The private credit market had previously flourished at the same time as the broadly syndicated market experienced a dislocation. However, over the last 12 months, banks have been returning to the syndicated market strongly, resulting in tougher competition for private credit lenders. At the same time, a wave of repricings reduced the higher spreads that had traditionally been a feature of the private credit market and created downward pressure on the size of loan commitments provided by direct lenders. Moreover, M&A and IPO activity was muted as many prospective deal makers sat on the sidelines waiting out the results of the US Presidential election. As a result of these increased challenges in the private credit market, lenders focused more on new asset classes and industries such as infrastructure, consumer lending and real estate to carve-out gains in a tepid landscape for deal activity.

That said, with the 2024 Presidential election behind us, the 2025 outlook points towards gaining momentum for M&A and IPO activity. Given the repeated success of the private credit market in providing private equity sponsors with speed, innovative financing solutions and execution certainty, the private credit market will be poised to capitalise on this increased activity over the next 12 months.

Public debt markets have become increasingly competitive with the private credit market over the course of 2024, marking a shift from 2023 when the vast majority of acquisition financings were provided by private credit lenders. With falling interest rates tightening credit spreads, the broadly syndicated market roared back in 2024 to recapture the market share that investment banks had ceded to private credit lenders, in particular through refinancings, which, according to LCD data, accounted for 20% of financing transactions by deal count in 2024.

Despite this competitive landscape, banks have been increasingly involved in a number of key partnerships with private credit players, showcasing the undeniable strength of the private credit market and signalling the evolving relationship between the public and private debt markets. For example, Citigroup Inc entered into a USD25 billion partnership with Apollo Global Management in 2024 and Wells Fargo teamed up with Centerbridge Partners in a USD5 billion partnership. We expect more partnership announcements of this kind in 2025 as market participants look to consolidate and strengthen their positions as the outlook brightens with increased M&A and IPO activity.

Private debt continued to play a major role in acquisition financings over the last 12 months as private credit lenders stepped up with committed financings in the form of jumbo unitrache debt facilities to support some of the largest acquisition financings on tight timelines. To meet the demand of rising deal sizes, private equity sponsors have increasingly been building larger clubs of private debt lenders rather than relying on a single or small number of underwriters.

The main challenge for the expansion of private credit has been the re-emergence of the broadly syndicated market against the backdrop of tightening credit spreads, which in turn increased competitive pressure from investment banks in the syndicated space. Private credit lenders have also become more cautious and conservative following the erosion of deal protections stemming from the fast growth of the private credit market. Private credit lenders have sharpened their focus on liability management issues, particularly following the Pluralsight drop-down of assets to ensure that the erosion of terms does not become commonplace in the market.

The primary product for private credit providers remains the unitranche facility. However, private equity sponsors have also turned to private credit lenders for a variety of creative hybrid financing packages including Holdco facilities, mezzanine debt and junior capital positions to provide additional liquidity to support acquisitions in the United States without sacrificing leverage levels. Private equity sponsors in the United States have been increasingly taking advantage of debt-like, non-convertible preferred equity in order to supplement the liquidity of the operating company within the corporate structure, with the preferred equity allowing sponsors to incur additional leverage without the burden of cash interest payments (as these products often have a payment in kind (PIK) feature).

Private credit providers are primarily focused on private equity sponsors and their portfolio companies. At the same time, private credit solutions also support emerging growth companies and non-investment grade corporate borrowers (including public borrowers). By contrast, private credit providers are not particularly active in the investment grade space. Yields are therefore often insufficient to satisfy a private credit provider’s investment strategy.

Recurring revenue deals are still a relatively new innovation allowing lenders to finance growth-stage companies that have low or negative earnings before interest, taxes, depreciation and amortisation (EBITDA). Amid the increasing interest rate environment in the back half of 2022 and throughout 2023, the number of recurring revenue deals coming to market slowed dramatically. This last year, however, saw the re-emergence of these transactions both in the context of new take-private acquisitions (including Vista’s closing in Q1 of EngageSmart) and the private M&A markets.

Overall transaction size between private credit transactions and syndicated matters has continued to converge further. Private credit continues to see a greater number of jumbo deals at market.

The private credit asset class continues to attract investor interest. In the last 12 months, traditional banks have pushed further into the private credit space via partnerships and also internal focus on private credit solutions. Additionally, the continued enthusiasm for private credit has spurred a wave of consolidation (including Blackrock’s planned acquisition of HPS Investment Partners).

With a new US administration, the Federal Trade Commission (FTC) and the Justice Department more broadly are expected to reduce regulatory scrutiny around M&A and financial services. Accordingly, many are anticipating a robust year for the M&A markets with private credit serving to support many transactions.

While no US federal regulatory framework applies to non-bank lenders that are engaged in commercial lending in the United States, a few US states require non-bank lenders to obtain a licence before engaging in commercial lending activities (ie, lending activities between corporate lenders and corporate or institutional borrowers for business or commercial purposes) under certain circumstances. The commercial lending licensing requirements of some of these states are generally only triggered when a commercial loan is secured by real property located in the state. In our experience, California is the state most often implicated in the commercial lending context due to the broad scope of California’s commercial lender licensing requirement. The US states that may impose commercial lending licensing requirements (unless an exemption from such licensing requirements applies), generally include California, Florida, Nevada, North Dakota, South Dakota and Vermont.

While New York has a commercial lending licensing requirement, the requirement only applies to business and commercial loans in the principal amount of USD50,000 or less that also meet other specified conditions.

Certain US state banking regulators are the primary regulators for private credit activity in the United States.

Special rules may apply depending on the industry and asset. Generally speaking, typical areas of regulatory approval for acquisitions (or financings thereof) include US antitrust regulations, foreign direct investment laws applicable to the industry and asset (for example Committee on Foreign Investment in the United States (CFIUS) approvals), along with customary sanctions, anti-money laundering and KYC rules that apply to lenders generally.

