Continued Growth

In 2024, private credit’s growth, especially in sponsor-backed leveraged finance, highlighted its expanding role in the financial markets. Traditionally more a mid-market product, private credit funds are now entering the large-cap space due to rising demand for flexible financing and sponsors’ need for alternative capital sources with the tightening of the syndicated market.

Dual-Track

Dual-track processes, which explore both syndicated and direct lending, are increasingly common in the large-cap space and, increasingly, the mid-market. This strategy creates competitive tension between banks and private credit funds, with sponsors benefiting from greater flexibility and better pricing.

Sector Focus

Private credit is active across various sectors, particularly in technology, industrials, consumer goods and financial services.

Private Credit CLOs

In November 2024, Barings launched the first European middle-market private credit CLO, valued at EUR380.6 million, highlighting private credit’s growing importance and potential for further growth.

Path Ahead

Looking ahead, market participants are expected to innovate in capital structure management and risk strategies. Basel 3.1 reforms may lead banks to be more selective in lending, offering private credit lenders more opportunities. Despite strong 2024 deal flow, private equity sponsors have withheld top assets due to high interest rates and inflation. A surge in M&A activity is expected in 2025 as these assets become available.

In 2024, private credit lenders maintained their competitive edge in the upper middle market by reducing margins and accommodating higher leverage levels, retaining roles in many prominent deals. This adaptability is further evidenced by their ability to offer financing solutions across the capital structure, including junior and hybrid capital instruments, effectively addressing borrowers’ needs in the face of rising capital costs and liquidity demands.

Private credit lenders also leveraged their competitive advantage in transactions involving large sterling tranches, which are more challenging in the syndicated loan market due to their relative illiquidity. However, the resurgence of the syndicated loan market has led some private credit lenders to refocus on mid-market strategies, where they continue to provide value and maintain market presence.

In the lower middle market, ongoing bank disintermediation is driving a notable trend of collaboration between banks and asset managers. This collaboration allows for innovative financing solutions and the sharing of expertise, benefiting borrowers seeking more tailored and flexible funding options.

Whilst there has been certain refinancings of private credit debt with public debt market products, this was not a prominent feature in 2024.

Private credit has been actively used for headline acquisition financing transactions in Europe for the last few years but the reopening of the syndicated market led to a healthy mix of both private credit and banks financing acquisitions in 2024.

A notable development is the increasing collaboration between private credit lenders and banks. Despite competing for market share, both parties are finding common ground and working together on deals. One significant feature is the use of holding company (Holdco) financings, where private credit lenders provide financing at the Holdco level while banks syndicate a loan or bond at the operating company (Opco) level. This synergy allows both private credit lenders and banks to leverage their strengths, offering more comprehensive financing solutions to meet the diverse needs of borrowers.

The return of syndicated markets in 2024 led private credit lenders to reduce pricing to remain competitive, although this may be viewed as a “correction” instead as this debt was priced at all-time highs.

In the European large-cap syndicated loan market, covenant-lite structures have become standard, especially in sponsor-led transactions. Private credit financings, which traditionally include maintenance covenants, are now shifting towards covenant-lite structures, particularly in unitranche and senior direct lending, as private credit funds increase their presence in the large-cap leveraged finance market. This shift highlights private capital providers’ growing influence and adaptability, as they innovate to meet borrowers’ needs and compete in the large-cap market.

In 2024, there was a resurgence in junior financings and hybrid capital from private credit lenders due to the following.

• Flexibility: Holdco debt allows for tailored capital structures, balancing debt and equity and accommodating cash flow patterns.
• Leverage: placing debt at the Holdco level can prevent over-leveraging the Opco group.
• Ratings: maintaining leverage at the Holdco level can improve Opco credit ratings.
• Cash flow: Holdco debt (often payment in kind (PIK) debt) aids cash flow management, allowing cash retention for reinvestment and operations.
• Exit strategy: Holdco debt can simplify exit strategies, making deals more appealing to buyers.

The rise in Holdco/junior financings highlights collaboration between syndicated and private credit lenders, offering comprehensive solutions for large debt amounts. Jumbo Holdco financings have emerged, with private credit funds forming “clubs” to provide more than GBP1 billion financings, pooling resources and sharing risk. This showcases the private credit market’s adaptability and innovation in meeting complex sponsor and borrower needs.

Comparatively, the preferred equity market in Europe is still developing. While it offers flexible capital and equity-like returns, it hasn’t reached the scale of junior financings. As the market evolves, growth opportunities may arise in preferred equity as sponsors and investors seek diverse financing options.

Private credit lenders are increasingly providing debt to both sponsor-backed and public companies. For non-sponsor-backed companies and public companies needing event-based funding, private credit offers certainty of funding and terms, unlike the high-yield and syndicated markets. Private credit funds are also typically more flexible when it comes to underwriting deals, which is highly valued by companies navigating complex financial situations. Features like the PIK toggle allow deferred interest payments, adding financial flexibility. Private credit transactions also maintain higher confidentiality, which is crucial for sensitive transitions like public-to-private deals.

Operationally, private credit deals offer streamlined interactions, with borrowers typically dealing with a single or small group of lenders for consents and amendments. This contrasts with the complex process of negotiating with large syndicates in the syndicated loan market, simplifying financing management and enhancing adaptability to changing business needs.

While earnings before interest, taxes, depreciation and amortisation (EBITDA)-positive businesses continue to be the primary focus for private credit lenders, there is growing interest in the recurring revenue market within the UK and Europe. Private credit funds are increasingly allocating capital to pre-EBITDA businesses. These funds are able to offer flexible financing structures tailored to the unique needs of these businesses, accommodating their growth trajectories and cash flow patterns.

These businesses, often in sectors like technology and subscription-based services, generate predictable and stable cash flows through recurring revenue models. This financial predictability is appealing to private credit lenders, who can assess the potential for future profitability and growth, providing financing solutions that support these businesses as they scale.

Typical Deal Sizes

Jumbo deals

Over GBP1 billion, provided by a “club” of private credit lenders, with major funds holding “anchor” portions (GBP500 to GBP750 million).

Mid-cap

GBP150 million and above, provided by a single private credit lender or “club” deals, with each holding GBP150 to GBP250 million portions.

Typical fund sizes

Private credit funds manage substantial capital, with sizes varying by strategy, market conditions and fundraising success. Established lenders have flagship funds of more than USD10 billion, with mid-market or specialist funds ranging from USD2 to USD5 billion.

Challenges in fundraising for private credit providers

One-stop shop

Capital allocators prefer a one-stop shop approach with pan-European focus, allowing consolidated investment across the capital structure for a streamlined strategy.

Saturation

The upper mid-market is saturated, increasing competition. Interest is shifting to the less competitive lower mid-market, offering more opportunities and potential returns.

