The private credit market had previously flourished in times of the broadly syndicated market dislocation but over the last two years, banks have been strongly returning to the syndicated market, resulting in stiffening competition for private credit lenders. In the past 12 months, with fears of inflation easing globally, combined with the interest rate reduction cycle, M&A and IPO activity growth gained significant momentum, and 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 was able to capitalise on this increased activity in 2025.

With this exponential growth of private credit, traditional sponsors and corporate borrowers have also looked to private credit to finance a wide range of asset classes, from real estate and infrastructure to technology and healthcare. In the real estate sector, for example, private credit is playing a crucial role in financing development projects and acquisitions, particularly in light of tightening bank lending standards. In infrastructure, private credit is being used to fund large-scale projects, such as renewable energy developments, that require significant capital investment. There is also a rise in private credit financing in the technology space, with its rapid pace of innovation and growth, where borrowers are tapping private credit keen to support companies with scalable business models and strong growth potential.

Private credit has also been leading the development of financing structures for large-scale AI-related infrastructure. innovating to support the capital needs of evolving technologies.

Public debt markets have become increasingly competitive with the private credit market over the course of 2025 and 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 over the last couple of years to recapture the market share that investment banks had ceded to private credit lenders, in particular through refinancings.

Public debt markets will also benefit from deregulation and other changes relating to the leveraged lending guidelines, and 2026 may well see participants in public debt markets competing aggressively with the private credit markets.

Despite this competitive landscape, banks have increasingly been involved in a number of key partnerships with private credit players, showing the undeniable strength of the private credit market and signalling the evolving relationship between the public and private debt markets.

Private debt continued to play a major role in acquisition financings in the United States in 2025 as private credit lenders stepped up with committed financings in the form of “jumbo” unitranche debt facilities to support some of the largest acquisition financings on tight timelines. To meet the demand for rising deal sizes, private equity sponsors have increasingly been building larger clubs of private debt lenders rather than relying on a single underwriter or small number of underwriters.

Even with the resurgence of public debt markets, private debt has continued to thrive in the acquisition financing space given the strong adaptability and evolving capabilities of the largest funds.

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 heightened 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. Particularly following the Pluralsight drop-down of assets, private credit lenders have sharpened their focus on liability management issues to ensure that such erosion of terms does not become commonplace in the market.

Private credit providers are focused primarily 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. As such, yields are 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 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 had slowed dramatically. This past year saw the re-emergence of these transactions in the context of new take-private acquisitions (including Vista’s closing in Q1 of EngageSmart) as well as in the private M&A markets.

Overall transaction sizing has continued to further converge between private credit transactions and syndicated matters. 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 an internal focus on private credit solutions. Additionally, the continued enthusiasm for private credit has spurred a wave of consolidation (including BlackRock’s acquisition of HPS Investment Partners).

On 5 December 2025, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a joint interagency statement rescinding the March 2013 Interagency Guidance on Leveraged Lending as well as the accompanying FAQs for implementing such Guidance. Instead, the agencies expect institutions to manage leveraged lending exposures consistent with general principles for safe and sound lending. This has the potential to allow lenders to make their own determinations of risk appetite, which will give private credit lenders greater flexibility to underwrite a broader range of loans and to each develop an institution-specific definition of what is a “leveraged loan”. In turn, this may let some private credit with more competitive mandates be better able to compete at deeper leverage levels that would have been restricted under the prior supervisory constraints.

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 triggered only 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, such 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, but 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, 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. As an example, business development companies arranged by private credit providers may implicate specific disclosure and reporting requirements.

Private credit providers are able to provide sole underwrites or club deals for multibillion-dollar transactions on terms that are competitive. To this point, this approach of forming clubs to facilitate larger transactions has not encountered 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 backstop new acquisitions and skip a commitment letter process and instead move directly into the credit agreement negotiation. Of course, this type of process would not be possible in the syndicated market.
• 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 2025, with the increase in M&A activity, we also saw an uptick in the number of amendments and refinancings which 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 are increasingly looking more like those 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 included directly 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. This applies if the direct or indirect security for the acquisition financing consists of securities that are traded on an exchange in the United States, or “margin stock”. Such restrictions, often referred to as the “margin regulations”, limit the amount of loans that can be collateralised by such securities. The US margin regulations can also be implicated 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 such 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 earnouts 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 such purchases may be conducted is often limited to 25–30% of total outstanding term loans.

Loan documentation (in both the syndicated and private credit market) has developed since the great financial crisis to permit non-pro-rata debt buybacks. All except the most lower-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.

Recent developments include:

• 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 such protections included in debt documents.
• Portability: While M&A and capital markets activity is on the upswing, the prior trough in deal activity prompted an increasing number of sponsors to seek portability in the form of “permitted change of control” provisions.

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 such preferred equity allowing sponsors to incur additional leverage without the burden of cash interest payments (as these products often have a payment-in-kind feature).

Increasingly, private credit transactions are including paid-in-kind (PIK) components.