Private credit providers may have specific reporting requirements to their investors and to regulators depending on the vehicle utilised. For example, business development companies (BDCs) arranged by private credit providers may have to meet specific disclosure and reporting requirements.

Private credit providers are able to provide sole underwrites or club deals for large multibillion-dollar transactions on terms that are competitive. This approach of forming clubs to facilitate larger transactions has not raised any regulatory impediment.

In recent years, we have seen the size of private credit transactions continue to grow while the dry powder available for deployment by such direct lenders has simultaneously increased.

Increasingly Shorter Process

The timeline for transactions in the private credit space is consistently shrinking. In recent times, sponsors have increasingly elected to equity back-stop new acquisitions and skip a commitment letter process and move directly into the credit agreement negotiation instead. Of course, this type of process would not be possible in the syndicated market.

Recurring Revenue Transactions

2024 saw the emergence of transactions based on annual recurring revenue (including Vista’s announced take-private of Smartsheets). Only private credit providers have been involved in supporting these transactions, which involve lenders supporting high-growth technology businesses with strong recurring revenue and a promising future which would allow for the transaction to flip to EBITDA metrics down the line.

Delayed Draw Term Loans

Private credit providers are well-positioned to make delayed draw facilities readily available. In instances where a sponsor is looking to implement a “growth by acquisition” strategy, this ability can make a private credit solution more attractive than a syndicated option which may not include an accompanying delayed draw component. It is less typical for syndicated solutions to offer sizeable delayed draw components.

Portability

Private credit lenders are typically closely engaged with the sponsor and well-positioned to move quickly on amendment transactions. In 2024, a number of amendments and refinancings included the addition of portability (ie, a “permitted change of control”) allowing the Opco to trade hands without triggering an event of default.

PIK

Sponsors are often seeking PIK options in private credit transactions to allow the sponsor increased flexibility in managing liquidity.

Financial Covenants

Financial covenants in private credit transactions increasingly look more like financial covenants included in syndicated transactions. In other words, where private credit lenders had previously sought financial maintenance covenants applicable to the full facilities, recent private credit transactions mirror syndicated documentation in providing for a springing financial covenant only applicable to the revolver and only triggered when the revolver is drawn above a certain threshold.

Many middle market and larger private credit transactions are being structured as unitranche deals with a payment waterfall directly included in the credit agreement itself. This removes the need for a separate agreement among lenders. Still, where a capital structure includes an unsecured mezzanine debt component, the senior secured facility and the mezzanine debt facility will be bound together by a subordination agreement designed to restrict payments on the mezzanine debt (for the benefit of the senior secured facility).

Foreign lenders may be subject to certain limitations that prevent them from leading deals or serving in the agency function.

Using proceeds to acquire (or carry) “margin stock” is subject to certain limitations and restrictions. These apply if the direct or indirect security for the acquisition financing consists of securities that are traded on an exchange in the US, or “margin stock”. These restrictions (often referred to as the “margin regulations”) limit the amount of loans that can be collateralised by these securities.

The US margin regulations can also be triggered by the existence of arrangements that constitute indirect security over “margin stock”, such as through negative pledge provisions or other arrangements that limit a borrower’s right to sell, pledge or otherwise dispose of “margin stock”. In addition, borrowers and issuers are restricted from using proceeds in violation of applicable laws, including anti-money laundering, sanctions and anti-corruption laws, and these restrictions are usually included in the financing agreement.

As a market convention, the use of proceeds for an acquisition financing is often limited by contract to the financing of the acquisition (including purchase price adjustments), the refinancing of existing indebtedness and, to a limited extent, for initial working capital. Acquisition financings rarely also permit additional special dividends but earn-outs and appraisal rights are often funded with proceeds of acquisition financings.

Generally speaking, borrowers, and their sponsors, are contractually permitted to buy back term loans (but not revolving debt). The extent to which these purchases may be conducted is often limited to between 25% and 30% of total outstanding term loans.

Loan documentation (in both the syndicated and private credit markets) has developed since the great financial crisis to permit non-pro-rata debt buybacks. All except the lowest middle market loan documentation will include customary provisions permitting Dutch auction buybacks offered to all lenders. Many sponsors also insist on the ability to buy loans from lenders via “open market repurchases”, which may not expressly need to be offered to all lenders.

Any analysis should be undertaken on a case-by-case basis.

Liability Management Transactions

Certain liability management exercises have impacted private credit transactions (eg, Pluralsight) and increased the focus of private credit lenders on capacity for investments in non-loan parties and in liability management protections more generally. At this point, private credit lenders are increasingly assessing not only the presence of liability management protections but also the flavour of the protections included in debt documents.

Portability

While M&A and capital markets activity is increasing, the prior trough in deal activity prompted an increasing number of sponsors to seek portability in the form of “permitted change of control” provisions.

Private credit providers continue to develop and deploy new junior and hybrid capital solutions to provide additional liquidity. These options allow for higher overall leverage levels. In many instances, sponsors are looking to debt-like, non-convertible preferred equity at the Holdco level.

Private credit transactions are increasingly including PIK components.

Availability of PIK Option

In the context of a typical private credit transaction with an Opco (as opposed to a Holdco debt), a PIK option is limited to the first two or three years following the closing date. In other words, after year two (or, in some cases, year three), all interest payments must be made fully in cash.

Amount of PIK

When available, a PIK option will allow for some portion of the “applicable margin” due on a term loan facility to be paid-in-kind. The amount of “applicable margin” that may be paid-in-kind is typically capped at 50% although this is negotiated between the parties. Moreover, where a term loan facility includes a pricing step-down (or series of step-downs), private credit providers may expect a “minimum cash pay” construct which prevents the amount of cash margin paid from dipping below a certain level (eg, a 2.50% “minimum cash pay”).

PIK Premium

Where a PIK option is available, private credit providers expect to be paid a premium when the PIK option is exercised. This premium may be hardwired at 50 bps so that any usage of the PIK option produces a 50 bps premium. Alternatively, some formulations will allow the borrower to only use a portion of the PIK option and only pay a portion of the PIK premium (eg, only convert half of the allowable 50% of the margin into PIK (ie, 25% PIK) and only pay half of the premium (ie, 25 bps).