Challenges for newcomers

Capital concentration around established funds poses challenges for new entrants. Established funds with proven track records and resources, means newcomers need to differentiate through innovative strategies or a niche focus.

Default risk

Private credit market participants report low default rates despite macro challenges. However, lenders must monitor and manage default risks, as they impact capital access.

The level of regulatory scrutiny in private credit markets is generally seen to have increased in 2024. The UK Financial Conduct Authority (FCA) conducted a multi-firm review, focused on the risk of inaccurate valuations, conflicts of interest, poor liquidity and leverage controls in private credit markets. As private credit funds broaden their capital sources to include high net worth individuals and family offices, they may face increased regulatory scrutiny, despite not being deposit-taking institutions, as the private credit market continues to mature.

Lenders must have an appropriate licence to carry out regulated activities in the UK. Whether lending requires a licence depends on the loan’s nature and the borrower’s sophistication:

• cash loans: no licence needed for loans over GBP25,000 for “business use”; and
• preferred equity/bonds/convertible instruments can be issued to lenders if the lender is a “professional client” under UK FCA regulations.

Corporate lending alone doesn’t generally require UK authorisation but is subject to UK AML requirements, necessitating FCA registration. Offshore entities lending to UK borrowers are typically exempt.

Lenders can generally take security over a UK borrower’s assets unless this involves mortgages or property rights over residential real estate.

The FCA is the primary regulator for private credit funds in the UK.

UK-based private credit managers must adhere to UK sanctions regimes under the Sanctions and Anti-Money Laundering Act 2018, which is the legal basis for imposing, updating and lifting sanctions.

HM Treasury, through the Office of Financial Sanctions Implementation, enforces financial sanctions, including asset freezes on designated persons and restrictions on investment and financial services.

Foreign investment in UK private credit funds is only allowed if it does not come from sources on the UK financial sanctions lists or violate UK sanctions.

UK FCA-regulated private credit funds must comply with various regulatory and reporting requirements. Generally, the UK regulatory regime requires:

• compliance with rules for senior managers and material risk takers;
• compliance policies for risk management, market abuse, conduct and staff training;
• maintenance of regulatory capital; and
• reporting on FCA metrics related to regulatory compliance.

UK-regulated lenders or those registered with the FCA for AML purposes have ongoing AML reporting obligations.

In 2024, private credit firms particularly focused on governance and valuation processes due to FCA scrutiny, aiming to address subjectivity, potential conflicts of interest and misalignments in net asset value (NAV) calculations, asset valuations and data availability.

While UK antitrust enforcers have not brought enforcement actions focused on private credit, co-ordinated lending has the potential to raise antitrust enforcement risk because of the increasing prevalence of intercreditor disputes and general regulatory scrutiny on private capital.

There has, however, been some case law in the US. In the mid-2010s, private plaintiffs brought antitrust claims against private equity sponsors for “clubbing deals,” which were alleged to have reduced the competitive intensity of lending. Plaintiffs alleged that some of the largest private equity firms depressed take-private prices through a code of conduct or “club etiquette” among sponsor groups.

Under US antitrust laws, restructuring discussions that occur within the context of a formal bankruptcy proceeding are potentially immune from antitrust liability. See United Airlines, Inc. v U.S. Bank N.A., 406 F.3d 918, 921 (7th Cir. 2005). Even outside formal court led restructurings, more recent US antitrust cases have distinguished between enforcement of existing debts and prospective lending. One court observed that efforts “maximizing the creditors’ ability to collect an outstanding debt” potentially differed from cases in which courts applied Sherman Act liability that “involved creditors who agreed about whether or on what terms to extend credit in the future”. CompuCredit Holdings Corp. v Akanthos Capital Management, LLC., 916 F. Supp. 2d 1326, 1330 (N.D. Ga. 2011).

Although US case law is not binding on English courts, an English court may draw on such US case law should similar claims arise in England.

Structures

Common structures include:

• unitranche (term + delayed draw facility) by private credit lenders, with a super senior revolving facility from a bank;
• Holdco facility by private credit lenders, with traditional syndicated structures at Opco level (eg, syndicated loans or high-yield bonds);
• subordinated debt by private credit lenders alongside senior secured financing (syndicated loans or high-yield bonds); and
• preferred equity.

Revolving and Delayed Draw Facilities

Private credit lenders often provide a delayed draw/acquisition-capex facility, a term loan available post-closing (eg, three years) for bolt-on acquisitions. They don’t typically provide revolving facilities (RCFs) or ancillary facilities. For tight acquisition timelines, private credit lenders may offer a hollow tranche revolving facility for a limited period (eg, 90 days), functioning like a term facility, expected to be replaced by an RCF. Unplaced commitments by the timeline’s end are cancelled or treated as term facility commitments. Many direct lenders collaborate with RCF providers to leverage intercreditor synergies for sponsors.

Typical documentation for private credit transactions includes:

• a facilities agreement, which covers commercial terms, representations, undertakings, events of default, transfers, amendments and loan mechanics;
• an intercreditor agreement, which governs rights between creditor classes. Unlike evergreen intercreditor agreements which are typical in syndicated markets, private credit intercreditor agreements are specific to debt classes and terms between unitranche and super senior RCF lenders. In Holdco facilities, private credit lenders aren’t typically party to Opco-level intercreditor agreements but enter a subordination agreement for shareholder debt; and
• a fee letter, which documents agreed fees and payment terms.

First-Out-Last-Out (FOLO) Transactions

The rise of collaborative structures like unitranche and super senior debt has reduced FOLO transactions. When used, FOLO transactions are documented under a single credit facility, with a side agreement dividing the loan into first-out and last-out tranches. The higher-risk last-out tranche offers a higher margin, aligning with different lenders’ risk preferences.

In England, foreign lenders don’t typically need authorisation to make loans unless engaging in “regulated activities” related to “specified investments” under the Financial Services and Markets Act 2000 (the “FSMA”). “Regulated activities” include accepting deposits, dealing in investments as principal or agent, arranging deals, managing and advising on investments and insurance contracts, requiring authorisation under Section 19 of the FSMA. There are also “change in control” requirements for investing in entities in “regulated activities”.

Under Section 21 of the FSMA, only authorised persons can communicate an invitation or inducement to engage in an “investment activity” (a “financial promotion”) in the course of business. Unauthorised persons can communicate a “financial promotion” if approved by an authorised person.

Corporate lending isn’t a regulated activity in the UK, unlike lending to individuals or certain partnerships, which may fall under the UK consumer credit regime. Corporate lending is subject to UK AML requirements.

The UK doesn’t differentiate between the regulatory treatment of term and RCF loans and has no general restrictions on the sale, transfer or sub-participation of loans.

There are no restrictions on using private credit for take-privates and acquisition financing and no restrictions on a borrower’s use of proceeds under English law.

