Practical Law, What’s Market: 2024 Year-End Trends in Large Cap and Middle Market Loans

Collateralized loan obligation (CLO) issuance surged to a record $197.1 billion in 2024, representing an increase of 70%. BSL CLO activity was especially robust, reaching $161 billion and 82% of annual issuance, while middle market CLO issuance stood at $36 billion.

Market Highs and Lows

Loan volume increased in both the BSL and private credit markets in 2024, with syndicated lending climbing 45% and, according to KBRA Direct Lending Deals (DLD), direct lending issuance more than doubling. The BSL market reclaimed a significant amount of market share lost in 2023, with almost $30 billion of private credit debt refinanced through BSLs by October 2024, according to Bank of America Corp research (as reported by Bloomberg).

Refinancings and repricings had a banner year, jumping 137% to a record $1.2 trillion. Strong activity levels reduced the near-term maturity wall of loans outstanding at the end of 2023 and scheduled to mature by the end of 2026 by 75% as of December 13, 2024, according to data from LCD (citing Pitchbook | LCD).

Although new money/M&A loan issuance started the year out slowly, issuance picked up, increasing 83% year-over-year to $481.4 billion, with new money institutional loan activity doubling to $214 billion and leveraged buyout (LBO) volume increasing to $72 billion, a jump of nearly 150% from prior year levels.

Dividend recap issuance continued its resurgence amid a slower M&A market. These may appeal to private equity sponsors that are reluctant to exit assets given the continued price dislocation between buyer-side and seller-side valuations, but are confronted with the need to make distributions to their investors.

The valuation gap between buyers and sellers remained one of the biggest hurdles facing M&A transactions last year. Market analysts noted that the increase in sponsor-to-sponsor deals in 2024 signaled that some have started to adjust their expectations around valuation, in contrast to 2023, when most deals were acquisitions from a founder or buyouts. `

According to market observers, competition between corporates and private equity sponsors has picked up in the M&A space, creating tension between sponsors and the strategic market overall. Corporates are seen as an attractive alternative because they can usually offer higher multiples, potentially accommodating larger acquisitions. Practitioners have seen instances where corporates have been selected for a deal in place of a private equity sponsor.

In the private credit market, new direct lending issuance, driven by refinancing and opportunistic transactions, reached $302 billion in 2024 up from the $146 billion recorded in 2023, and $143 billion in 2022, according to KBRA DLD.

According to KBRA DLD, refinancings and repricings increased to $134 billion, a surge of 262% year-over-year, while dividend recap loans soared to $18.2 billion in 2024, from $3.6 billion in 2023. Overall M&A (LBOs & add-ons) jumped 37%, to $140 billion, from $102 billion in 2023. Better buyouts activity drove the increase, claiming a 62.5% share of all M&A.

Second lien loan volume, on the other hand, has been more muted in recent years. Elevated interest rates have made these loans more expensive, and investors have been cautious in taking on riskier credit. However, as interest rates continued to stabilize, practitioners observed more borrower interest in second lien debt in 2024.

Covenant-lite (cov-lite) loans continued to dominate the leveraged loan space in 2024. 91% of the leveraged loan market was considered cov-lite at the end of 2024, according to data from Pitchbook | LCD. Cov-lite loans also continue to make inroads into the private credit space. As the two markets continue to converge, direct lenders have been more willing to offer looser covenant packages and pricing in the more highly competitive deals. For more information on cov-lite loans, see Practice Note, Covenant-Lite Loans: Overview on Practical Law.

Alternative financing options, explored by borrowers facing a constrained lending environment and increased difficulty in securing financing, include:

• Mezzanine debt. According to practitioners, mezzanine debt financing has become increasingly popular in the BSL market, as well as with sponsors in the middle market. For more information on mezzanine debt, see Practice Note, Mezzanine Finance: Overview on Practical Law.
• Recurring revenues loans (RRLs). Although the RRL market is still evolving, these types of loans are typically made to growth-stage borrowers. For more information on recurring revenue loans, see Article, Recurring Revenue Loans: Key Considerations for Market Participants on Practical Law.
• Asset-backed lending. Market observers consider this asset class to be a prime area of growth for the private credit market given its continuously expanding array of underlying collateral, potential returns to investors, and market benefits to borrowers.
• Fund finance. Lenders continued to provide fund financing, including subscription financings and net-asset value (NAV) financings with private credit showing increasing interest in this corner of the market. The current financing environment is the primary driver of demand for fund finance. For more information on fund finance, subscription facilities, and NAV facilities, see Practice Note, Fund Finance: Overview and Fund Finance Toolkit on Practical Law.

