a far cry from the highs of 7%-9% the US economy saw in the peak in 2022.

On the other hand, 2024 was a year of political change, both in the USA and globally. Nearly 50% of the world’s population went to the polls in 2024, with important national elections in the United States, the United Kingdom, France, India and Japan, among a number of other countries. Political uncertainty around the outcome of elections, and the impact of policy change from victories by non-incumbent parties, gave cause for pause, particularly in the M&A markets. This uncertainty continues into 2025, as market participants take a wait-and-see approach in light of new tariff and trade policies globally, as well as a protectionist regulatory environment potentially less friendly to foreign direct investment.

Debt market conditions in 2024

After a cautious and slow reopening of the debt financing markets in 2023, the markets roared back to life for a record year in 2024. According to LCD Pitchbook, 2024 saw a record-setting USD1.4 trillion of overall activity in the new-issue market, which was 60% higher than 2021 and 41% higher than the prior peak in 2017. The story of the 2024 debt financing markets is one of investors bursting with dry powder. This was true on every side of the equation – CLOs and other syndicated loan and bond investors showed exceptionally hot demand for new debt investments, and private lenders were sitting on undeployed capital. The result was an exceptionally hot financing market where demand for new issuance far outstripped supply. In addition, private equity sponsors continued to be under increasing pressure from LPs to deploy capital after 18-24 months of a sluggish M&A market, but with still limited opportunities to make new investments at attractive valuations.

The result of this excess demand and a slow M&A market was a slew of opportunistic repricing and maturity extension transactions. LCD Pitchbook estimates that of the USD1.4 trillion of total activity in 2024, some USD900 billion were repricing or maturity extension transactions – roughly 60% of loans outstanding at the start of 2024 were repriced during the year. In addition to repricing and maturity extensions, other types of opportunistic transactions such as dividend recaps were a feature of the market in 2024. USD81.3 billion of new issuance activity was raised for dividend recaps, the second highest year on record (after 2021). By comparison, LBO-related new issuance for 2024 stood at USD60.3 billion – an increase over 2023 but lower than every other year since 2015. The valuation gap between buyers and sellers remained a theme in the M&A market throughout 2024, even as the lower spreads on offer on acquisition facilities provided buyers with more attractive potential capital structures. This slow M&A market in part explains the prevalence of dividend recap transactions last year, as private equity sponsors looked for opportunities to return capital to LPs while exits were delayed.

Leading the increase in demand for leveraged loan products was the return of the broadly syndicated loan (BSL) market and high-yield bond market. Largely closed for business throughout most of 2022 and the first half of 2023, last year saw both markets roaring back. High-yield bond issuance in 2024 stood at USD281.6 billion, greater than 2023 (USD176.1 billion) and 2022 (USD102.3 billion) combined. Borrowers rushed back to the BSL and HY bond markets in search of lower pricing, as excess demand allowed arrangers to offer lower spreads. Not to be outdone, private credit lenders pushed to maintain the market share they won in 2022-23 when they were the only players in town providing new debt financing, and increasingly looked to decrease pricing and/or offer additional flexibility through delayed-draw facilities or paid-in-kind interest rate in order to retain their share of sub-investment grade deals and limit the number of existing private credit financings that may otherwise look to refinance in the BSL market at attractive pricing.

Despite the return of the BSL and HY bond markets to almost pre-2022 levels, the higher leverage capital structures of that period have not fully returned. 2019 to early 2022 saw a slew of first lien/second lien syndicated deals make their way through the BSL market, as well as bank/bond deals comprising a tranche of senior secured term loans supplemented by an issuance of unsecured bonds. The market would often support adding an extra turn of leverage in the form of junior capital (second lien term loans or unsecured bonds) behind the senior secured debt, often with further upstairs leverage in the form of preferred equity – which on average led to higher overall leverage on these deals. 2024 did not see a return to these senior/junior/preferred structures. More common structures in the BSL and HY bond markets were a mix of (i) senior secured bank debt; (ii) pari senior secured term loans and bonds; and (iii) where relevant to the business, pari senior secured term loans, bonds and an asset-based loan facility. The pari senior capital structures of 2024 have resulted in lower average leverage than pre-2022 deals. LCD Pitchbook reports that the average debt/EBITDA ratio of all primary debt market transactions in 2024 was 4.7x, down from the peak of 5.3x in 2021.