Debt buybacks by borrowers are permitted under English law and facility agreements will typically include provisions governing this. There are usually three options:

• open order transactions: the borrower notifies the lenders of the total amount of the loans it intends to acquire and the price offered. If the offer is oversubscribed, offers from the lenders are accepted on a pro rata basis;
• solicitation transactions: the borrower solicits offers from lenders to purchase its debt, selecting the lowest offers first and, where offers are at the same price, purchasing the debt on a pro rata basis; and
• bilateral transactions: this involves a direct negotiation between the borrower and a single lender. The parties are free to agree the terms. This option is often used when the buyer and seller have a pre-existing relationship or when confidentiality and discretion are important.

Private credit lenders will often require that the open order process is completed first before there is a solicitation or bilateral process.

Similar to the broadly syndicated market, private credit lenders are focused on limiting the “trap doors”/loopholes in the covenants that allow for sponsors/borrowers to undertake liability management exercises (ie, uptiering transactions and dropdown/asset-stripping transactions). This has led to the development of a few “blockers”, ie, contractual protections to prevent the borrower group/sponsor from undertaking these transactions.

Key “blockers” that are now included in private credit transactions are as follows.

• Prevent key assets being transferred to unrestricted subsidiaries, which could use them as collateral for new, senior debt.
• Ensure key assets remain with guarantors, limiting transfers to non-guarantor restricted subsidiaries by imposing caps.
• Cap the aggregate value of assets moved to unrestricted subsidiaries.
• Stop majority lenders from subordinating existing lenders’ security/introducing priming debt without unanimous consent.
• Prevent automatic release of a subsidiary guarantor’s guarantee if it becomes non-wholly owned through permitted transactions.

In the current high interest rate environment, many sound businesses face increased debt service and reduced senior debt capacity. Junior and hybrid capital solutions help alleviate these pressures.

Junior capital, which typically includes subordinated debt or mezzanine financing, supplements senior debt with flexible terms, such as interest deferral or PIK interest, aiding cash flow management.

Hybrid capital solutions, including convertible debt or preferred equity, offer tailored financing with potential capital appreciation and reduced cash outflows.

Preferred equity is attractive in high interest rate or financial distress situations as it offers fixed dividends, priority in liquidation and provides more security than common equity as well as higher returns than debt.

Preferred equity doesn’t impose the same repayment obligations as debt, preserving cash flow and reducing strain. It allows companies to raise capital without diluting common equity holders’ control, as it usually lacks voting rights.

In high interest rate environments, it offers favourable terms compared to debt costs and aids recapitalisation or restructuring in financial distress situations.

Common Junior/Hybrid Debt Structures

The common junior/hybrid debt structures are as follows:

• Holdco facility by private credit lenders with traditional Opco-level structures (eg, syndicated loans or high-yield bonds);
• junior/second lien facility by private credit lenders with senior financing from syndicated loans or high-yield bonds; and
• preferred equity.

Private credit lenders may also take equity shares (eg, common equity or warrants) along with providing debt.

Security Package

Typically, enforcement for Holdco instruments is above the Holdco borrower, with security over shares and receivables granted by its immediate shareholder. Alternatively, enforcement may be below the Holdco borrower, with a holding company covenant to prevent leakage, involving a share and receivables pledge over the entity below and an account pledge from the Holdco borrower.

In private credit transactions, PIK facilities are common, especially at the Holdco level, offering a “pay-if-you-want” option. Borrowers can choose to pay interest in cash or capitalise it, with discounts for cash payments, enhancing cash flow flexibility during periods of financial constraint.

Senior-level facilities are usually cash-pay, with an option to PIK interest for a set number of periods, applying a premium for deferred payments to compensate for increased risk.

Amortisation is not typically required, with lenders preferring bullet repayment at maturity. For incremental facilities, loan documents often require that additional debt should not be amortising unless existing lenders receive the same terms.

Call protection is a key feature in private credit loans. Lenders will typically require a prepayment premium (“make-whole”) to compensate for the interest income lost due to early repayment. The structure of call protection varies and lenders also agree to a declining premium schedule (eg, NC1, 101). The exact prepayment fee terms are a matter of commercial negotiation.

While principal and fee payments aren’t subject to UK withholding tax, interest payments are generally subject to withholding tax of 20% under the current law.

Double Tax Treaty Exemption

Private credit lenders often rely on an exemption under a double tax treaty (“DTT”) if no domestic exemption is available. The conditions of the DTT and tax authority requirements must be analysed to ensure compliance. For example, the benefit of a DTT can generally only be claimed by persons that are “residents” of one or both of the contracting states. A person is usually a “resident” of a contracting state if they are “liable to tax” in it by reason of domicile, residence, etc (Article 4(1) of the OECD model tax convention). If a private credit lender is lending through a tax transparent lending vehicle ie, where the partners or members of the entity are directly responsible for tax arising on the income or gains of the entity, the vehicle itself is not “liable to tax” in that contracting state for the purposes of that treaty and, therefore, will not be a “resident” of that contracting state for those purposes. The application of the DTT to the vehicle would generally be denied.

Beneficial owners of the interest received by the tax transparent lending vehicle should seek relief in their jurisdictions of tax residence instead. The UK’s double tax treaty passport (“DTTP”) scheme allows expedited authorisation for non-UK lenders to receive UK source interest in line with the DTT rate of withholding tax. To obtain a DTTP, the lender must provide a tax residence certificate from its home jurisdiction tax authority and seek confirmation from HMRC as to its entitlement to treaty benefits.

Tax transparent lending vehicles can only use the DTTP scheme if all constituent beneficial owners of the income qualify for the same DTT benefits under the same DTT. If they do not, the DTTP is not applicable and each beneficial owner will need to make a long-form certificated claim.

Not all DTTs offer complete exemption from withholding tax and DTTP access can be complex, so other exemptions like the qualifying private placement (“QPP”) exemption should be considered.

Domestic Exemptions

QPP

Conditions relating to the lender, borrower and terms of the debt (eg, a debt term under 50 years and at least GBP10 million (can comprise a placement of several debt securities)) will need to be satisfied. The lender (or its partners on its behalf) must make several confirmations, including residence in a “qualifying territory” with a DTT with the UK that includes a non-discrimination clause and the borrower must not be connected to the lender. The latter requires careful consideration if the private credit lender is participating in a loan by the main fund’s lending vehicle.

Sovereign immunity

This public international law principle exempts certain foreign government entities from withholding tax on income earned in another country.

Corporate-to-corporate

This domestic exemption is available if the private credit lender is lending through a UK tax-resident company or a UK permanent establishment.

For private credit lenders using tax transparent vehicles, a key consideration is that, under the Loan Market Association (LMA) definition of “qualifying lender”, these vehicles are not considered “qualifying lenders” because they are not “beneficially entitled” to the interest. However, their ultimate partners or members are. The definition must therefore be amended to reflect this. If a lender is not a “qualifying lender”, it cannot benefit from change in law protection in respect of the gross-up.