Amortisation

Private credit transactions that include a PIK option often include some level of amortisation holiday. A common formulation would be to forgo amortisation in any quarter in which a PIK election is made. That said, there are some private credit deals in the market without any amortisation at all for the life of the loan.

Private credit providers continue to seek broader call protection than that typically offered in the syndicated market. But while private credit providers continue to seek 103/102/101 or 102/101 “hard call” formulation these protections have been diluted by various carve-outs not historically included in “hard call” formulations.

Exclusions

Recent private credit transactions generally include some combination of the following exclusions:

• internally generated cash;
• a qualified IPO;
• sale of all or substantially all of the applicable borrower’s assets;
• change of control;
• dividend recapitalisations; and
• some sort of “transformative transaction” or “enterprise transformative event” (typically defined as: (x) an acquisition or disposition of significant size; (y) a transaction that is not permitted by the existing debt documents; and/or (z) a transaction that if consummated would not leave the borrower sufficient flexibility under the existing debt documents).

Of course, many transactions will include some subset of this list and there is certainly room for negotiation around underlying definitions like “internally generated cash” and “transformative transaction”.

Step-Downs

In a traditional 102/101 “hard call” formulation, any prepayment made in year one (if not eligible for an exclusion/carve-out), would be accompanied by a 2.00% premium. In the most recent matters, sponsors have sought interim step-downs such that the prepayment premium would decline by 25 bps per quarter (ie, a prepayment in the third full fiscal quarter following the closing date would only garner a 1.50% premium).

Payments by US issuers or borrowers to US holders or lenders are not subject to withholding taxes under federal law.

The US federal government generally imposes a 30% withholding tax on interest paid to non-US lenders on a debt obligation of a US person (and certain non-US persons engaged in trade or business in the US). For this purpose, payments with respect to any original issue discount, if not considered less than de minimis, are also treated as interest income and subject to such withholding tax.

If a lender is qualified for the benefits of an applicable double taxation treaty between the US and its country of residence, the withholding tax may be reduced or eliminated.

A non-US lender may alternatively qualify for exemption under the “portfolio interest exemption” (the “PIE”). To qualify, the lender must not:

• be a controlled foreign corporation related to the borrower or a bank receiving interest on an extension of credit entered into in the ordinary course of its trade or business; or
• own directly, indirectly or by attribution equity representing 10% or more of the borrower’s total combined voting power of all voting stock (or, if the borrower is a partnership, 10% or more of its capital or profits interest).

The PIE is only available for debt in “registered form” for US federal income tax purposes and does not apply to certain contingent interest, such as interest determined by reference to any receipts, sales, cash flow, income, or profits of or the fluctuation in value of property owned by, or dividends, distributions or similar payments by the borrower or a related person.

To claim an exemption or reduction under an applicable double taxation treaty or the PIE, the beneficial owner of interest must generally submit a completed IRS Form W-8BEN-E (or, IRS Form W-8BEN, if an individual).

If interest paid to a non-US lender is effectively connected with the lender’s trade or business in the US, such interest will not be subject to US federal withholding tax if the lender submits a completed IRS Form W-8ECI, but will generally be subject to net income tax in the US and, for foreign corporations, branch profits taxes.

Other exemptions may be available for foreign governments or governmental entities assuming they provide the applicable completed IRS Form W-8EXP.

Withholding taxes may also apply upon:

• payment to a US person that does not demonstrate an exemption by providing an applicable completed IRS Form W-9;
• payment of US source interest and certain other amounts to entities treated as “Foreign Financial Institutions” not eligible for an exemption from Foreign Account Tax Compliance Act (FATCA) withholding tax; and
• payment of various fees (such as letter of credit fees), modifications to debt obligations and various adjustments on debt obligations convertible into stock.

Payments under a guarantee are generally similarly treated, with the source of payments for US federal income tax purposes generally determined based on the residence of the borrower. If the lender is receiving security proceeds, the transaction may generally be treated as a payment on the loan. Under certain circumstances, the lender may be treated as the owner of the foreclosed property, resulting in adverse tax consequences (especially cases of US real property held by a foreign lender).

Continuous and regular lending to US borrowers may result in the US government considering the person as engaged in US trade or business, requiring the lender to file a US tax return and pay income taxes on income attributable to the trade or business. Any activities considered secondary trading are generally exempted from these rules, irrespective of continuity or regularity.

Foreign lenders should therefore take care to limit the extent and scope of their origination activities. If foreign lenders that are engaged in extensive origination activity are also qualified for the benefits of a double taxation treaty and do not have a permanent establishment in the US, the foreign lenders may be protected under the rules of the treaty.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

As is the case with syndicated loans, private credit lenders typically take a security interest in substantially all of the property and assets of the company group. These assets can be broadly divided into real property interests and personal property interests. Where real property constitutes collateral, a lender takes a valid security interest by execution of a mortgage, deed of trust or similar security interest under applicable state law where the real property is located. The creation and enforcement of a security interest in real property is governed by the law of the state where the real property is located, so engagement of counsel in this jurisdiction is important to ensure that necessary local law requirements are adhered to.

Security interests in personal property are governed by Article 9 (Secured Transactions) of the Uniform Commercial Code (the “UCC”) of the applicable jurisdiction. To create a valid security interest in personal property, including equipment, inventory, deposit accounts, investment property, instruments, intangibles, receivables and shares in companies (as well as the other categories of collateral governed by Article 9 of the UCC):

• a security provider (the grantor) must execute or authenticate a written or electronic security agreement that provides an adequate description of the collateral;
• the grantor must have rights in the collateral or the power to transfer such rights; and
• value must be given.

Although the last two requirements are mandatory, an oral security agreement may be sufficient if the secured party is in possession or control of the collateral. However, the absence of a signed and written security agreement would be rare in a commercial transaction. The security agreement is typically selected to be governed by the same law as the law of the state that governs the loan agreement even though the assets intended to be covered by such security agreement may be located outside of such state. The UCC is state statutory law and each state of the United States has enacted its own version of it. Although a variety of relatively minor differences exist, Article 9 of the UCC is substantially the same across each and every state.