• Availability of PIK option: In the context of a typical private credit transaction with an opco (as opposed to 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 payments of interest 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%, though this is a negotiated point. 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, 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 such that any usage of the PIK option produces a 50 bps premium. Alternatively, some formulations will allow the borrower to use only 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” formulations, 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: (i) internally generated cash, (ii) a qualified initial public offering (IPO), (iii) sale of all or substantially all of the applicable borrower’s assets, (iv) change of control, (v) dividend recapitalisations and/or (vi) some sort of “transformative transaction” or “enterprise transformative event” (typically defined as (a) an acquisition or disposition of significant size, (b) a transaction that is not permitted by the existing debt documents and/or (c) 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 regarding underlying definitions such as “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 generally not subject to withholding taxes under federal law. Backup withholding may apply to payments to US holders or lenders if they do not furnish a valid IRS Form W-9, as discussed in 4.2 Other Taxes, Duties, Charges or Tax Considerations.

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 United States). 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 United States and the lender’s country of residence, the withholding tax may be reduced or eliminated.

Alternatively, a non-US lender may qualify for exemption under the “portfolio interest exemption” (PIE). To qualify, the lender must not (i) be a controlled foreign corporation related to the borrower, (ii) be a bank receiving interest on an extension of credit entered into in the ordinary course of its trade or business or (iii) 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, if an individual, IRS Form W-8BEN). A non-US lender that is an intermediary and is not the beneficial owner of interest must generally submit a completed IRS Form W-8IMY, accompanied by documents from beneficial owners or other attachments.

If interest paid to a non-US lender is effectively connected with such lender’s trade or business in the United States, such interest will not be subject to US federal withholding if such lender submits a completed IRS Form W-8ECI, but will generally be subject to net income tax in the United States 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: (i) payment to a US person that does not demonstrate an exemption by providing an applicable completed IRS Form W-9, (ii) payment of US source interest and certain other amounts to entities treated as “Foreign Financial Institutions” or certain “Non-Financial Foreign Entities” not eligible for an exemption from FATCA withholding tax, and (iii) 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 residence of the borrower. If the lender is receiving security proceeds, such 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 lender as engaged in US trade or business, requiring the lender to file a US tax return and pay income taxes on income attributable to such trade or business. Any activities considered secondary trading are generally exempted from such rules, irrespective of continuity or regularity. As such, foreign lenders should 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 United States, the foreign lenders may be protected under the rules of such treaty. Relatedly, payments of various fees under US financing transactions may subject foreign lenders to US withholding tax and/or US income taxes depending on the characterisation of the fee income as well as the eligibility of the fee recipient for treaty relief.

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 such 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 (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), (a) a security provider (the grantor) must execute or authenticate a written or electronic security agreement that provides an adequate description of the collateral, (b) the grantor must have rights in the collateral or the power to transfer such rights, and (c) 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 written and signed 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 is substantially uniform across each 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 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” such 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 notice filing under the UCC (referred to as a UCC-1 financing statement) at the secretary of state of the “location” of the debtor, although important exceptions apply. A UCC-1 is ineffective to perfect in deposit accounts, money or letter-of-credit rights as original collateral. Perfection in some assets is 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. Therefore, perfection in such assets 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 (such as insurance, as original collateral) require compliance with applicable state law governing such assets.

For debtors that are “registered organizations” (which term 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 such 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 time of writing has been enacted in the majority (including the state of New York with an effective date of 3 June 2026) of, but not all, US states, will permit perfection by control of digital assets, such as cryptocurrencies and 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 such exceptions is unusual, and at a minimum a 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, 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), if they are part of the collateral package at all, 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 that a grantor goes into insolvency proceedings within 90 days (or one year if the lender is an “insider”) of such perfection. If a preference action is successful, the lender will need to return such collateral or proceeds thereof 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 such grants are permitted and common. Under New York law and in the United States 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 thus 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 are typical, although current law suggests that only a UCC-1 filing is sufficient for perfection in such assets), and delivery of physical share certificates and debt instruments 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, a 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. Typically, private credit transactions are 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 such as 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 such intercorporate guarantee benefits the group as a whole. Generally, the United States does not 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 such 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 avoidable if (a) it is made with actual intent to defraud or deprive creditors of value or (b)(i) it is made when the debtor is insolvent or renders the debtor insolvent and (ii) the debtor receives less than its 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 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 2018, 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 on 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.

Generally, the United States does not 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 United States is a flexible jurisdiction from the perspective of financial assistance by the target, and no whitewash is necessary. Generally, no governmental approval is 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 avoidable 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 generally does not recognise retention of title transactions and instead will 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 such 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 forth the circumstances when the security interest in collateral will be released, including upon payment in full of all outstanding obligations. To the extent that a sale or disposition of collateral is permitted under the credit agreement, it is common to provide a corresponding release of lien in such collateral. Although the lien release provisions may be drafted to occur automatically upon such repayment or disposition, it is market practice to include an 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 a 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 (i) 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 (ii) provide notice of lien release to applicable third parties that have entered into control arrangements with the lender. If other perfection methods were undertaken in connection with such 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 United States, 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 that perfect only by UCC-1 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 case of inventory, notification) requirements within the period set forth under the UCC.