Certain lending vehicles, particularly tax transparent vehicles, may not qualify for a DTTP. In these cases, a long-form certificated claim for each beneficial owner of the interest income is required, which can be time-consuming. If an interest payment is due before completion, the QPP exemption might be used as an alternative or short-term back-stop until HMRC grants treaty relief.

The QPP exemption is theoretically administratively simple, requiring only a QPP certificate from the lender to the borrower. However, there is some market uncertainty around the interpretation of the regulations. If the QPP exemption isn’t viable as a back-stop, it may be possible to include an interest deferral mechanism in the facilities agreement allowing the borrower to defer payments until HMRC issues a gross payment direction.

There are no specific tax incentives for foreign private credit lenders lending into the UK. However, it is worth noting that in 2022, the UK introduced the qualifying asset holding company (QAHC) to enhance the UK’s appeal as an asset-holding jurisdiction. This allows funds to establish asset-holding companies in the UK with greater tax efficiency and compete more effectively with the regimes in Luxembourg and Ireland.

To qualify, a QAHC must meet specific conditions including related to ownership and activities, which should be primarily investment-related. Continuous self-monitoring is essential to maintain QAHC status. Foreign private credit lenders wishing to hold UK assets using a UK vehicle should consider if the QAHC regime applies.

It should be noted that for funds setting up entities in Europe, there has been increased scrutiny on economic “substance” tests, which consider factors like office space and employees. These requirements prevent funds from simply establishing a lending vehicle in a jurisdiction to access double tax treaty relief. The European Commission’s anti-tax-avoidance directive (ATAD III) targets shell entities misuse for tax purposes.

EU entities must pass certain gateways related to income, staff and premises to prove sufficient “substance”. Entities deemed to be lacking “substance” may be unable to obtain tax residence certificates or benefit from double tax treaties and EU Directives. The draft ATAD III is not finalised, so its impact on private credit finance is uncertain.

Under English law, taking security is a relatively straightforward process, allowing security over a wide range of asset classes through charges, mortgages or pledges. Commonly secured assets in sponsor-backed private credit financings include shares, bank accounts and intercompany receivables, with a floating charge often granted over other company assets.

The security package’s scope depends on the transaction’s nature, guided by “agreed security principles”. For instance, loans to groups with valuable intellectual property or real estate may secure these assets to enhance the lender’s position.

Loan agreements typically require material subsidiaries to provide security and guarantees similar to those of the borrower. The material subsidiary definition is negotiable but generally includes entities representing a certain percentage of the group’s EBITDA or assets, which is typically 5%. Holding companies of material subsidiaries are usually expected to provide share security over the material subsidiaries’ shares and any intercompany receivables they owe.

In leveraged financings, a charge is commonly granted by a chargor in favour of the lender (chargee), allocating specific assets to satisfy debt obligations. Charges can be fixed, attaching immediately to defined assets with the chargee exercising control, or floating, covering a fluctuating pool of assets and “crystallising” into a fixed charge upon certain events.

Importantly, the title and possession of the asset remain with the chargor, unlike mortgages or assignments by way of security, which transfer the security provider’s title conditionally on release of the security or discharge of secured obligations. Pledges, creating possessory security, are rare in leveraged financings.

Perfection of security interests is crucial for validity and priority over other creditors. Perfection steps depend on the secured asset and the security interest’s nature but are generally straightforward and low-cost and include:

• registration: all charges by an English company or limited liability partnership must be registered at Companies House within 21 days. For certain assets, registration at specific UK asset registries, like the Land Registry for real estate, is necessary; and
• notice: providing notice of the security interest to third-party debtors or account banks is essential, as the notice timing often determines the security’s priority.

For security over English real estate, specific procedural steps and regulatory conditions must be met. An overseas entity granting security over a qualifying estate in England and Wales must be registered in the register of overseas entities at UK Companies House to register a mortgage at the Land Registry.

Once validly created and perfected, security under English law does not typically require ongoing maintenance. However, risks exist, such as a fixed charge being re-characterised as a floating charge if the chargee does not exercise control. Security is granted to a security trustee (or security agent) who holds the security interests on trust for secured creditors, allowing new lenders to benefit without restarting hardening periods.

Floating charges over all current and future assets of an English company are commonly granted. Private credit lenders typically require a robust security package with “fixed” security over several asset classes and “floating” security over all or substantially all assets.

Downstream, upstream and cross-stream guarantees may be provided by English companies, subject to having the necessary power, capacity and corporate benefit.

For upstream and cross-stream guarantees, directors must assess the corporate benefit of granting these guarantees and the guarantors’ financial standing. They will often seek shareholder approval to ensure alignment with company interests.

In private credit deals, term and revolving facilities and ancillary facilities under the RCF, typically share a common security and guarantee package. This can include permitted secured hedging if hedge counterparties join the intercreditor agreement.

A notable feature of many private credit deals is the super senior ranking of the RCF and certain permitted hedging. This arrangement allows RCF lenders and hedge counterparties to receive security enforcement proceeds before term lenders. This is a hallmark of the UK and European private credit markets. This structure is crucial for attracting RCF lenders, as most private credit funds are not equipped to offer revolving loans and associated clearing facilities.

Under the Companies Act 2006 (the “CA06”), public limited companies and their subsidiaries (public limited company or otherwise) are restricted from providing financial assistance for acquiring or refinancing the acquisition of shares in that public limited company, whether listed or unlisted. This includes guarantees, security, indemnities and any other assistance from a target company or its UK subsidiaries. Additionally, a UK public company cannot offer financial assistance for acquiring shares in its UK limited parent company.

Since this prohibition does not apply to private limited companies, lenders financing acquisitions of public limited companies typically require relevant public companies in the target group to re-register as private companies after the acquisition is completed and before providing any financial assistance.

Third-Party Consents

Third-party consents are necessary when there are restrictions on charging or assigning assets such as contractual rights, receivables or leasehold property. For small and medium-sized enterprises, the Business Contract Terms (Assignment of Receivables) Regulations 2018 facilitate access to financing by allowing the assignment of receivables governed by English law to finance providers and nullifying any terms that restrict these assignments in business contracts.

National Security and Investment Act

The National Security and Investment Act 2021 (the “NSIA”) grants the UK government extensive powers to scrutinise acquisitions that may pose national security risks. The NSIA impacts secured creditors taking or enforcing security over certain assets. A mandatory notification requirement is triggered for share security involving legal title transfer or the acquisition of voting rights above defined thresholds in an entity carrying out activities in one of the 17 specified sectors subject to the mandatory notification regime under the NSIA. Without prior government clearance, these changes of control are void. The government can also issue a call-in notice if it reasonably suspects a change of control may risk national security.