Therefore, little concern typically arises about a debtor in one state granting a security interest under a security agreement governed by the law of a different state. The parties in commercial financings commonly choose the law of a single state (for example, New York law) to govern both the loan agreement and the security agreement, even if some or all of the debtors (or their assets) are located in another jurisdiction. Although parties are generally free to choose what law governs the creation or “attachment” of the security interest, the choice of law rules governing perfection, including where to file a notice filing under the UCC (referred to as a UCC-1 financing statement) and priority are mandatory.

A security interest in personal property is said to have “attached” when it becomes enforceable against the debtor. A secured party will also want to “perfect” the security interest so that it is also enforceable against third parties, such as other voluntary or involuntary lienholders and against a trustee in bankruptcy proceedings.

A security interest in most types of personal property collateral governed by the UCC may be perfected by filing a UCC-1 financing statement with the Secretary of State in the “location” of the debtor, although important exceptions apply. A UCC-1 financing statement is ineffective to perfect in deposit accounts, money or letter of credit rights as original collateral. Perfection in some assets are governed by US federal law (which pre-empts state law such as the UCC), including registered copyrights, aircraft and related assets, most ships and other vessels, rail cars and other rolling stock.

Perfection in these assets therefore requires compliance with the perfection scheme established by the applicable federal statute. Security interests in vehicles and other assets subject to certificates of title must be perfected by applicable state law certificate of title statutes. Security interests in real estate and other assets excluded from the scope of Article 9 of the UCC (such as insurance, as original collateral) require compliance with the applicable state law governing the assets.

For debtors that are “registered organisations” (which includes most domestic corporations, limited liability companies and limited partnerships), the UCC-1 financing statement must be filed in the jurisdiction in which the grantor was formed or incorporated. Special rules apply to other types of organisations, including non-US entities, natural persons and other special types of debtors.

In addition to perfection by filing a UCC-1 financing statement, a secured party may perfect its security interest in certain assets by taking possession and/or “control” of the assets. Goods, instruments, tangible negotiable documents, certificated securities and tangible chattel paper are examples of collateral that may be perfected by possession. Obtaining “control” of assets such as deposit accounts, investment property (including share certificates), letter of credit rights and electronic chattel paper perfects a security interest and may provide additional protections or priority to the secured party over perfection by filing.

Certain collateral such as accounts (ie, receivables that are not evidenced by an instrument or chattel paper) and general intangibles (a residual category describing intangible collateral that does not fall into another UCC category) may only be perfected by the filing of a UCC-1 financing statement. Article 12 of the UCC, which at the time of writing has been enacted in some but not all states, will permit perfection by control of digital assets, such as cryptocurrencies and non-fungible tokens (NFTs), as well as certain electronic accounts and payment intangibles that exist in controllable form.

In certain circumstances, a security interest may be perfected automatically without any further action, but in commercial transactions relying on these exceptions is unusual and at a minimum a UCC-1 financing statement would be filed. A secured party may perfect its security interest by multiple methods (eg, by filing as well as by possession and/or control) and in the case of important assets such as certificated equity interests, a secured party will typically prefer to use every method of perfection available.

Perfection by possession and/or control is generally preferable to perfection by filing of a UCC-1 financing statement alone, as this entitles the secured party to higher priority, may protect the secured party from third parties acquiring better rights in the collateral and as a practical matter may facilitate enforcement on the asset in the case of a foreclosure.

The security agreement is signed at closing and contemporaneously with the loan agreement. UCC-1 financing statements and intellectual property filings made with the US Copyright Office (in the case of copyrights) and the United States Patent and Trademark Office (in the case of patents and trade marks) are typically filed at closing. Physical share certificates are usually delivered to the secured party at closing although in the case of an acquisition these are sometimes permitted to be delivered shortly after closing. Real estate mortgages and control agreements with third parties (for example, deposit account control agreements entered into with a third-party depositary bank), when part of the collateral package, are often post-closing items to be delivered within a few months of closing.

It should be noted that security interest in collateral that is perfected beyond 30 days of the loan closing may be avoided as a preference transfer by a bankruptcy trustee in the event a grantor goes into insolvency proceedings within 90 days (or one year if the lender is an “insider”) of the perfection. If a preference action is successful, the lender will need to return the collateral or the proceeds from it to the grantor’s estate. A lender should conduct routine collateral audit post-closing to identify any gaps in perfection before the borrower group gets into potential financial distress.

US law does not categorise grants of security as being “fixed” or “floating,” nor do those terms have legal meaning under US law, but by analogy these grants are permitted and common. Under New York law and in the US more generally, grants of security over personal property security routinely cover both presently owned and after-acquired assets.

Certain personal property collateral is excluded from Article 9 of the UCC and therefore obtaining a valid security interest over those assets is more difficult. The primary methods of perfection in personal property are the:

• filing of a UCC-1 financing statement;
• filings with the US Copyright Office with respect to registered copyrights; and
• filings with the United States Patent and Trademark Office with respect to patents and trade marks.

However, the current law suggests that only a UCC-1 financial statement filing is sufficient for perfection in these assets and physical share certificates and debt instruments must be delivered to the secured party.

Other methods of perfection by “control,” for instance by control agreements with respect to deposit accounts or securities accounts, are negotiated deal points. Security interests in real property, where negotiated to be part of the collateral package, typically take the form of a security instrument such as a mortgage, deed of trust, a trust indenture or a security deed (ie, a deed to secure debt), depending on the jurisdiction in which the property is located, with a mortgage being the typical security instrument used in New York.

A blanket lien on all assets, including future assets, is possible, but is often limited by market convention to have customary exclusions. Private credit transactions are typically supported by “all asset” or “blanket” liens (subject to agreed exceptions) over the assets of the target and its subsidiaries and an equity pledge by a holding company in the top-tier operating company.

