2025 – Leveraged Finance – Year in Review: “What It Sounds Like”

Introduction – “I do have one idea… actually 57, but let’s start with my favourite”

Despite the crazy-busiest end to a year in recent memory, we’ve taken a moment to add our 2025 Year in Review to your holiday reading list.

Choosing a theme this year was easy.  There was plenty to choose from, between Trump’s second (and final?) inauguration and Taylor’s engagement (“Life of a Dealgirl Showgirl”?), but there really was only ever one clear winner – KPop Demon Hunters - which totally captured 2025’s Zeitgeist (if not our eyes and ears).[1]

And so, as your APAC Deal Hunters, we bring you 2025’s Year in Review inspired by HUNTR/X:

Frothy conditions / repricings – “Takedown” (those margins)

2025 was a great time to be a borrower – with conditions reaching the realm of frothy (don’t say bubble).

Falling base rates (although potentially temporary only in Australia) were accompanied by real margin compression from both banks and private credit - driven by increasing competition between more providers, with plenty of dry powder and a still relatively limited number of transactions in which to deploy.

We saw more repricing deals than ever – with Sponsors raising refinancing facilities with lower margins, refinancing second lien debt with first lien debt or replacing relatively more expensive debt (eg unitranches) with TLBs/bank debt.  

For the right sponsors and transactions, other terms have also become more borrower friendly: higher leverage, more cov-lite / cov-loose deals and generally more flexible T&Cs.

Portability schmortability – “My strategy, strategy will get ya, get ya, baby”

Portability (where debt can survive a change of control) remains a hot topic – particularly for refinancings or Amend & Extends for PortCos nearing an exit (or at least hoped to be), but even for some borrowers raising as a day 1 feature (we love the optimism on hold periods). 

Here’s a contrarian view for our sponsor clients:  Portability sucks! And no, not just because it may reduce the number of new debt deals for us to work on!

• Real lived experience is that portability can create issues that distract the entire M&A process. Financing is normally the buyer’s issue – it’s up to them to source financing, without any financing out in the acquisition agreement and usually on “certain funds” terms (so that events at the Target level don’t impact availability of funding).[2] The dynamic changes if the existing facilities are to remain. Buyers will ask (quite reasonable) questions like:
  
  
  • What happens if there’s a default pre-completion?
    
    
  • Well if I am inheriting this debt, what changes can you make to the debt terms pre-completion? 

And now the (well meaning) sell-side has to deal with a new bunch of issues in SPA negotiations – trying to anticipate what could happen to the existing debt facilities over the pre-completion period (which could be a long time with foreign investment, merger clearance and other regulatory processes).

• There’s portable, and there’s “portable”.  Some portability clauses provide outs for lenders on items such as KYC, aggregation and sometimes for other policy issues – meaning some form of consent/review process with lenders will still be required, removing the funding certainty portability was meant to provide.
  
  
• Portability conditions can include a fee to lenders payable on a change of control.  But, on deals without portability where lender consent to a proposed change of control is sought, if it's a quality deal with a quality buyer (as is often the case), lenders keen to stay in the deal (with limited other opportunities to deploy) may provide consent without charging any fee.
  
  
• We’ve rarely met a sponsor (and definitely never met a Sponsor capital markets team) who looks at any existing Target debt package arranged by someone else and said: “Yep, I can’t do any better than that!”

Staple financings - “I lived two lives, tried to play both sides”

Staple financing packages continue to feature in sale processes – with mixed success on their take-up.

There’s a spectrum with more full-blown long form term sheets (hard staples) as opposed to earlier 1-2 page commercial terms grids (soft staples or, as some call it, a “paperclip”). 

The question remains whether they will actually be “hit” or continue merely to set a floor for the bidder to formulate their own debt package with the “I can do better than that” mindset above.  That said, we are seeing some well-developed staple packages being issued as a reasonable starting point for bidders to iterate and finesse – which is helpful in some sale processes where timelines are tight and competitive tension is high.