Sustainability-linked loan (SLL) issuance was depressed in the first half of 2024 amid continued economic pressures, concerns regarding greenwashing accusations, and ongoing political controversy regarding the promotion of businesses' environmental, social, and governance (ESG) efforts through lending solutions. Some borrowers reportedly amended their loan agreements to remove sustainability-related provisions (see What's Market, Lam Research Second Amended and Restated Credit Agreement Summary (SLL facility) and Lam Research Third Amended and Restated Credit Agreement Summary (removes SLL provisions). However, practitioners are hopeful that interest in sustainable finance will continue as the market evolves and becomes more sophisticated. For example, in the global market blue bonds began gaining traction. Blue bonds are a source of financing for activities, assets, and projects that promote and incentivize sustainable investments in coastal, oceanic, and water-related sectors. For more information on sustainable financing products, see ESG and Sustainability Toolkit (US) on Practical Law.

This article examines key developments seen in the US loan market in 2024.

BSL and Private Credit Markets

Loan market activity in 2024 demonstrated that the BSL and private credit markets are able to coexist, successfully competing, converging, and cooperating.

With each market mostly retaining its core constituency, the BSL and private credit markets continued to compete for strong, large cap borrowers. The most creditworthy borrowers often opted to run dual-track processes as they weighed which market could provide the best loan structure and terms. In this environment each market made adjustments to attract more borrowers.

In 2024, many deals migrated to the BSL market due to lower borrowing costs. In the first quarter of 2024, private credit lost market share due to a large number of borrowers refinancing in the BSL market although it did regain some of that lost market share in the second quarter, and the two markets continued to compete for refinancings in 2024.

According to market observers, private credit lenders responded by offering a higher starting leverage, and reducing pricing spreads with some practitioners estimating private credit spreads are down between 50 basis points (bps) and 100 bps. Private credit lenders retained their traditional advantages (speed of execution and control over the lender group) over syndicated lenders, but they also offered more flexible loan structures, loosened loan terms, or offered terms the BSL market cannot always match, for example:

• Delayed draw term loans (DDTLs) (see Delayed Draw Term Loans below).
• Additional payment-in-kind (PIK) interest by way of synthetic PIK (such as, interest paid via a DDTL facility) offered to the most creditworthy borrowers (see PIK Interest below).
• Making available cov-lite terms in the upper middle market and covenant loose terms in the traditional middle market. According to KBRA DLD, 13% of the market is cov-lite, while nearly all BSLs are issued cov-lite. Cov-lite loans have historically been a selling point for the BSL market.
• More borrower favorable loan terms, such as EBITDA adjustments and debt portability conditioned on the new owner's assets under management (see EBITDA Adjustments and Debt Portability below).
• Granting preemptive amendments ahead of a covenant default.
• Allowing negative covenant baskets not typical for private credit transactions (such as the restricted payment management fee basket).
• Use of warrants and preferred and common equity positions, specifically in the lower middle market.

Driven by the need to deploy excess dry powder and to expand their market share and asset class, private credit lenders also focused on:

• Increasing the pool of borrowers by shifting focus to investment grade borrowers.
• Diversifying into previously unexplored areas of lending, such as infrastructure project financing.
• Shifting from traditional asset-backed revolvers and term loans to alternative asset-backed debt. Private lenders ventured beyond the transactional finance space to expand into general corporate finance, NAV facilities, warehouse lending, and other structured finance deals.

Private credit lenders continued to partner with banks to launch private credit funds. These joint ventures (JVs) allow the syndicated and private credit markets to subsist together, but are beneficial to banks and private credit lenders. They allow banks to maintain or boost their market share, attract new borrowers, and address regulatory restraints on their lending. Private credit lenders, on the other hand, receive benefits such as, diversified origination with access to non-sponsored borrowing relationships, capital flexibility, credibility, and enhanced loans offered with respect to scale and personnel. Recently launched JVs include:

• In October, Centerbridge Partners and Wells Fargo launched a strategic relationship to meet the alternative credit needs of non-sponsor North American middle market companies. The platform is targeting to have $5 billion of investible capital.
• In September, Citigroup and Apollo Global launched a $25 billion private credit and direct lending program.
• In May, PNC Financial Services Group, Inc. and TCW Group, Inc. announced a partnership to deliver private credit solutions to middle market companies. The platform aims to have $2.5 billion of investible capital in year one.