Although collateral exclusions are negotiated on a deal-by-deal basis, common exceptions to an all-asset grant include assets for which a grant of security is subject to legal restrictions or consequences, such as “margin stock” or “intent-to-use” trade marks, assets for which a grant or perfection is determined to be overly costly, such as mortgages for real property located in a “flood zone” or assets subject to certificate of title statutes and assets for which a grant of security would violate or impair other contractual relationships of the debtor, such as security interests in purchase money, or capital lease assets or assets subject to securitisation financings.

Often general exclusions exist for any assets in which the grant of security would violate any laws or regulations, would require third party (including governmental) consents or for which the burden or cost of granting a security interest outweighs the benefits afforded thereby. Exceptions may also apply to the requirement to perfect security interests in certain collateral, particularly if the relevant perfection action is costly or time-consuming. Although these exceptions are common, the business context of any particular deal will dictate which exclusions are acceptable.

US companies are generally permitted to guarantee and secure the obligations of another group member, via upstream, downstream or cross-stream guarantees, subject to certain considerations and limitations.

To be enforceable, the guarantee needs to comply with certain general principles like receipt and sufficiency of consideration and, in some states, be in writing and duly executed by the guarantor to comply with the statute of frauds. However, showing direct corporate benefit to the guarantor is not necessary to determine sufficiency of consideration where the intercorporate guarantee benefits the group as a whole. The US does not generally have any restrictions on “financial assistance” that would prohibit providing guarantees or security to support borrowings to finance the acquisition of a target company.

In insolvency proceedings, corporate benefit consideration is relevant to determine whether the guarantee can be challenged as a fraudulent transfer under the US Bankruptcy Code. Under fraudulent transfer analysis, a transfer of an interest in property of the debtor may be voidable if:

• made with actual intent to defraud or deprive creditors of value; or
• made:
1. when the debtor is insolvent or that render the debtor insolvent; and
2. for which the debtor receives less than reasonably equivalent value.

The company and the lenders will need to be comfortable with the solvency of the guarantors and security providers, requiring solvency representations to this effect. In addition, the estates of an entity subject to a Chapter 11 bankruptcy proceeding would have the right to pursue any claims of the debtor, including claims for breach of fiduciary duty claims against directors and officers, such as for the approving of fraudulent transfers (to the extent available under applicable law).

In the case of upstream guarantees or other credit support from foreign subsidiaries in support of the indebtedness of a US debtor, deemed dividends may apply under US federal tax law. Since 2019, limited tax law reform has reduced the impact of upstream guarantees and other credit support from non-US subsidiaries.

Notwithstanding the positive tax reform opening the door to more non-US credit support, as a general matter and except in rare occasions where it is critical from a credit perspective, non-US upstream guarantees and credit support are often excluded outright from the guarantee and collateral package of US debt financings, primarily on cost and complexity grounds.

The US does not generally have any restrictions on “financial assistance” that would prohibit providing guarantees or security to support borrowings to finance the acquisition of a target company. However, there may be regulatory issues to consider when the guarantee or security provider is a specialised or regulated entity.

The US is a flexible jurisdiction from the perspective of “financial assistance” by the target, and no whitewash is necessary. No governmental approval is generally required for providing guarantees or security, although exceptions exist for highly regulated entities. US law does not have a concept of “hardening,” but transfers, including creation or perfection of a security interest, on account of an antecedent (pre-existing) debt made within the 90 days prior to a bankruptcy filing when the debtor was insolvent, are voidable if they permit the creditor to receive more than they would in a hypothetical liquidation under Chapter 7 of the US Bankruptcy Code. The 90-day period is extended to one year for “insiders”. There are a variety of statutory defences and safe harbours to preference claims.

US law does not generally recognise retention of title transactions and will instead recharacterise such an arrangement as merely the reservation of a security interest. Article 9 of the UCC broadly overrides restrictions on assignment under contracts or applicable law that would prohibit or restrict the creation of a security interest in the asset. The extent of the override depends on several factors, including the type of asset in question and whether the restriction is on the sale of the asset or only the creation of a security interest in it.

The primary method of lien release is an agreement or acknowledgment by the secured party, together with terminations of financing statements or other filings made in public records. The security agreement or loan agreement typically contains provisions setting out the circumstances in which the security interest in collateral will be released, including upon payment in full of all outstanding obligations. To the extent a sale or disposition of collateral is permitted under the credit agreement, it is common to provide a corresponding release of lien in the collateral.

Although the lien release provisions may be drafted to occur automatically upon the repayment or disposition, it is market practice to include agreement from the lender (or its agent) to expressly release and terminate the applicable liens, such as in a loan payoff letter (in the case of loan repayment) or a lien release instrument (in the case of a disposition). In connection with the release, physical collateral of share certificates and promissory notes that were delivered to the lender will be returned to the debtor. In addition, the lender will:

• file (or authorise the filing of) UCC-3 termination statements with respect to all UCC-1 financing statements filed against the debtor and termination of the security interest filings made at the US Copyright Office and the United States Patent and Trademark Office; and
• provide notice of lien release to applicable third parties who have entered into control arrangements with the lender.

If other perfection methods were undertaken in connection with the collateral (such as real estate mortgages or entry into control agreements with third parties), additional termination agreements or instruments may also be required.

In the US, borrowers often incur multiple financings with different lenders, each secured by a valid and enforceable security interest in a common pool of collateral. The UCC provides statutory rules to determine priority of competing liens in personal property collateral. Among secured creditors, a perfected security interest has priority over an unperfected one. Among creditors with perfected liens, a security interest perfected by control or possession generally has priority over a security interest perfected only by a UCC-1 financing statement filing and among creditors who perfect only by UCC-1 financing statement filing, the first in time to file generally has priority. The most notable exception to the first in time rule is the priority given under the UCC to creditors secured by a purchase money security interest (PMSI) so long as the PMSI lender complies with the filing (and, in the case of inventory, notification) requirements within the period set out under the UCC.

