Leveraged Finance in the Mid-Market: Trends and a look ahead at 2025

This article looks at recent trends in UK mid-market debt finance and what we anticipate for 2025.

2024’s economic news was more positive than recent years, despite continued geopolitical unrest and a general election in the UK. That optimism was mirrored in the deals we have been seeing, with an uptick in deal volume, a shift in the types of deals and more confidence in the market. Event driven financings are on the rise with parties seemingly more realistic about pricing, terms and execution timetables.

Economic stability and market activity

The stability brought by plateauing interest rates and slower inflation has increased borrower confidence, despite rates not being expected to drop significantly any time soon.

The economic improvement is reflected in the number of insolvencies, with the rate of company insolvencies down 24% in October 2024 compared to the same month of 2023 (although overall numbers still relatively high since the pandemic). However, global default rates on leveraged loans have increased from 2% in early 2022 to around 7% in June 2024, according to the Bank of England’s Financial Stability Report.

Numerous overseas events continue to impact the market closer to home. The impact of the US election result remains to be seen, but it could mute appetite in certain sectors and increase regulation in some economies. The anticipation of tax changes in the Autumn budget drove deal volumes, resulting in a particularly busy period across the market in October. 2025 has started off with news of higher UK borrowing costs and ongoing disquiet around the impact of the Autumn budget on businesses and additional concern regarding what the March 2025 budget will bring.

Deal types and timetables

We’re seeing deals with a full range of leverage levels and across all products and lender profiles. Many lenders are now keen to get capital out of the door, and reduced interest rates have allowed the banks to offer more competitive terms.

There are of course some borrowers still kicking refinances down the road after a turbulent few years as well as a subset of borrowers with interest rate hedging who are yet to feel the effect of higher interest rates. The increase in activity may provide them with an opportunity to sell non-core or underperforming assets.

Increased due diligence and more tailored controls

Due diligence (DD) processes are becoming more detailed, reflecting lenders’ desire to avoid hidden leverage and borrowers’ aim to secure the best pricing. This can lead to longer transaction run-ins, but overall fewer hold-ups.

Lenders are focusing on fewer, but more tailored and meaningful financial covenants, with a greater emphasis on covenant detail and definitions. Broadly, terms are becoming more borrower friendly, but with lenders often insisting on caps for carve outs and exceptionals (by reference to a % of EBITDA, for example) and generally working hard to ensure financial models tell a true story.

Both commercial and insurance DD have increasingly featured on our acquisition financings, again reflective of lenders’ desire to get under the skin of borrowing businesses (and rely less on the heavily caveated snapshot provided by insurance broker letters) and ensuring no skeletons in the closet.

Private equity and sponsored groups

There is an element of ‘wait and see’ for private equity clients regarding carried interest and other budget-related changes. However overall sentiment matches the wider market’s confidence. After a couple of shakier years, there is pressure to invest as well as pressure for returns driving preparation for exits, as further detailed in our PE team’s forecast for 2025 available here: Reflecting on PE deal activity and trends of 2024 and the forecast for 2025

Subordinated debt instruments used to bridge financing gaps are now being refinanced as external debt providers’ margins become slightly more affordable.

Debt funds continue to provide debt alongside private equity, leading to increased warrants, conversion rights, and controls (for example lender board representation) in facilities agreements which were previously features of equity documents. This can lead to tricky intercreditor negotiations where there are multiple investors.

Facilities agreement trends

We continue to see lenders offer more flexible terms where leverage is set to reduce, and particularly where there is a credit worthy sponsor in the background. Shareholder injections can often be used to bridge cashflow gaps, help fund acquisitions and (as reported last year) we consider equity cure provisions relatively standard now. That of course depends on appropriate subordination provisions and on lenders having appropriate controls over such injections (for example lenders restricting the number of times an equity cure can be applied and counted towards EBITDA).

Given the increase in bolt-ons in the market, which was also recognised in our PE team’s 2024 reflections, permitted acquisition definitions are becoming more extensive and flexible and accordions are also becoming common place on syndicated transactions of all sizes. With no day one credit risk, accordions  provide both parties a potential cost saving given the market is undecided about whether security that references specific finance documents will survive a significant amendment to the underlying terms. Activating an accordion generally provides a simplified and quicker process, certainly for a UK group, with limited documentation. We still see yield protection (AKA Most Favoured Nation), and activation is usually subject to a leverage test. We are also starting to see RCFs provided as accordions, as well as term loans.

Extended periods between exchange and completion are again featuring in private deals, with ‘certain funds’ provisions appearing in facility agreements more regularly as a result.

ESG

Environmental, Social, and Governance (ESG) factors remain high on the agenda for borrowers and lenders and are often scrutinised as part of the DD process – ESG is recognised as a long-term issue and so allows the more advanced borrowers a way to illustrate value, longevity and good governance. Even if not possible to identify on day one, facilities agreements regularly anticipate ‘to be agreed’ ESG KPI linked margin ratchets which can be introduced during the term by agreement.

Certain of the International Sustainability Standards Board’s (ISSB) standards are expected to be adopted in the UK in early 2025, standardising sustainability reporting.  These won’t impact most mid-market businesses immediately, but prudent companies will get ahead before they inevitably become mandatory. The proposed UK Green Taxonomy consultation indicates the government’s intention to align finance policies with sustainability goals.

Asset-based lending (ABL) and cashflow hybrids

We are also increasingly seeing ABL finance being taken up alongside cashflow lending on leveraged transactions – enabling borrowers to maximise loan amounts (and minimise overall margin) whilst giving lenders some additional comfort from the receivables (or inventory) backing.  Our specialist ABL and leveraged teams work together to advise on the idiosyncrasies of these transactions. We’re also seeing asset-based sustainability-linked loans in the mid-market.

We’re expecting the changes to laws in Scotland, which will allow lenders to take non-possessory security over fixed assets (as is already the case in England and Wales) to result in an increase in asset backed transactions North of the border.

IP security

The increase in IP value and popularity in lending to certain relevant sectors has led to more transactions with IP as collateral on cashflow lends and more recently ABL too, requiring appropriate DD and security registration.

There are some notable challenges - recently those have included securing trade secrets (which by their very nature are made up of confidential information, and therefore shouldn’t appear on the public register) and the rapid development of Artificial Intelligence, both in establishing its value and in ensuring it remains compliant with privacy laws when analysing so much data. We’re expecting rapid developments in the impact these areas have on our market in coming years.

Outlook and conclusion

The mid-market’s tenacity continues, with exciting times ahead. Most stakeholders see both quality and quantity in their pipelines. While there will be hurdles and continued turbulence overseas and, certainly given the news of the latest UK borrowing costs, also at home, the overall outlook for 2025, whilst not back to the 2021/22 levels, is positive. We look forward to working alongside our clients and counterparts in the coming year.