A&Es/Dividend recaps/Leverage - “Up Up Up - It’s our Moment”

No – it’s no Accident & Emergency.  We saw more Amend (usually to provide more flexibility to the borrower) & Extends (for longer tenor) this year – often accompanied by an Upsize.  The upsize could be for multiple purposes – more headroom to fund bolt-on acquisitions / growth capex, but sometimes also to fund div recaps.

As with previous years, Sponsors remain under pressure to return funds to investors and, where exit conditions are challenging, are looking at other options to boost DPI (short for Distributed to Paid-in Capital).  Div recaps have been the most popular DPI tool again this year, particularly with lower cost of debt capital in current market and with many deals being at a natural refinancing point.  For a relatively simple proposition though, div recaps involve complexity in implementation which needs to be carefully considered for each deal – refer to our mid-year article for a primer on div recaps.

IPO release conditions - “We could be free-e-e-e-e, free-e-e-e-e”

With the success of Bain Capital’s Virgin Australia Airlines IPO this year, investment banks and advisers are feeling optimistic again spruiking IPO exits to Sponsors.  After a very long drought, we’re thrilled to see IPOs featuring again as a potential exit path for Sponsors for some assets.[3] 

With that, we are also seeing IPO release conditions return to some refinancing / A&E debt packages. IPO release conditions are a switch which allow a deal to survive an IPO and automatically amend terms of the facility agreement to reflect what would be appropriate for a listed company.

Hot sectors - Data centres/infrastructure – “You’re my Soda Pop, my little Soda Pop”

The infrastructure sector was “soda pop” this year with many large transactions, and within that, data centres continue to be the hottest asset class especially with the enormous need to fund capital expenditure to meet hyperscale client needs / AI demands. 

The focus is on accessing as many available capital pools as possible with capital recycling being the buzzword.  Parties are exploring exciting new financing techniques and structures to unlock new pools of capital – with terms (and teams) that straddle (and take the best bits from) infrastructure, real estate, leveraged finance and securitisation markets.

TLBs are back – “Let the past be the past until it’s weightless” (cov lite)

After a long absence from the market, underwritten TLBs are back!  This year saw the dam break[4] with TLBs for PEP/FMH, CC Capital/Insignia, as well as various refinancings including KKR/Arnotts and CFS, EQT/Icon Cancercare and Australian Technology Innovators.  This has been a welcome development for Sponsors as it adds another strategy to compete with the cov-lite direct lend/unitranches.  This has not necessarily been a negative for the more pro-active and flexible private credit funds above to deploy across different products.

Thin cap – “No one is coming to save you (Pray for me now)”

For those lucky enough to have avoided thinking about thin capitalisation since the new laws came into effect from 1 July 2023, here is a quick primer:

• Under the (not so) new rules, deductions for interest expense are generally capped at 30% of ‘tax EBITDA’ (which is very different to adjusted pro forma financing EBITDA) for most taxpayers. For many leveraged borrowers, this can result in denied deductions. 
  
  
• Certain taxpayers may be eligible to apply the ‘third party debt test’ (TPDT) as an alternative to the tax EBITDA test.  This test is incredibly complex and the rules are difficult to follow – in summary the debt can only fund commercial activities in Australia, where lenders are not associates of the borrower and where lenders only have “recourse” to Australian assets.

That “recourse” requirement becomes very relevant for Australian headquartered businesses with offshore operations (and yes that even applies to operations in New Zealand!).  Often the burden of that requirement falls to lenders with offshore assets removed from their security pool.  Overall this has added unwelcome complexity to debt financing structures on cross-border transactions.

Merger reform – “Gonna show you how it’s done done done”

We are now weeks away from the start of Australia’s new mandatory clearance regime.

Acquisitions of assets subject to that regime which do not have clearance are void.  To repeat an Elon meme from last year’s YIR: “Let that sink in”.

Unfortunately the rules are not black/white in their application – which means our expectation is that parties will err towards the side of conservatism where this is unclear and seek merger clearance / waivers from ACCC (the Australian competition authority). 