The statutory rules of priority under the UCC can be contractually altered by the lenders, typically in an intercreditor agreement entered into by the different lenders (or their agents) and acknowledged by the grantors. Intercreditor agreements are generally held to be enforceable in line with their terms by the bankruptcy court under Section 510(a) of the US Bankruptcy Code. Intercreditor agreements establish lenders’ relative priorities in common collateral, whether as first lien/second lien, pari passu (or equal) lien, or split lien (ie, first lien in one pool of collateral and second in rest), including enforcement or exercise of remedies with respect to the collateral upon default under the financing agreements and order of payment from proceeds of the collateral, including under 363 sale or other collateral liquidations in case of the bankruptcy of the borrower group.

Liens arising by operation of US state or federal law are wide-ranging. Liens may arise in connection with unpaid taxes, judgments, goods in possession of bailees, shippers or service providers, landlords, depositary institutions providing financial services to their customers and numerous federal statutes applicable to agricultural products, to name a few. In many cases the general rules of Article 9 of the UCC establish lien priority as among competing interests, but in some cases the UCC either expressly defers to another statutory priority scheme or, in the case of federal law or international treaties, the UCC priority rules are pre-empted.

Parties are generally permitted to contractually alter their priority in collateral and therefore a party with a priming statutory lien may voluntarily agree to subordinate their lien to that of a secured lender, but in many cases a secured lender avoiding a priming statutory lien is not feasible. Liens arising by operation of law are often solely applicable to specific assets and/or secure only specific obligations, so with routine diligence lenders may be comfortable that the impact of any such actual or hypothetical liens is negligible in the context of the overall transaction or otherwise draft covenants to mitigate the risk.

Under the UCC deposit accounts as original collateral may only be perfected by “control”. The most common method in secured lending transactions is a deposit account control agreement entered into between the debtor, the secured party and the depositary bank. A UCC-1 financing statement is ineffective to perfect in deposit accounts as original collateral. It is therefore common for private credit transactions to either exempt deposit accounts from the perfection requirement or, in some cases, partially or entirely exclude deposit accounts from the collateral. A depositary bank has an automatically perfected lien under the UCC over the deposit accounts of its customer and a secured lender wishing to obtain priority over the lien will need to obtain the depositary’s agreement to subordinate its interest. However this is moot in lending transactions where deposit accounts are either not required to be perfected or are excluded from the collateral.

It is common for secured hedges and cash management obligations to be secured by the same collateral that secures private credit transactions. These interests are most often secured under the same collateral documentation as the bank loans and these obligations are secured on a pari passu basis.

In financings provided by multiple lenders in the US, the lenders typically appoint a collateral agent under the credit agreement to hold security interest in collateral granted by debtors on behalf of the lenders. There is no US law requirement that security interest be granted directly to each lender individually nor is there any requirement that the collateral agent be licensed or regulated in the taking or holding of collateral.

If a loan is assigned by a lender (assignor) to a new lender (assignee), typically pursuant to an assumption and an assumption agreement attached to the credit agreement, the assignee will purchase and assume all of the assignor’s rights and obligations under the credit documents, including all rights of the assignor as a secured party in the collateral. No additional steps to re-grant or re-perfect liens would be needed.

Remedies are available for lenders with a valid security interest immediately upon the occurrence of a default or an event of default on the secured obligations, subject to any contractual agreements to the contrary and application of the “automatic stay” in the event that the grantor is subject to a bankruptcy proceeding. The definitive documentation under private credit transactions usually rigorously defines what constitutes a “default” or “event of default” (or like term) after which the secured party may exercise remedies against the collateral. Although creditors that are secured parties generally have the option of judicial enforcement, out-of-court “self-help” options are available under the UCC, which are cheaper, faster and therefore much more common than resorting to judicial remedies.

Among other “self-help” remedies, a secured party may:

• commence collection activities with respect to deposit accounts, receivables or other rights to payment;
• repossess; and/or
• sell collateral and exercise rights of set-off.

Any exercise of remedies or enforcement by a secured party is required to avoid a breach of the peace and in general must be commercially reasonable. The UCC also requires various notices in connection with the exercise of certain remedies such as sales of collateral or retention of collateral in full satisfaction of the debt, but market practice has also imposed various contractual limits (usually contained in the applicable collateral agreement) on the enforcement of security without additional notices or grace periods.

Private credit transactions commonly include an equity pledge of the borrower and its subsidiaries, and if an out-of-court foreclosure sale is contemplated, a sale of some or all of the equity of the company group is an attractive option. Before, or in connection with the enforcement, the secured party may wish to exercise voting or other rights inuring to the holders of the equity interests, including replacing the board of directors or other governing body of the borrower, but any such voting or proxy rights must be specifically negotiated in the security agreement and may be subject to limitations under the borrower’s organisational documents.

Even so, secured lenders may not have an opportunity to exercise “self-help” remedies before the debtor seeks the protection of the US Bankruptcy Code. Lenders and a debtor may alternatively reach a consensual out-of-court agreement whereby the debtor will peacefully transfer collateral to the lender in exchange for consideration such as releases and/or residual equity, etc.

The United States consists of multiple states’ jurisdictions and any agreement must specify the state law that will apply (as opposed to federal law). The law of the State of New York is typically chosen as the governing law for sophisticated debt financing transactions in the United States, particularly for acquisition financings. This is the most common governing law for private debt unitranche deals, broadly syndicated deals and capital markets transactions, including bond financings. It is also common for State of New York law to govern acquisition financings of non-US acquisitions. While the laws of California and Illinois were historically used for lower middle market jurisdictions, the overwhelming majority of sophisticated debt documents are currently governed by State of New York law in practice.

Subject to limitations and qualifications, courts in the State of New York generally permit parties to choose the substantive laws of another jurisdiction to govern a contract, including the substantive laws of other states and/or jurisdictions outside the US. A few other states permit the choice of their law to govern a contract even in the absence of any contacts if the contract satisfies certain dollar thresholds. However, some US states may not respect this choice of law if litigated in such US states in the absence of a reasonable relationship to the chosen governing law.