The trend of private credit lenders "clubbing" up on larger transactions continued except for larger private credit lenders with enough dry powder to underwrite deals alone. Private credit lenders joining together to extend credit made it necessary in smaller deals to negotiate special provisions in the loan agreement to limit excess discretion with respect to certain terms. In contrast, in larger deals with a few lenders committing significant amounts (between $500 million and $1 billion), voting rights are less of a concern because, according to practitioners, the dynamic among lenders is typically understood. In these deals, private credit lenders find majority rule acceptable because the lenders know who constitutes the majority.

For more information, including the difference between the BSL and private credit market, see Practice Note, Direct Lending Overview and Direct Lending Toolkit on Practical Law.

Defaults and DIPs

Amid elevated interest rates, sector-specific headwinds, and borrower-specific challenges, such as liquidity issues and deteriorating operational performance, loan default volumes reached $120.9 billion in 2024, the result of 97 separate issuers defaulting under their loan agreements, which is higher than 2023 levels and the highest number since 2020, according to S&P Global Market Intelligence. Fitch predicts the leveraged loan default rate for 2025 will remain relatively unchanged at 3.5% - 4.0%.

Corporate bankruptcies rose in 2024, with 694 companies filing for bankruptcy protection, an increase of 9% from 2023, and the largest single year total since 2010, according to S&P Global Market Intelligence. The three sectors with the most bankruptcy filings include consumer discretionary (109 bankruptcy filings), industrials (90 filings), and health care (65 filings).

Distressed exchanges rose in 2024, according to market observers, in part because private equity sponsors wanted to maintain control of their assets and avoid bankruptcy. While borrowers have continued to implement out-of-court LMTs, according to practitioners, in many instances, those transactions have not successfully prevented a subsequent bankruptcy filing.

According to market watchers in recent stand-offs between private credit lenders and private equity sponsors involving distressed borrowers, private credit lenders are increasingly exercising the voting rights given to the collateral agent under the loan agreement following an event of default. According to practitioners, private credit lenders are using board rights to install independent managers to try to control the direction and outcome of workouts.

For information on DIP financing trends, see Practice Note, DIP Financing Overview and Article, Key Developments and Trends in DIP Financing (2023/2024).

Regulatory Developments: Corporate Transparency Act (CTA)

Those who had hoped for greater clarity in the application of the Corporate Transparency Act (CTA) in 2024 saw their expectations dashed. By the end of December, the filings stipulated by the CTA, which went into effect on January 1, 2024, were no longer required after the US Court of Appeals for the Fifth Circuit vacated a stay of preliminary injunction against enforcement of the CTA. At the time of going to press (January 31, 2025), filings remain voluntary despite the US Supreme Court's stay of the Texas Top Cop Shop injunction.

For more information on CTA developments in 2024 and 2025, see Corporate Transparency Act (CTA) Rules and Publications Tracker on Practical Law.

Loan Negotiation and Documentation Trends

Borrowers and sponsors were able to negotiate favorable loan terms in 2024, especially the most creditworthy borrowers and top-tier sponsors, for which terms were often as liberal as those seen in recent times. For their part, lenders focused on closing loopholes in loan agreement provisions that might be used to facilitate LMTs and sought to include in their loan agreements the appropriate protective fixes necessary to limit LMTs.

In a competitive lending environment, borrowers and sponsors continued to drive the syndication process in some deals, by circulating papers to a growing number of lenders (sometimes as many as 15 lenders) offering loose loan terms for the opportunity to be a part of the borrower's syndicate group. Borrowers and sponsors also continued to pursue dual track negotiations in the BSL market and with private credit providers to determine which financing solution offered the most attractive terms.

Loan Terms

Negotiations of loan covenants became more borrower favorable during 2024, particularly in the most competitive deals. EBITDA adjustments and covenant baskets were among the areas of greatest focus, with concerns around LMTs of particular note.