The statutory rules of priority under the UCC can be altered contractually 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 accordance 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 lien in the 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 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, either the UCC 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 thus a party with a priming statutory lien may voluntarily agree to subordinate its 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 applicable solely 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 being 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. Because of this, it is 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 such lien will need to obtain the depositary’s agreement to subordinate its interest. However, this is moot in lending transactions where deposit accounts either are 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. Most often, these interests are secured under the same collateral documentation as the bank loans and such obligations are secured on a pari passu basis.

In financings provided by multiple lenders in the United States, such lenders typically appoint a collateral agent under the credit agreement to hold security interest in collateral granted by debtors on behalf of such 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 assumption agreement attached as an exhibit 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 not result in 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. Prior to or in connection with such enforcement, the secured party may wish to exercise voting or other rights inuring to the holders of such 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. Alternatively, lenders and a debtor may 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 comprises multiple states’ jurisdictions, and any agreement must specify the state law that will govern (as opposed to federal law). Typically, the law of the state of New York is 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 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 transactions, the overwhelming majority of sophisticated debt documents are governed by New York law in current practice.

Subject to limitations and qualifications, courts in 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 United States. 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 United States 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. § 200 et seq. The United States is not a party to any treaties for reciprocal recognition of foreign judgments; hence, foreign judgments are 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 both (a) judgments from other states in the United States, under Article 54 of the New York Civil Practice Law and Rules, and (b) some international money judgments from outside the United States, under Article 53 of the New York Civil Practice Law and Rules. In the latter case, there are fraud and public policy exceptions, and New York courts 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 where the foreign court did not have personal jurisdiction over the defendant, or where it did not have jurisdiction over the subject matter.

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

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

Enforcement can take many forms and therefore it is difficult to generalise. 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 such sale. In the case of a public sale, the secured party will also need to publish 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 around 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 advisers in connection with finding potential buyers.

For personal property, secured creditors generally must proceed in a commercially reasonable manner or risk losing their deficiency 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 instance, decide to run a slower sale process, hire a professional sell-side adviser, 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.

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 based on 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 such 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 such property, though 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. An over-secured creditor (ie, where the value of the 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 the creditor’s collateral does not exceed the amount of its debt) is 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. Also, given the difficulty in demonstrating adequate protection, a non-consensual priming DIP financing is 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 each group of similarly situated creditors and 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 such administrative and priority claims are not paid in full (or unless the creditors holding such claims agree otherwise). The aforementioned claims are then followed by other general unsecured or under-secured claims. Notwithstanding the foregoing, certain unsecured creditors often are 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 cure of any pre-petition default). Customers are often paid through “customer program” 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 regarding out-of-court restructurings.

A secured party seeking to enforce a loan, guarantees of the loan, and/or a security interest securing such 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 of 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 that fails to comply with the requirements of the UCC risks losing some or all of its deficiency claim and could be liable for damages. Also, a secured party that 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 have its appointed directors, etc owe fiduciary duties to the company (and, depending on applicable law, potentially other constituencies in interest in the company).

Generally, a lender is 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 loaned 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, then 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, some claims, such as certain environmental liabilities, will run with the asset even after a bankruptcy. Creditors should therefore take care in these contexts to avoid accepting unwanted liabilities.

Another risk area is industries that are heavily regulated and/or which may require regulatory or third-party approval prior to a change of control (including by exercise of remedies by lenders).

The primary focus in the case of avoidance actions would be on preferences and fraudulent transfers, and the primary beneficiaries of any avoidance action are unsecured creditors (except as may be set forth in a DIP financing order). Notably, preferences and fraudulent transfers can be brought both under applicable state law as well as under the US Bankruptcy Code, and the requirements of each vary (including the length of the statute of limitations).

First, transfers on account of an antecedent debt (debt that precedes the transfer) made within the 90 days prior to the bankruptcy filing when the debtor was insolvent are avoidable as preferences if they permit the creditor to receive more than it 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. There are a variety of statutory defences and safe harbours to preference claims.

Second, transfers of an interest in property of the debtor may be avoidable if (a) they are made with actual intent to defraud or deprive creditors of value, or (b)(i) they are made when the debtor is insolvent or render the debtor insolvent, and (ii) the debtor receives less than their reasonably equivalent value.

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

Proceeds of avoidance actions are generally 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 when the lenders “take the keys” and the private equity sponsor(s) receive a mutual release. As part of such 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 (a) the buyer of a distressed company prefers to purchase in bankruptcy because of the court ordering the sale to be “free and clear” of all liens and other encumbrances, (b) there are burdensome leases or other contracts that the lenders or the buyer wishes the company to reject, or (c) there is litigation that the lenders or the buyer wish 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 such dissenting lenders constitute at least half of the creditors in that class, or hold more than one-third of the claims in that class, then 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 such 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 such 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.