The US is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral awards, which has been incorporated as Chapter 2 of the Federal Arbitration Act, 9 USC. Section 200 et seq. The US is not a party to any treaties for reciprocal recognition of foreign judgments. Foreign judgments are therefore enforced pursuant to applicable state statutes, which generally follow the Uniform Foreign Money-Judgments Recognition Act, the Uniform Foreign-Country Money Judgments Recognition Act, or common law principles of international comity. Final and binding money judgments that are enforceable in the country where they were rendered are generally enforceable.

Subject again to limitations and qualifications, courts in the State of New York generally recognise:

• judgments from other states in the US, under Article 54 of the New York Civil Practice Law & Rules; and
• some international money judgments from outside the US, under Article 53 of the New York Civil Practice Law & Rules.

In the latter case, there are fraud and public policy exceptions. Courts in the State of New York will reject a foreign country judgment rendered under a judicial system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law or a judgment rendered where the foreign court did not have personal jurisdiction over the defendant or where the foreign court did not have jurisdiction over the subject matter.

Special rules may apply depending on the specific industry and asset in question. However, typical areas of regulatory approval for acquisitions (or financings thereof) include US antitrust regulations, foreign direct investment laws applicable to the industry and asset (for example, CFIUS approvals), along with customary sanctions and anti-money laundering and KYC rules that apply to lenders and persons acting in the US market generally.

Cross-border lending is generally common and is mainly subject to customary sanctions and anti-money laundering and KYC rules that apply to lenders generally.

Enforcement can take many forms and therefore it is difficult to say how long a typical enforcement process would take.

In the case of a foreclosure sale, among other requirements, notices must be sent to debtors and other parties with an interest in the collateral, in most cases at least ten days prior to the sale. In the case of a public sale, the secured party will also need to publish a public notice in appropriate newspapers and periodicals. However every aspect of the foreclosure process must be commercially reasonable and, especially where the collateral is of high-value, unique and/or complex, a commercially reasonable process may take much longer than ten days.

In the most likely case of enforcement on the equity interests of a borrower and its subsidiaries a commercially reasonable enforcement process in the form of a public sale may take approximately six to eight weeks (although this can be significantly faster or slower depending on the facts). Typical costs include attorney costs in conducting the enforcement process, costs for advertising in periodicals or other publications (in the case of a public sale) and possibly hiring professional advisors in connection with finding potential buyers.

For personal property, secured creditors must generally proceed in a commercially reasonable manner or risk losing their advantage and potentially being liable for damages. This vague standard is generally left to courts to resolve and an antagonistic debtor or holder of a competing interest may raise any number of plausible arguments that a foreclosing secured creditor’s enforcement process was commercially unreasonable in one way or another.

A secured lender pursuing a public sale of collateral may for example decide to run a slower sale process, hire a professional sell-side advisor and/or spend more time and resources advertising or finding potential bidders in an effort to pre-empt challenges of commercial unreasonableness. In developing a commercially reasonable process it is generally advisable for the secured party to consider what steps it would take if it were selling its own assets.

There is no applicable information in this jurisdiction.

The filing of a bankruptcy case under the US Bankruptcy Code will result in an automatic stay that prevents lenders (and all creditors) from enforcing any security without prior relief from the bankruptcy court or otherwise taking an affirmative action against property of the debtors’ estate (including terminating contracts, etc). Relief from the stay is available upon application and a showing of cause, including the lack of “adequate protection” of a lender’s interests in its collateral.

Lack of “adequate protection” means a lack of security to protect against the diminution in value of the secured lender’s collateral during the bankruptcy case (eg, from the debtor’s use/dissipation of the collateral). Any property acquired after the date of the filing of a bankruptcy petition is not subject to a secured party’s after-acquired property provisions of its security agreement and the security interest will not attach to the property, although lenders will frequently receive liens on after-acquired property as “adequate protection”.

Secured lenders may be “under-secured” or “over-secured” in a Chapter 11 bankruptcy proceeding. An “over-secured” creditor (ie, where the value of creditor’s collateral exceeds the amount of its debt) is entitled to interest, fees and related charges as part of its allowed secured claim in a bankruptcy case, whereas an “under-secured” creditor (ie, where the value of creditor’s collateral does not exceed the amount of its debt) may not.

Given the requirement that “adequate protection” is a condition to a priming debtor-in possession (DIP) financing, this is a central area of focus during most bankruptcy proceedings in which substantially all of the assets of a Chapter 11 debtor are otherwise encumbered by senior secured debt and insufficient collateral is available for junior DIP financing. Given the difficulty in demonstrating adequate protection, a non-consensual priming DIP financing is also extraordinarily rare.

Creditors in a bankruptcy proceeding are ranked. Under the absolute priority rule, secured parties are generally paid before unsecured creditors, including administrative claims that arise during a bankruptcy proceeding. Secured parties are classed into groups of similarly situated creditors depending on their relative priority in the assets, comprising collateral they receive and the proceeds of collateral when realised.

Among unsecured creditors, post-petition administrative and priority claims listed in statute (eg, taxes) will be paid first before other unsecured claims and a Chapter 11 debtor may not be able to reorganise under the US Bankruptcy Code if the administrative and priority claims are not paid in full (or unless the creditors holding such claims agree otherwise). These claims are then followed by other general unsecured or “under-secured” claims. Notwithstanding this, certain unsecured creditors are often paid in a bankruptcy through “critical vendor” orders, 503(b)(9) claims (which require payment for goods delivered in the 20 days preceding a bankruptcy filing) and assumption of executory contracts in a plan or sale (which requires the resolution of any pre-petition default). Customers are often paid through “customer programme” orders and employees are generally paid, aside from certain types of claims (eg, severance claims).

The length of an insolvency proceeding depends heavily on the type of bankruptcy (pre-arranged, pre-packaged, freefall or 363 sale case) and how much litigation is involved.

See 7.8 Out-of-Court v In-Court Enforcement.