The use of net asset value (NAV) facilities by private equity sponsors rose as a key trend in 2022-2023, and continued to be an important theme in 2024. While single-asset back-leverage facilities that benefit from a fund guarantee have been a common tool for private equity sponsors for some time, NAV facilities provide leverage across the entire fund portfolio. These NAV facilities have continued to be an important source of liquidity for private equity sponsors at a time where M&A markets remain slow. NAV facilities allow sponsors to access additional leverage (and thereby improve returns) that might not otherwise be available at a reasonable cost at the portfolio investment level.

Looking ahead to 2025

Heading into 2025, participants in the New York financial markets were cautiously optimistic for a busy year brought on in large part by a return of the M&A markets. The US Federal Reserve was expected to continue to lower interest rates, inflation was expected to continue to stabilise and cool, private equity sponsors were increasingly eager to deploy funds and pursue exits (in particular after 18-24 months of a slow M&A market), and debt market investors were still flush with dry powder – the conditions seemed ripe for the busiest year for M&A-related new issuance since 2021. Unfortunately, the first few months of 2025 have turned this early optimism on its head.

Macro-economic outlook

Coming into the year, market watchers were anticipating multiple interest rate cuts from the US Federal Reserve. Instead, this optimism has steadily diminished to a “wait-and-see” holding pattern. In its March 2025 meeting, the US Federal Reserve kept interest rates steady at 4.5%, lowered its GDP forecast for 2025 to 1.7% (from 2.1%) and raised its core inflation projection to 2.8% (from 2.5%). The US Bureau of Labor Statistics reported a 0.5% rise in the consumer price index in January 2025, and a further 0.2% rise in February 2025. Successive tariff announcements from the US government and other countries over the last several weeks have impacted the finance markets and the broader economy – with US Federal Reserve Chair Jerome Powell noting that a “good part” of the Fed’s revised outlook on the economy is due to recent tariff announcements. As a result of these macro-economic factors, market participants have been less willing to make new debt investments, and are more cautious in deploying their dry powder given increasing anticipation of a potential recession in the US economy in 2025 or 2026.

Mergers & acquisitions

The hope for a robust resurgence in M&A activity in 2025 is now unlikely in the first half of 2025. The bid-ask valuation gap that has been a persistent feature of the market over the last 18-24 months is now expected to continue in the near term. Market uncertainty, characterised by a threatened resurgence in inflation and the real chance of a recession, will continue to make reaching valuations difficult. This will be further compounded by the increased cost of capital resulting from the US Federal Reserve holding rates and debt financing becoming less readily available as debt investors hold back in the face of economic uncertainty. In this trickier market environment, we expect to see a continued focus by private equity sponsors on smaller add-on acquisitions, private investment in public equity (PIPE) transactions, distressed asset transactions and partnership deals involving existing portfolio companies, rather than large-scale LBOs. Market participants are hopeful that recent unpredictability in markets will even out over the next several months, as tariff and trade policies are implemented globally and the broader impact is priced into businesses, in which case the rosier outlook in the M&A markets originally anticipated for this year may be able to begin materialising in the second half of the year.

Liability management transactions

The record pace of refinancings and maturity extensions in 2024 put a significant dent in the near-term maturity wall for many borrowers. That said, we expect liability management activity to continue to play a meaningful role in the market in 2025 – particularly given the number of companies with substantial leverage that were not able to refinance in 2024 and in light of a less rosy near-term economic outlook. Highly levered companies and their private equity sponsors that face upcoming maturities will be looking to liability management transactions to address their capital structure, particularly where conditions in debt financing markets make a regular-way refinancing difficult. As a result, lenders for new financings remain focused on negotiating named protections to limit the ability of borrowers and sponsors to implement coercive and non pro rata transactions.