EBITDA Adjustments

The negotiation of adjustments to the EBITDA definitions in loan agreements continued to be a significant point in deal discussions, with the focus falling on the more speculative add-backs and whether add-backs should be capped. As the market continued to shift toward more borrower-favorable terms, practitioners report that lenders took a more flexible approach toward some add-backs being uncapped, such as add-backs for non-recurring expenses. However, lenders generally take a firmer stance against including add-backs for run-rate cost savings, which are typically capped if included (see What's Market, TripAdvisor, Inc. Credit Agreement Summary). Lenders also continued to resist for the most part revenue-based adjustments, such as add-backs for lost revenue or income arising from unanticipated events, as well as run-rate credit for new product lines, newly signed contracts, and other business initiatives that are expected to generate income. For an example of a loan agreement that includes a revenue-based add-back, see What's Market, Maximus, Inc. Credit Agreement Summary.

For more information on EBITDA and common adjustments to EBITDA in loan agreements, see Practice Note, EBITDA Adjustments in Loan Negotiations and Article, What's Market Analysis: EBITDA Add-Backs (2023/2024) on Practical Law.

High-Water Mark

Practitioners reported seeing greater attention paid to the use of a high-water mark feature for the borrower's earnings figures in negative covenant baskets. In loan agreement baskets that are based on the borrower's reported EBITDA, the high-water mark concept preserves the use of the highest figure for EBITDA that the borrower achieves during the life of the loan for covenant compliance purposes, allowing borrowers to maintain basket capacity under the loan agreement's covenants even if the borrower's EBITDA subsequently decreases. In the BSL market, arrangers may agree to the use of a high-water mark for earnings, subject to market flex. The high-water mark concept does not generally appear in syndicated middle market deals or in private credit transactions. Even in BSL deals, lenders are more averse to attaching high-water mark mechanics to restricted payment or investment baskets.

"Pick-Your-Poison"

A loan covenant feature that gained traction in stronger credits during the year is the so-called pick-your-poison (PYP) basket, which permits the borrower to reallocate basket capacity within its negative covenant package. Lenders in the BSL market are typically more open to including PYP baskets than lenders in private credit deals. In loans that include a PYP basket, the borrower can generally reallocate basket capacity in certain ways, such as reallocation:

• Among the loan agreement's general baskets for investments, restricted payments, and restricted debt payments. See What's Market, CACI International Inc. Credit Agreement Summary.
• Of restricted payment capacity to the debt covenant, permitting the borrower to incur additional debt instead of paying dividends or making other distributions. See What's Market, The Azek Group LLC Credit Agreement Summary.

Lenders generally looked more favorably on requests from borrowers to incorporate PYP features that reallocate covenant capacity in ways that preserve value within the borrower's business, such as reallocation of investment capacity to the repayment of debt. Points of negotiation concerned conditions around the use of PYP baskets, such as whether debt incurred using PYP capacity must be unsecured, rather than secured, debt.

Blocker Provisions and Liability Management Transactions (LMTs)

Continuing a trend seen in recent years, some borrowers seeking to generate additional liquidity to fund operations or avoid contractual defaults turned to LMTs to modify their capital structures and realign the liabilities on their balance sheets to enable them to obtain additional funds either within the terms of their existing financing arrangements or by amending them. In new deals and amendment negotiations of existing loans, lenders remained focused on limiting the ability of borrowers to effect LMTs without their consent by including blocker provisions in their credit agreements.

The market has not coalesced around a standard approach to LMTs, and deal terms are negotiated with outcomes driven by a borrower's or sponsor's negotiating leverage. However, certain limitations have become common, such as restrictions on the ability of the borrower or a restricted subsidiary to transfer their intellectual property to an unrestricted subsidiary, where it is out of reach of the lender and outside the scope of the credit agreement (see What's Market, CECO Environmental Corp. Third Amended and Restated Credit Agreement Summary (restricts any unrestricted subsidiary from owning any material intellectual property or asset and restricts the company or any restricted subsidiary from transferring any material intellectual property or asset to an unrestricted subsidiary; Section 2.18(e)) and What's Market, Dory Acquisition Sub, Inc. Credit Agreement Summary (restricts the transfer of material assets to non-loan parties; Section 7.19)).

