Debt Download

In the News

• Concerns over inflation slowed deal flow in the broadly syndicated loan (BSL) market in the first half of the month, and these concerns may have begun to dampen investor demand, according to recent reports. The BSL market saw $20.6 billion of supply net of associated repayments, though much of this came during an active opening week before a sharp drop, which was seen as “inevitable” given the rising fear of inflation, according to Covenant Review and Debtwire. The average all-in single-B spread rose slightly through February 14 to S+331 (S+324/99.8 OID), from a multiyear low of S+320 (S+318/99.9 OID) in January. The market also shifted in favor of lenders on flex terms, with 21 pricing cuts to two pricing increases for a 10.5:1 ratio, against a 7.4:1 ratio in January. In fact, lenders have begun pushing back against what they see as “aggressive pricing” for borrowers with “less favorable ratings,” according to Bloomberg. Four companies going to market with $3.3 billion in loans saw their deals pulled from the BSL market in February amid such investor pushback, which has led lower-rated companies to “flock…to private debt to refinance loans.” 
• A slowdown in new-loan originations has emerged as a red flag in the quarterly earnings of regional banks, according to The Wall Street Journal. Last year US commercial banks saw a 2.7% growth in loans, an historically low figure and one that does not seem poised for improvement given banks’ “tepid outlook” for lending going forward. In fact, the figures look even more dire against an otherwise favorable backdrop: steady interest rates, a deregulatory environment and slowing inflation. 
• Notwithstanding the slowdown noted above, larger investment banks are forgoing revenue by ditching arrangement fees in an increasingly competitive environment, according to Bloomberg. Amid the repricing frenzy of the past year, banks are "sometimes even volunteering to do [transactions] for nothing.” While the loss of revenue stings, “banks are willing to take the hit partly to justify headcount, keeping their bankers busy in the absence of M&A activity, and to maintain their rankings in league tables.”
• One sector of finance that is booming is the hybrid bond, according to The Wall Street Journal. Investment-grade issuers are attracted to these instruments largely for their treatment as equal parts equity and debt by the credit ratings agencies. This hybrid treatment also helps issuers comply with their financial covenants by lowering the issuers’ debt. While a higher coupon attaches to these subordinated instruments, those payments may be deferred for several years. The article notes that U.S. companies issued $27.93 billion in hybrid bonds in 2024, up from $3.35 billion the year before, and advisers “expect strong issuance in the year ahead.”
• Apollo plans on building a marketplace to facilitate trades of private assets in what would be a further merging of public and private debt sectors, according to Bloomberg. The marketplace would bring together banks, exchanges and fintech firms “to deliver real-time information and intraday prices for private credit deals”—like what we see in the syndicated market. In a similar move, BlackRock is trying to merge the “two kingdoms” of public and private asset management by embarking on a $30 billion acquisition spree of alternative managers to add to its extensive public assets. And private debt has already proven its allure to public lenders, with JPMorgan most recently announcing a $50 billion direct lending fund for “risky” private equity portfolio companies. Looking ahead, Apollo has predicted that “investors broadly will not actually talk about public credit and private credit; they’re going to talk about credit,” according to Private Debt Investor. Similarly, KKR predicts this private-public convergence will be an “iPhone moment” in that it will be the “dawn of a new paradigm.” Not everyone is convinced, however. A Financial Times columnist notes that the melding is a “bad idea” that would deprive the private credit class of its signature strengths, including tailored documentation, providing access to credit for those companies that are a “poor fit” for public debt, lower volatility, tighter bilateral relations, and a lower risk of an “asset liability mismatch.” 
• Defaults started to rise at the end of 2024, and now “credit analysts worry that tariffs could further stretch the finances of corporate America,” according to The Financial Times. At the end of 2024, $28 billion in loans to US borrowers were at least 30 days past due (including accruing and nonaccruing loans), up $5.4 billion from a year earlier. The delinquency rate from US bank loans rose to 1.3% at the end of the year, the highest rate since Q1 2017. Small and mid-sized companies specifically are expected to suffer “an enormous cost” from long-running tariffs. Meanwhile, S&P Global Ratings reported 10 global corporate defaults in January, which is the same as December but four fewer than in the same period last year. Consumer products led all sectors with three defaults, followed by two for healthcare.

Goodwin Insights – U.K. Crystal Ball Predictions

For this edition of Debt Download, we highlight the Goodwin Debt Finance team’s predictions for 2025 in leveraged finance in the United Kingdom and Europe more broadly. Here is a summary of what we are expecting:

As with 2024, the outlook for 2025 is one of uncertainty. A combination of sticky inflation, falling interest rates (and with increasing pressure on central banks to make further reductions) and the equity markets in the U.S. and the U.K. hitting record highs makes the business of predictions something of a fool’s game. While some had hoped that the conclusion of the U.S. election would provide a degree of clarity, the looming presence of tariffs and retaliatory tariffs of a yet-to-be-determined geographical reach has only served to further muddy the economic waters.

That said, with the Bank of England having cut interest rates from the high watermark of 5.25% to 4.50% over the last nine months (and with similar steps being taken in Europe and the U.S.) and the prevailing consensus view being that rates should fall to as low as 4.00% by the end of the year, it seems reasonable to presume that a rate-cutting cycle has been entered into. This can only be a boost to debt-supported M&A activity and may well be the trigger for a significant uptick. Downward trending interest rates can only ratchet up the pressure on private equity to spend some of the dry powder that has been accumulating over the last few years (estimated to be around $1.3 trillion).

Our best guess is that European PE finance markets will start 2025 more tentatively than had originally been anticipated, with Q1 continuing the theme of bolt-ons and repricings, but Q2 and Q3 will bring a more substantive increase in activity as confidence increases and valuation gaps between purchasers and sellers begin to meet in the middle. We would sound a note of caution, however, since the resurgence in activity has been promised for some time now and has yet to fully materialize in any sustained manner.

We anticipate that the likely other themes in the European PE financing markets will be: 

1. Portability provisions, where companies can carry over existing debt arrangements on a change of ownership, will return in leveraged finance transactions in Europe. As participants anticipate an increase in M&A activity, the inclusion of portability ahead of a sale can prove attractive to a potential purchaser who may not wish to enter the debt market to refinance existing indebtedness;
2. Many financial sponsors will look at the secondaries space, continuation funds, NAV facilities, asset-based lending and the like to navigate the evolving debt markets; and  
3. Private credit lenders and banks will collaborate on transactions, as the distinctions between their respective offerings blur and competition for mandates continues to increase.

For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown and Reid Bagwell.

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This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.