Continued competition between private credit and traditional bank debt

In 2024, private credit lenders competed to maintain the market share they had won in 2023 while the BSL and HY bond markets were shut. We expect to see continued competition between these markets in 2025. While the BSL and HY bond markets drew borrowers back in 2024 with highly competitive pricing, private credit lenders continued to have an edge due to their ability to provide speed and certainty of funding, as well as flexible capital structures with delayed draw facilities and paid-in-kind interest. Now that recent market conditions reflect additional uncertainty (for the reasons discussed above), much like in the latter half of 2022 and the first half of 2023 – the deal certainty that private credit lenders can offer will give them a leg up over the BSL and HY bond markets. We expect to see savvy private equity sponsors and borrowers continue to consider both private credit and syndicated markets as they seek the best available finance terms, and with private credit lenders stepping in to fill any gap if the BSL and HY bond markets slow down and are less available.

An interesting feature of this private v bank lender competition in 2024 was an increase in private credit refinancings of broadly syndicated term loans. While larger-cap companies overall stuck with the BSL and HY bond markets in light of competitive pricing and the ability to fill larger orders – Q4 of 2024 saw some large private credit refinancings of BSL debt, including the USD3.2 billion refinancing of Bain Capital’s Powerschool Group and the USD4.15 billion refinancing for CommScope, in both cases by a club of private lenders. In 2025 we will continue to see private credit lenders compete to take market share away from the BSL markets, both for mid- and large-cap borrowers – particularly for lower-rated borrowers with near-term maturities on their syndicated loans and HY bonds.

At the same time that lenders in each of these markets were in hot competition for a limited supply of new issuance, 2024 saw some amount of consolidation and strategic partnerships between the two markets that we may continue to see in 2025. A number of banks have recently announced partnerships with private credit lenders, including Citigroup’s USD25 billion partnership with Apollo and Wells Fargo’s USD5 billion partnership with Centerbridge. In addition, private credit lenders are partnering with insurance companies through equity investments and partnership/management agreements, which will give private lenders additional dry powder for new deals in the coming years. For example, in recent years, Blackstone, Apollo, Brookfield and KKR, among others, have all purchased all or part of an insurance company.

Select deal themes

As static debt markets may make higher leveraged deals more difficult to achieve, some private equity sponsors may turn to more expensive private credit-provided holdco debt to fill out the capital structure. Holdco financings are obtained at a level above the operating company-level debt agreement, outside the covenants for the operating company-level debt but also without any direct support of the underlying assets of the business. The inherent risk in the structural subordination in these facilities commands higher pricing (on both interest margin and call protection), making them more attractive to private credit lenders with capital to deploy in a slow market with fewer new issuances coming across their desk. Holdco financing facilities will typically be unsecured, have a PIK (“paid in kind”) feature and mature outside the operating company-level debt.

We are also starting to see PIPE (“private investment in public equity”) deals pick up in 2025. For public companies, given the relative slowdown in the markets for syndicated debt and equity securities, PIPE transactions allow for a company to raise additional financing that may otherwise not be available (or available at unattractive pricing). For private equity sponsors, as M&A markets continue to be slow, PIPE transactions are an alternative source to invest undeployed LP commitments in a quality business. In addition, a private equity sponsor may seek to lever its investment through a fund-level financing or a single-asset back-leverage or margin facility to augment its investment return.

NAV facilities

NAV facilities have been a key feature of a private equity sponsor’s playbook over the last few years. Now they are here, they are not going away – as sponsors continue to value the additional upstairs leverage that could not be accessed cost-efficiently at the investment level, as well as the access to liquidity as a bridge to investment exits. As M&A markets continue to move slowly, with sluggish debt markets along with them, NAV facilities will continue to be a key source of leverage and liquidity for private equity sponsors, as well as a source of capital to fund follow-on investments and growth capital for their existing portfolio companies.