A secured party seeking to enforce a loan, guarantees of the loan and/or a security interest securing these obligations must comply with any legal requirements under applicable law, primarily Article 9 of the UCC for personal property and applicable real property law for real property, and any enforceable terms in the underlying loan documentation. The UCC provides debtors with various protections that cannot be waived by the debtor prior to default (eg, the right to receive pre-foreclosure notice and the right to have any sale of the collateral conducted in a commercially reasonable manner). There are also overarching doctrines of good faith and fair dealing imposed by state law.

A secured party who fails to comply with the requirements of the UCC risks losing some or all of its advantage claim and could be liable for damages. A secured party who takes control of a company through enforcement of an equity pledge (for instance by replacing the company’s board of directors or other governing body) prior to actually foreclosing on the shares may also have its appointed directors, etc owe fiduciary duties to the company (and, depending on applicable law, potentially others with interests in the company).

A lender is generally not liable under environmental laws for actions of a borrower or other security provider. A lender whose only relationship to a contaminated site is that it has lent to the owner or has taken a security interest in the land will not be primarily or secondarily liable under environmental laws for the actions of the owner. However, if a lender exercises management over the property beyond that of a traditional lender, there may be some risk of liability. Similarly, if a lender forecloses on a contaminated property to enforce its security interest and becomes the owner thereof, there is a risk that it may thereby subject itself to liability.

In bankruptcy, certain claims, such as environmental liabilities, will run with the asset even after a bankruptcy. Creditors should therefore take care to avoid accepting unwanted liabilities in these situations. This issue is particularly in focus for industries that are heavily regulated and/or which may require regulatory approval prior to a change of control (including by exercise of remedies by lenders).

The primary focus in the case of avoidance actions will be on preferences and fraudulent transfers and the primary beneficiary of any avoidance action will be unsecured creditors. Notably, preferences and fraudulent transfers can be brought under both applicable state law as well as under the US Bankruptcy Code and the particular requirements of each may vary (including the length of the statute of limitations).

First, transfers on account of an antecedent debt (a debt that precedes the creation of the security interest) made within the 90 days prior to the bankruptcy filing when the debtor was insolvent are voidable as preferences if they permit the creditor to receive more than they would in a hypothetical liquidation under Chapter 7 of the US Bankruptcy Code. The look-back period for insiders is one year as opposed to 90 days and there are a variety of statutory defences and safe harbours to preference claims. Exemptions do, of course, exist. For example, if the security interest in question is granted substantially contemporaneously with the occurrence of the debt being secured and is perfected within 30 days of its creation, it is then generally exempt from attack as a preference.

Second, transfers of an interest in property of the debtor may be voidable if they:

• are made with actual intent to defraud or deprive creditors of value;
• are made when the debtor is insolvent; or
• render the debtor insolvent, in each case for which the debtor receives less than reasonably equivalent value (ie, constituting constructive fraud).

In addition to preference and fraudulent transfer claims, a DIP or any Chapter 11 estate would have the right to pursue any claims of the debtor, including breach of fiduciary duty claims against directors and officers, such as for approving fraudulent transfers (to the extent available under the applicable law).

Proceeds of avoidance actions are unencumbered assets available for unsecured creditors. As a matter of practice, an unsecured creditors’ committee will seek to prevent a post-petition DIP lender, especially one that is a pre-petition secured creditor, from obtaining DIP liens over avoidance actions and bankruptcy judges will often side with the creditors’ committee on this point (although there are many examples of proceeds of avoidance actions securing DIP financings).

Section 553 of the US Bankruptcy Code preserves set-off rights with respect to mutual debts.

Out-of-court restructurings are the most common restructurings in private credit. While they take many forms, the most common is the lenders’ “taking the keys” and the private equity sponsor(s) receiving a mutual release. As part of these restructurings, the lenders often exchange some quantum of their debt for the equity of the borrower or the holding company that owns the borrower. It is also commonplace for the lenders to provide new funding to the company to defray the cost of the restructuring and provide go-forward liquidity.

Bankruptcies in private credit usually occur when:

• the buyer of a distressed company prefers to purchase in bankruptcy because of the court ordering the sale to be “free and clear” or all liens and other encumbrances;
• there are burdensome leases or other contracts that the lenders or the buyer wishes the company to reject; or
• there is litigation that the lenders or the buyer want to leave behind.

Out-of-court, dissenting lenders’ rights are typically limited to so-called “sacred rights” in the credit agreement. The scope of “sacred rights” is credit agreement-specific and is currently being litigated in several high-profile cases.

In bankruptcies, dissenting lenders can vote to reject a bankruptcy plan and if the dissenting lenders constitute at least half of the creditors in that class, or hold more than one-third of the claims in that class, the bankruptcy plan will need to be approved under the US Bankruptcy Code’s “cram-down” procedures. If dissenting lenders constitute a smaller amount of the class, they still have rights to object under the “best interests of creditors” test, which requires that a creditor receive at least the recovery it would receive in a liquidation.

Pre-arranged and pre-packaged plans are available in the United States. A true pre-packaged plan, in which votes are solicited and received pre-filing, is the most expedited type of bankruptcy and there are precedents for these bankruptcies lasting a very short time (less than one week). A pre-arranged case can be somewhat faster than a freefall bankruptcy but is not as fast as a pre-packaged case.

In 2024, one of the more notable restructurings in the private credit space was the Pluralsight restructuring. Even though Pluralsight did not file for bankruptcy, it was widely reported that the private equity sponsor transferred intellectual property to a non-guarantor restricted subsidiary, loaning money to that entity on a structurally senior basis. This made news because it was viewed as “liability management” coming to private credit. The private equity sponsor ultimately unwound the transaction and consummated a more traditional debt-for-equity out-of-court restructuring.

Private credit is not immune to liability management transactions.

While private equity sponsors will need to carefully determine whether to consummate a liability management transaction without the consent of their secured lenders, the threat has become more credible and could be used as leverage in more traditional workout negotiations.