Hardening Periods

English law includes several hardening periods before insolvency:

• transactions at an undervalue: two years;
• preferences (preferential treatment to one creditor): six months, extending to two years for connected parties;
• floating charges for insufficient value: 12 months, extending to two years for connected parties; and
• transactions defrauding creditors (ie, transactions entered into at an undervalue with the intention of putting assets beyond the reach of creditors): no time limit. Claims can be brought by any “victim” and not just administrators or liquidators.

The principle of equity of redemption gives security providers the right to recover a secured asset upon satisfaction of the debt. The terms for releasing security are usually outlined in the security agreement or the intercreditor agreement, with the release of security documented in a deed of release executed by the security taker.

Upon release, the relevant registers, such as Companies House or the Land Registry, are also updated to note the release of the relevant security. These filings are generally straightforward and not costly.

Under English law, multiple security interests are allowed and parties can contractually agree on the order and priority of subordination. Besides contractual subordination, deal structures often involve structural subordination, where parent company’s creditors are subordinated to subsidiaries’ creditors. This occurs because subsidiary assets and cash flows typically satisfy their creditors first, leaving parent company creditors with structurally subordinated claims, with claims only on residual value after subsidiaries’ creditors are paid. Case law supports both simple contractual and turnover subordination agreements, as neither violate the pari passu rule or anti-deprivation principle.

The priority of competing security interests under English law is complex. Generally, security interests rank by creation order, with exceptions:

• legal security interests (acquired for value without notice of prior equitable interests) take priority over equitable interests;
• notice to the debtor/contractual counterparty determines priority in successive purported assignments of the same debt or other chose in action;
• required registration at asset registries, (eg, the Land Registry), usually determines priority among competing interests by registration order, but Companies House registration does not directly affect priority; and
• subsequent fixed charges have priority over earlier floating charges unless the subsequent fixed charge-holder knows the earlier floating charge includes a negative pledge.

Methods to Structure Around Priming Liens

Facilities agreements typically restrict incurring debt or granting guarantees/security that rank ahead of the lender’s debt, extending to incremental facility provisions, which only allow pari passu debt. Any amendments to these restrictions in the facilities agreement or priority provisions in the intercreditor agreement will also be all-lender consent items. Junior creditors and super senior revolving lenders are usually stayed from enforcing remedies until senior creditors are repaid.

Subordination

Creditors of shareholder loans to the borrowing group are generally expected to become party to the intercreditor agreement as subordinated creditors. Group company creditors providing intercompany loans are also party to the intercreditor agreement, subordinating their claims to senior creditors. Parties may negotiate minimum debt thresholds for these accessions.

Anti-Layering

Private credit lenders typically require an anti-layering provision to prevent additional debt layers that could subordinate existing creditors’ claims. These anti-layering provisions restrict borrowers from incurring new debt that ranks senior to existing obligations, maintaining the hierarchy of claims and protecting senior lenders’ interests.

“No Short Circuit Clause”

Private credit lenders typically require a “no short circuit clause” to prevent junior creditors from bypassing the priority structure to receive payments or enforce claims ahead of senior creditors. This ensures junior creditors cannot undermine the agreed payment order, such as accessing collateral or receiving payments before senior creditors are fully satisfied.

Cash pooling and other transactions in the ordinary course of banking operations are not usually restricted under the debt or security covenants in private credit transactions (similar to the treatment of these arrangements in broadly syndicated loans).

Any permitted secured hedging (where such hedge counterparties have acceded to the intercreditor agreement) will usually share the security and guarantee package. There may also be an agreed amount of hedging that will rank super senior.

Corporate lending is usually unregulated in the UK (see 2.1 Licensing and Regulatory Approval). In general, regulatory issues do not arise with the taking or holding of collateral in the UK.

In private credit transactions, a “single point of enforcement” is common, typically involving a share charge over the shares in a key holding company. This allows the secured lender to appoint a fixed charge receiver (FCR) over the shares or an administrator over the parent company to dispose of the shares of the holding company (and operating group subsidiaries). Enforcement of the share pledge takes control of the group away from the sponsor in order to deliver a going concern sale of the operating group.

Asset level security is increasingly rare and usually limited to subsidiary level bank accounts and intellectual property.

Enforcement typically involves an insolvency officeholder, being either:

• an FCR appointed out of court under the security document; or
• an administrator appointed out of court if lenders have a “qualifying floating charge” over most assets, or by court application.

An FCR, appointed by lenders that hold a fixed charge over specified debtor assets, has enforcement powers under the security document, such as taking custody or managing or selling assets to satisfy secured debt.

An administrator has broader legal duties to all creditors. Administration is a more public process and triggers a moratorium.

With adequate planning and some board or management co-operation, enforcement sales can often be pre-packaged, minimising the taint of insolvency.

Choice of Foreign Law

Contracting parties can choose the governing law and jurisdiction for any contractual disputes. The choice of law may mirror the jurisdiction. If the governing law differs from the jurisdiction hearing the dispute, the foreign court may require expert evidence on the relevant law.

However, English courts will not uphold a choice of law for contractual obligations if to do so would be inconsistent with or overridden by Regulation (EC) No 593/2008 (Rome I) or for non-contractual obligations if it conflicts with Regulation (EC) No 864/2007 (Rome II), both as amended by the UK’s post-Brexit The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc) (EU Exit) Regulations 2019.

Submission to a Foreign Jurisdiction

Usually when parties agree to submit disputes to a foreign court’s exclusive jurisdiction, a party cannot bring proceedings in England and Wales in breach of that agreement. If parties choose non-exclusive jurisdiction, this allows disputes to be heard in the jurisdiction specified in the clause, or the parties may be entitled to take disputes to other jurisdictions. If a claim is filed in England and challenged for jurisdiction, the English court will decide if it is competent to determine the dispute.

Waiver of Immunity

The enforcement of a waiver of immunity clause depends on its wording. The courts of England and Wales take a restrictive approach to state immunity under the State Immunity Act 1978 (the “SIA”), which confers general immunity from English court jurisdiction on foreign states with certain exceptions. These exceptions include where the State agrees to submit to the jurisdiction or to submit a dispute to arbitration and the relevant court proceedings relate to that arbitration. The SIA also provides immunity from execution, with exceptions including for written consent to execution or commercial transactions involving property used for commercial purposes.

The enforcement of foreign judgments in the UK depends on the applicable legal regime, which varies according to the jurisdiction of the originating judgment.

The courts of England and Wales do not generally retry the merits of a recognised foreign judgment or arbitral award. However, a party must first bring a claim or application in England and Wales for recognition, after which the judgment or award becomes domestically enforceable. The recognition application process is typically straightforward, but parties can argue against recognition.

Recognition may be refused based on statutory grounds or under common law. Grounds for refusal include:

• fraud in procuring the foreign judgment;
• contradiction with the public policy of England and Wales;
• judgments related to taxes, or fines/penalties, or otherwise based on foreign laws considered penal or revenue-related by English courts;
• violation of natural justice principles;
• improper service of proceedings on the judgment subject; and
• lack of jurisdiction by the foreign court.