Anecdotally, practitioners note that the more routine provisions aimed at blocking LMTs are generally acceptable in deal negotiations without further discussion. However, because new LMT structures continue to emerge as the concept evolves, counsel for lenders are sensitive to issues around perceived loopholes in loan agreement covenant packages that may be used to permit LMTs. With increased attention on M&A deals likely in a more active acquisition environment, there may be greater scrutiny of more permissive provisions in credit agreements, possibly leading to further new structures in LMTs.

LMT strategies continued to evolve in 2024 with the drop-down transaction executed by Pluralsight as one of the most recent examples. Vista, the sponsor of Pluralsight, executed a drop-down transaction that moved Pluralsight's intellectual property to a non-guarantor restricted subsidiary. Pluralsight's LMT drew significant attention from market observers because it was the first time a private equity sponsor initiated a liability management exercise in the private credit market.

The courts continue to play an important role in the evolution of LMTs. The most recent example is the Fifth Circuit's ruling in In re Serta Simmons Bedding, LLC, which reversed the decision of the bankruptcy court and struck down the debtor's prepetition uptiering transaction, holding that the debtor's private engagement with individual lenders did not constitute an open market purchase on a secondary market for syndicated loans, in violation of the ratable sharing provisions of the debtor's credit agreements (2024 WL 5250365 (5th Cir. Jan. 21, 2025)).

The Fifth Circuit's decision provides some guidance on undefined open market purchase provisions in financing agreements and underscores the importance of careful drafting, as loan agreements may now consider defining "open market purchase" or narrowing its application to reduce potential litigation risk. In the meantime, it is an open question whether there may be more litigation around these uptiering transactions and fewer of them attempted in the market.

For more information on LMTs, see Practice Notes, Finance Fundamentals: Drop-Down Financings v. Uptiering Transactions in Liability Management Transactions and Restructuring Through Liability Management: Uptier, Drop-Down, and Double-Dip Transactions on Practical Law.

Other Loan Terms

Other loan terms that received attention in negotiations include:

• Incremental debt provisions.
• PIK interest.
• Delayed draw term loans.
• Call protection.
• Debt portability.
• Voting rights.
• Proxy rights.

Incremental Debt Provisions

Market participants have reported seeing a trend toward looser incremental loan provisions, especially in higher quality credits. Lenders have recently been more willing to relax incremental debt capacity and MFN coverage has also become less aggressive, with many borrowers and sponsors requesting an increasing number of carve-outs to MFN protection. Other ways incremental provisions have trended more borrower-favorable include:

• An ability to reclassify incremental baskets. See What's Market, Amentum Parent Holdings LLC Credit Agreement Summary and What's Market, Ribbon Communications Operating Company, Inc.
• MFN thresholds. See What's Market, John Bean Technologies Corporation Second Amended and Restated Credit Agreement Summary (75 bps) and What's Market, Amentum Parent Holdings LLC Credit Agreement Summary (75 bps).
• MFN sunsets. See What's Market, CACI International Inc. Credit Agreement Summary (6 months).
• Currency limitations. See What's Market, CACI International Inc. Credit Agreement Summary.
• Maturity date carve-outs. See What's Market, Dory Acquisition Sub, Inc. Credit Agreement Summary and What's Market, Amentum Parent Holdings LLC Credit Agreement Summary.
• Security limitation. See What's Market, Dory Acquisition Sub, Inc. Credit Agreement Summary (pari passu) and What's Market, CACI International Inc. Credit Agreement Summary (syndicated dollar-denominated).
• Dollar-capped MFN. See What's Market, Amentum Parent Holdings LLC Credit Agreement Summary.

For an example of a limited MFN protection that includes a six-month sunset, pari passu carve-out, maturity date carve-out, dollar cap exception, permitted acquisition and permitted investment exception, and ratio debt exception, see What's Market, Amentum Parent Holdings LLC credit agreement.