For arbitral awards, specific Conventions or Statutes, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, dictate enforcement requirements. Any irregularities in meeting these requirements can be challenged during the recognition application process in England and Wales.

A foreign private credit lender’s ability to enforce its rights under a loan or security agreement are no different to the ability of a non-foreign private credit lender to enforce their rights under a loan or security agreement.

The appointment of either an administrator or a receiver can be relatively quick remedies provided that the secured lender observes all contractual and statutory requirements. As a private remedy, the appointment of a receiver can be made on the same day as demand is made of the debtor.

Enforcements involve a “change of control”, necessitating diligence and structuring similar to M&A deals, including regulatory approvals, material contract reviews and tax planning.

Understanding the intercreditor position of any other creditor classes is crucial. In UK mid-market direct lending, unitranche lenders typically control enforcement, but it’s important to consider any super-senior RCF or working capital facilities.

Effective enforcement often requires management support. Early thought should be given to management engagement, incentives or alternative teams. If any directors are uncooperative:

• lenders may remind them in writing of their personal duties, which, under English law shifts towards creditors when insolvency, liquidation or administration is probable; and
• in extreme cases, lenders could use voting rights under share security documents to remove uncooperative directors.

Receivers, administrators or security agents will require indemnification and possibly up-front cost coverage and separate legal counsel.

Insolvency is assessed on a company-by-company basis, so both English and non-English subsidiaries must be carefully managed, with filing obligations monitored according to jurisdiction.

The value at which secured assets are disposed of is a key focus for potential challenge. Lenders typically protect against these claims by appointing an insolvency officeholder to transact. Administrators are subject to the “Statement of Insolvency Practice 16” or “SIP 16”, while fixed charge receivers are not, but both adhere to similar standards in practice.

Valuation invariably requires market testing usually involving:

• a comprehensive sale process run by an M&A adviser, though an abbreviated/desktop process may suffice if urgent or if recent value evidence exists, such as a recent company-led sale process; and
• if feasible, an independent, robust process including a range of financial and trade buyers.

Receivers, administrators and/or security trustees may require a fairness opinion or valuation report from an independent accountancy firm or investment bank, even if not required by the intercreditor agreement. Lenders should not influence the process and are not obligated to delay a sale for junior stakeholders to recover more.

Other potential liabilities include:

• environmental fines or clean-up costs imposed during insolvency. These may rank as insolvency expenses, taking priority over secured creditors’ claims. Secured creditors usually incur liability only when enforcing real estate security as mortgagees in possession;
• when an insolvency officeholder sells part or all of an insolvent company’s business, employees generally transfer to the purchaser with their employment liabilities under the Transfer of Undertakings (Protection of Employment) Regulations 2006. Dismissals may result in unfair or wrongful dismissal liabilities for both seller and purchaser; and
• if a lender acts as a mortgagee in possession of shares in a borrower company and exercises voting rights, the lender may be liable for pension scheme deficits due to being connected with an employer in an occupational pension scheme.

Administration

The purpose of administration is threefold:

• rescuing the company as a going concern;

• achieving a better result for creditors as a whole than in an immediate liquidation (if the first objective is not reasonably practicable to achieve); or
• realising property for secured or preferential creditors (if the first two objectives are not reasonably practicable to achieve).

An administrator can generally be appointed out of court by the debtor company, its directors or a holder of a “qualifying floating charge”.

Administrators have broad powers to conduct the business of the company and, subject to satisfying the requirements under the Insolvency Act 1986 (the “IA86”), dispose of its property, including assets under a floating charge. While an administrator is in office, most of the powers of the board of directors are suspended.

A statutory moratorium prevents enforcement of security or guarantees over the company’s property without the administrator’s consent or leave of the court. The same requirements for consent or permission apply to instituting or continuing legal processes. The moratorium does not extend to security arising under a “financial collateral arrangement” (generally, a charge over cash or financial instruments such as shares, bonds or tradeable capital market debt instruments and credit claims) under the Financial Collateral Arrangements (No 2) Regulations 2003 (the “FCAR”).

Fixed Charge Receivership

An FCR may be appointed pursuant to the Law of Property Act 1925 over assets secured by a fixed charge or more commonly following a default under the terms of a security document that augments the statutory powers.

A receivership may run parallel to liquidation or administration, but an administrator may require a receiver to vacate unless appointed under a “financial collateral arrangement” under the FCAR.

The receiver’s primary duty is to realise assets for the appointor, taking reasonable care to obtain the best price, in contrast to an administrator, who acts in the interests of all of a company’s creditors and has different statutory objectives. The receiver is entitled to a statutory indemnity for liabilities from asset realisations and may receive a contractual indemnity from their appointor.

Liquidation/Winding-Up

Liquidation involves dissolving a company by realising and distributing assets to creditors and members according to statutory priority under the IA86. A winding-up takes two forms:

• court-ordered compulsory liquidation; and
• members’ or creditors’ voluntary liquidation.

In a members’ voluntary liquidation, the company’s directors swear a statutory declaration as to the company’s solvency over the following 12 months. In a creditors’ voluntary liquidation, the primary ground is the company’s insolvency and inability to pay its debts.

Liquidators can bring or defend legal proceedings on the company’s behalf, conduct the company’s necessary business, sell company property, execute documents and challenge antecedent transactions.

Pre-Pack Sales

Pre-pack sales involve selling a company’s business or assets to a third party or a lender owned vehicle immediately upon entering administration or receivership, with the sale arranged before the administrator’s or receiver’s appointment. Alternatively, a secured lender may appoint a receiver for the same purpose.

Pre-pack sales are frequently used to implement restructurings through share and/or asset sales in conjunction with a security enforcement.

A lender may “credit bid” its outstanding debt as consideration for the sale of the company/its assets to a lender-owned vehicle. Upon the sale, the debt/existing security is typically released by the security trustee under the terms of the intercreditor agreement. A direct lending context is generally straightforward with only one secured creditor (or creditor class) with clear priority on who can give enforcement instructions and more limited value protections in the intercreditor agreement.

The advantages of a pre-pack sale include:

• minimised business disruption, especially in receivership;
• pre-selection of a receiver or administrator and pre-agreed sale terms for a quicker, more economical process compared to a sale during trading administration;
• a faster realisation of cash for secured creditors, potentially yielding better returns due to reduced trading disruption;
• effective security enforcement implementation, triggering the release clause in an intercreditor agreement, enabling business transfer and leaving behind “out-of-the-money” creditors;
• directors benefiting from independent approval of credit bids by the administrator/receiver, reducing liability and minimising challenges from disgruntled creditors;
• limiting adverse publicity, media speculation and potential damage to the business’ goodwill; and
• potential preservation of employment.

Recent updates to the pre-pack administration legal framework impose greater scrutiny on connected party transactions. However, this should not unduly impact secured creditors.

The general priority on insolvency is as follows (in descending order of priority).

• Holders of fixed charge security (but only to the extent the value of the secured assets covers that indebtedness) and parties with a proprietary interest in assets in the possession (but not under the full legal and beneficial ownership) of the debtor (but only with respect to the assets in which they have a proprietary interest).
• Expenses of the insolvent estate (there are statutory provisions setting out the order of priority in which expenses are paid), in certain circumstances, specific moratorium debts may rank ahead of expenses.
• Ordinary and secondary preferential creditors:
1. ordinary preferential debts include (but are not limited to) debts owed by the insolvent company in relation to:
1. contributions to occupational and state pension schemes;
2. certain wages and salaries of employees for work done in the four months before the insolvency date;
3. holiday pay due to any employee whose contract has been terminated, whether the termination takes place before or after the date of insolvency; and
4. certain bank and building society deposits eligible for compensation; and
2. Secondary preferential debts rank for payment after the discharge of ordinary preferential debts and include claims by HMRC in respect of certain taxes (including VAT, PAYE income tax and employee NI contributions) which are held by the company on behalf of employees and customers as well as certain bank and building deposits that are not ordinary preferential debts.
• Holders of floating charge security, according to the priority of their security. This would include any security interest that was stated to be a fixed charge in the document that created it but which, on proper interpretation by the court, was rendered a floating charge. However, before distributing asset realisations to the holders of floating charges, the “prescribed part” (a ring-fenced fund of up to GBP800,000 for the benefit of unsecured creditors) must, subject to certain exceptions, be set aside for distribution to unsecured creditors.
• Debts and liabilities:
1. provable debts of unsecured creditors and (to the extent of any unsecured shortfall) secured creditors, in each case including accrued and unpaid interest on those debts up to the date of commencement of the relevant insolvency proceedings;
2. interest on the company’s unsubordinated debts in respect of any period after the commencement of liquidation or after the commencement of an administration which has been converted into a distributing administration; and
3. non-provable liabilities, being liabilities that do not fall within any of the categories above and therefore are only recovered in the (unusual) event that all categories above are fully paid (this does not include currency conversion claims).
• Shareholders: if, after the repayment of all unsecured creditors in full, any remaining funds exist, these will be distributed to the shareholders of the insolvent company.

In general terms, the longer an insolvency process takes the greater the losses incurred by creditors. A pre-pack enforcement executed at the holding company level will typically protect the wider operating group from the taint of insolvency and preserve value in its operating subsidiaries. Trading administrations will require funding either from the business itself or from the group’s creditors while the business is marketed. Depending on the group in question, this is usually for a limited period while the insolvency officeholder explores disposal opportunities.

See 7.9 Dissenting Lenders and Non-Consensual Restructuringsfor descriptions of schemes of arrangement and restructuring plans.

See 7.6 Transactions Voidable Upon Insolvency for descriptions of antecedent transactions that may be challenged by an insolvency officeholder of the borrower/guarantor. English law does not contain a concept of lender liability for deepening the insolvency of a borrower through further lending. Liability may arise if a lender acts as a shadow director of the borrower (ie, a person in line with whose directions or instructions the directors of a company are accustomed to act) but this threshold is a high one and requires a lender to act outside of its usual lending capacity.

Under English insolvency law, certain transactions can be challenged if a company enters administration or liquidation within a specific period after entering into the transaction.

Transactions at an Undervalue

A liquidator or administrator can apply for a court order to set aside a transaction at an undervalue.

The transaction can be challenged within a period of two years from its entry if at the time of the transaction or as a result of it, the company was unable to pay its debts (as defined in Section 123 of the IA86) unless a beneficiary of the transaction was a connected person, in which case there is a presumption of insolvency and the connected person must demonstrate that the company was not unable to pay its debts at the time of the transaction or became unable to do so as a result of the transaction.

A transaction may be set aside as a transaction at an undervalue if the company made a gift to a person, received no consideration or received significantly less value than the company gave. However, a court will not make an order if it is satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business and that, at the time it did so, there were reasonable grounds for believing the transaction would be beneficial.

If the court determines that the transaction was a transaction at an undervalue, the court will make such order as it sees fit to restore the company to the position it would have been in had it not entered into the transaction.

Preferences

A liquidator or administrator can apply to the court for an order to set aside a preference.

A transaction will only be a preference if, at the time of the transaction or as a result of the transaction, the company was or became unable to pay its debts (as defined in Section 123 of the IA86). The transaction can be challenged if the company enters into insolvency within a period of six months (if the beneficiary of the security or the guarantee is not a connected person) or two years (if the beneficiary is a connected person, except where such beneficiary is a connected person by reason only of being the company’s employee) from the date the company grants the preference. A transaction will constitute a preference if it has the effect of putting a company’s creditor (or a surety or guarantor for any of the company’s debts or liabilities) in a better position than it would otherwise have been in the company’s insolvent liquidation without the transaction. However, a court will not make an order unless the company was influenced by a desire to prefer the recipient.

If, however, the beneficiary of the transaction was a connected person it is presumed that the company desired to prefer that person unless the contrary is shown.

If the court determines that the transaction was a preference, it will make such order as it sees fit to restore the company to the position it would have been in had it not entered into the transaction.

Transactions Defrauding Creditors

A transaction may be set aside by the court as a transaction defrauding creditors if the transaction was at an undervalue and the court is satisfied that it was made for the substantial purpose of putting assets beyond the reach of a person who is making, or may make, a claim against the company, or of otherwise prejudicing the interests of a person in relation to the claim which that person is making or may make. Any “victim” of the transaction (with the leave of the court if the company is in liquidation or administration) may bring a claim under this provision, which is not limited to liquidators or administrators. There is no statutory time limit to initiate the challenge (subject to the normal statutory limitation periods) and the company does not need to be insolvent at the time of, or as a result of, the transaction.

If the court determines that the transaction was a transaction defrauding creditors, the court may make such order as it sees fit to restore the position to what it would have been if the transaction had not been entered into and to protect the interests of the “victims” of the transaction.

Set-off of mutual debts in insolvency (liquidation and administration) is mandatory and self-executing.

See 7.1 Impact of Insolvency Processes for a description of pre-pack sales. Consensual restructurings and semi-consensual restructurings (involving some type of enforcement action) are typically effected outside of court unless a statutory creditor compromise is required (see 7.9 Dissenting Lenders and Non-Consensual Restructurings).

Scheme of Arrangement

Although not an insolvency proceeding, under Part 26 of the CA06 the English courts have jurisdiction to sanction a scheme of arrangement that effects a compromise of a company’s liabilities between a company and its creditors (or any class of its creditors). An English company or, provided certain conditions are met to engage the jurisdiction of the English court, a foreign company may propose a scheme with respect to its financial liabilities.