PIK Interest

Although interest rates declined modestly in 2024, with the Federal Funds Rate standing at a target range of 4.25-4.50% at the time of publication (January 31, 2025), down from 5.25-5.50% a year ago, the continuing higher interest rate environment has fueled concerns among some borrowers about balancing adequate liquidity requirements while making larger-than-anticipated interest payments on their debt. PIK interest is a popular solution, especially in private credit deals, in particular through the use of PIK toggle provisions, which allow a borrower to choose to make interest payments in cash or in kind, thereby giving the borrower the flexibility to reduce its outgoing cash payments in a given period. PIK provisions gained increased attention in loan negotiations, and in response to competition between the BSL and private credit markets, some syndicated lenders are more open to accommodating borrowers' requests for PIK interest options. For examples of credit agreements with PIK interest provisions, see What's Market, K-PEC Liquidity Limited Credit Agreement Summary and What's Market, NeueHealth, Inc. Loan and Security Agreement Summary.

For more information on PIK interest provisions, see Practice Note, PIK Interest: Negotiation and Documentation and Standard Clause, Loan Agreement: Capitalized (or PIK) Interest (Syndicated Transaction) on Practical Law.

Delayed Draw Term Loans

The market saw continued interest by borrowers in DDTLs, which enable borrowers to access their term loan commitments in multiple drawings over an agreed period after closing, rather than in a single borrowing on the closing date. DDTLs are predominantly found in private credit loans, while arrangers of loans in the BSL market are generally less keen to consider them because they may not be well received in the secondary market. CLOs, which are the largest group of purchasers of corporate loans in the secondary market, are not typically set up to acquire loans with undrawn commitments for their portfolios. Although DDTLs are not common in the BSL market, banks and other lenders may be more open to offering them, albeit with less operational flexibility. Discussions often center on the duration of the availability period and the economic rights of the lenders providing the commitments, and market flex provisions are commonly used on these points of negotiation in syndicated deals.

Call Protection

Prompted by market expectations of a modest decline in interest rates, lenders continued to focus on call protection provisions. Soft call protections, which apply only to prepayments made as part of a refinancing or repricing of the loans, remain widespread in the BSL market. In the buy-and-hold culture of the private credit market, deals may have tighter call protection provisions with fewer carve-outs, such as for a change of control or engaging in transformative transactions, which are more common in the BSL market.

Debt Portability

In a challenging M&A environment, debt portability surfaced as a discussion point in some sponsored deals, though portability has not been widely adopted in the market. The portability of the financing of a prospective target may make it more appealing to potential buyers. The sale process is simplified for a buyer that does not need to arrange replacement financing in contemplation of an acquisition. In a loan agreement, debt portability typically involves permitting the sponsor to sell its equity in the borrower to a third party without the sale violating the loan agreement's change of control restrictions. For an example, see What's Market, Portillo's Holdings LLC Credit Agreement Summary.

Voting Rights: "You Snooze, You Lose"

Some voting provisions in loan agreements employ a concept sometimes referred to by practitioners as "you snooze, you lose." This feature is intended to protect the borrower from the risk of lenders failing to respond to requests for consents, waivers, and amendments. The borrower may fail to obtain sufficient lender consents for an amendment, a consent, or a waiver if some lenders fail to respond to the borrower's request within the required time frame. The effect of a you snooze, you lose provision is that the vote of a lender that does not respond to the borrower's request is discounted when calculating whether lenders holding the requisite percentage of the loans have given their approval to the amendment, consent, or waiver.

Proxy Rights

Voting proxy rights have increasingly taken on more significance, especially among private credit providers. Their buy-and-hold investment strategies may make them more motivated to seek to take over voting control of the board of directors or shareholders of a troubled borrower that is in default, favoring stricter rights with limited notice requirements. Syndicated lenders may take a more relaxed approach to proxy rights provisions and be more inclined to accept longer notice periods around their exercise, on the basis that these are rarely exercised.

Looking Forward

2025 looks set to be a solid year for the US loan market following the robust performance overall of the market in 2024. Generally favorable economic conditions and the prospect of further modest declines in interest rates are strong underpinnings. There are promising signs of the long-awaited return of M&A activity which will likely fuel activity in the loan market. Private credit providers are positioned for a successful year with large amounts of dry powder available to deploy into the asset class. Many businesses may benefit from continued competition between the BSL and private credit markets with available financing on borrower-favorable terms.

The market statistics cited in this article (unless otherwise stated) were provided by LSEG LPC.

For a complete copy of this article published on the Practical Law website on January 31, 2025 which also includes links to recent credit agreements, see Practice Note, What's Market: 2024 Year-End Trends in Large Cap and Middle Market Loans, Practical Law.