Before the court considers the sanction of a scheme of arrangement, affected creditors will vote on the proposed compromise or arrangement in respect of their claims in a single class or in a number of classes, depending on the rights of such creditors that will be affected by the proposed scheme and any new rights that such creditors are given under the scheme.

This compromise can be proposed by the company or its creditors. If a majority in number representing 75% or more by value of those creditors present and voting at the meeting(s) of each class of creditors vote in favour of the proposed scheme, irrespective of the terms and approval thresholds contained in the finance documents, then that scheme will (subject to the sanction of the court) be binding on all affected creditors, including those affected creditors who did not participate in the vote and those who voted against the scheme.

The scheme then needs to be sanctioned by the court at a sanction hearing where the court will review the fairness of the scheme and consider whether it is reasonable. The court has discretion as to whether to sanction the scheme as approved, make an order conditional upon modifications being made or refuse to sanction the scheme. Once sanctioned, the scheme of arrangement binds all affected stakeholders whose rights will be as set out in the scheme of arrangement, which will be effective (in line with its terms) upon delivery of the court’s order sanctioning the scheme of arrangement to the Registrar of Companies.

Unlike an administration proceeding, the commencement of a scheme of arrangement does not automatically trigger a moratorium of claims or proceedings.

Restructuring Plan

Like a scheme of arrangement, a restructuring plan is a procedure under Part 26A of the CA06 which allows the English courts to effect a compromise of a company’s liabilities between a company and its creditors (or any class of its creditors), but with the added possibility of a “cross-class cram-down”. While generally available to the same domestic and foreign companies as schemes of arrangement, a company seeking to enter into a restructuring plan process must show that:

• it has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern; and
• a compromise or arrangement has been proposed between the company and its creditors (or any class of them) for the purpose of eliminating, reducing or preventing, or mitigating the effect of, any of those financial difficulties.

A restructuring plan may be proposed by the debtor company, any creditor of the company or any liquidator or administrator appointed to the company. Affected creditors will vote on the proposed compromise or arrangement in respect of their claims in a single class or in a number of classes depending on the rights of such creditors which will be affected by the proposed restructuring plan and any new rights that such creditors are given under the restructuring plan.

A restructuring plan will be deemed to be approved if at least 75% in value of the creditors and/or members (if applicable) present and voting at the meeting of at least one class of creditors vote in favour of the proposed compromise. There is no requirement for the approving creditors to constitute a majority in number of those creditors present and voting, and there is crucially no requirement for each and every voting class to approve of the plan, provided that the court is satisfied that:

• none of the members of a dissenting class would be any worse off if the restructuring plan were to be sanctioned than they would be in the event of the “relevant alternative”; and
• the restructuring plan was approved by at least one class of creditors who would receive a payment or have a genuine economic interest in the company in the event of the “relevant alternative”.

The “relevant alternative” for the purposes of this assessment is whatever the court considers would be most likely to occur in relation to the company if the restructuring plan were not sanctioned. By virtue of these mechanisms, the restructuring plan process provides for the possibility of a “cross-class cram-down”, meaning the courts may sanction a restructuring plan even if one or more classes of affected creditors do not vote in favour of the restructuring plan, effectively allowing the vote of one class of stakeholders to bind other classes.

Following approval of the restructuring plan at the creditor meeting(s), the restructuring plan needs to be sanctioned by the court at a sanction hearing where the court will review whether the applicable statutory conditions have been met and may also consider whether the restructuring plan is just and equitable. The court has discretion as to whether to sanction the restructuring plan as approved, make an order conditional upon modifications being made or refuse to sanction the restructuring plan.

Once sanctioned, the restructuring plan binds all affected stakeholders whose rights will be as set out in the restructuring plan, which will be effective (in line with its terms) upon delivery of the court’s order sanctioning the restructuring plan to the Registrar of Companies or, where the company is an overseas company, publication of the court’s order in the Gazette. As with a scheme of arrangement, the commencement of a restructuring plan process does not automatically trigger a moratorium of claims or proceedings.

See 7.1 Impact of Insolvency Processes for a description of pre-pack sales.

In general, concerns relating to leakage permissions in the covenants and liability management that apply to syndicated loans also apply to private credit loans. These concerns may be heightened in private credit transactions due to:

• the lack of liquidity, which means that private credit lenders cannot easily exit their positions, prompting them to seek stricter terms to protect their investments over the loan’s duration;
• private credit lenders often provide bespoke financing solutions tailored to specific borrower requirements. In exchange for this customisation and flexibility, stricter covenants and terms to ensure that the borrower adheres to agreed-upon financial and operational metrics are required; and
• private credit lenders often take a more active role in monitoring and engaging with borrowers compared to syndicated lenders. Stricter terms facilitate this involvement, allowing earlier intervention if a borrower’s performance deviates from expectations.

On Holdco deals, even if there are significant flexibilities in the Opco documents, private credit lenders will require certain flexibilities to be limited at the Holdco level.

Due Diligence and Risk Assessment

Thorough due diligence and robust risk assessment are crucial in private credit transactions. Recent deals underscore the need for lenders to deeply understand the borrower’s business model, industry dynamics and financial health to mitigate risks effectively.

Covenant Structures

The use of covenants remains a critical tool for managing risk. Recent transactions illustrate the trend towards more nuanced covenant structures that balance protection for lenders with operational flexibility for borrowers.

Market Adaptability

The private credit market is influenced by broader economic conditions, such as interest rate fluctuations and geopolitical events. Recent transactions demonstrate the importance of adaptability, with lenders and borrowers adjusting terms and strategies to reflect changing market conditions.

Partnerships and Collaboration

Collaboration between private credit lenders and other financial institutions can enhance deal execution and broaden the range of available financing solutions. Recent deals highlight the benefits of strategic partnerships in expanding market reach and leveraging complementary strengths.

Focus on ESG

ESG considerations are increasingly important in private credit transactions. Recent deals reflect a growing emphasis on incorporating ESG criteria into investment decisions, aligning with broader trends towards sustainable and responsible investing.

Acknowledging the bespoke nature of private credit offerings is essential for both lenders and borrowers. Private credit funds are known for their underwriting flexibility, which allows them to tailor financing solutions to meet the specific needs of borrowers. This flexibility is a significant advantage, enabling private credit lenders to structure deals that might not fit the more rigid frameworks of traditional bank or syndicated loans. However, this adaptability also means that the documentation for private credit transactions tends to be more nuanced and requires careful negotiation.

While there are similarities between private credit products and those offered by the syndicated market, the tailored approach of private credit necessitates a distinct strategy. By engaging specialist teams early on, both lenders and borrowers can optimise their strategies, ensuring that the final terms of the transaction are well-suited to their respective needs and objectives.