For lenders, the prospects of lending to an acquisition which may turn out to be void is not exactly palatable – so borrowers/bidders can expect some lender scrutiny / questions on competition issues where there is no ACCC clearance / waiver condition precedent in the sale agreement.

Cosette bid for Mayne Pharma – "Don't worry. It's totally legit."

Cosette, a US-based pharmaceuticals company owned by 2 financial sponsors, signed a binding bid to take over Mayne Pharma, an ASX-listed pharmaceutical company with operations in the US and Australia via a scheme of arrangement.  The deal had several CPs including the Australian foreign investment approval board (FIRB) approval and there being no Target material adverse change (Target MAC).

Before the shareholder vote, Cosette tried to pull out of the deal by invoking the Target MAC, pointing to trading softness and other business issues that resulted in Mayne missing a forecast. 

Mayne successfully challenged the purported termination in court, which helpfully reaffirmed that pulling out of an M&A deal for a Target MAC is really hard – in summary because:

• Missing a forecast is not itself an adverse change; it’s only evidence of one. Evidence still needs to isolate cause and effect.
  
  
• “Reasonably expected” captures real-world impacts that have occurred even if the full commercial pain hasn’t yet been felt - but a risk that something might go wrong is not enough.

A few months after deal announcement/signing, Cosette told FIRB it was going to close or sell Mayne’s South Australian manufacturing site (likely causing material job losses and impacting domestic pharmaceutical manufacturing capability), a departure from what it said in the scheme booklet. The reasons given for this departure included the same matters which Cosette claimed constitute the Target MAC.

Mayne took this to our Takeovers Panel claiming Cosette had misled the market about its intentions.  The Panel ordered Cosette to agree to any conditions reasonably required by the Australian Treasurer (including conditions reasonably restraining its closure of the site). 

Ultimately the Treasurer blocked the deal on national interest grounds – which meant the FIRB CP was not satisfied – allowing Cosette to walk away from the deal.

While thankfully unique, this situation has significantly increased market participants’ focus on pre-signing work to reduce the risk of a bidder using a regulatory process to exit a deal.

ASIC private credit regulation – “Called a Problem Child ‘cos I was too wild”

After at least 3-years of “Golden Age” memes, Private Credit became the media’s favourite whipping boy this year with various media articles painting the asset class as cowboys, ready to assault capitalism as we know it.

Our lived experience has been quite different.  Our private credit clients generally have high lending standards and operate at a level of sophistication at least equal to their counterparts in banks – particularly given the sophisticated nature of their investors and borrowers. 

Early this year our corporate regulator, the Australian Securities and Investments Commission (ASIC), launched a review on evolving dynamics between public and private markets (with a focus on private credit), followed by various updates including a response paper in November.  The direction of travel of potential regulation seems to be stronger conduct expectations, more consistent disclosure requirements, closer scrutiny of conflicts and valuations, and a progressive shift to recurrent fund-level reporting beginning with pilots – especially around smaller, less-well-resourced / more retail-focused funds and/or those lending into the riskier end of the real estate sector.

As we’ve said elsewhere, it was good to observe ASIC’s acknowledgement the value of private credit to the market as a driver for increased competition and a source of debt capital for borrowers that might not otherwise have access, and that some market participants are already implementing international best practice.  One therefore hopes that for such market participants, additional layers of regulation will not be imposed which would make it less attractive to lend to Australian borrowers.

2026 - “No more hiding, I’ll be shining, Like I’m born to be”

Unlike previous years, we’re not going to come up with a list of predictions for 2026 – other than (if Q4 2025 is anything to go by) we expect it will be a very busy year for M&A/exits and, with that, new money leveraged financings.

Instead, we’d like to thank our wonderful clients for their support this year – we are grateful to have worked on the Blackstone/Airtrunk ~$16bn jumbo financings, acquisition financing for Adamantem/Nexon, KKR/Zenith, Quadrant Private Equity/Carlisle Health, PAG/CVC/Australian Venue Company, sale of Kinetic by OPTrust and Foresight, lenders for TPG/Infomedia and many A&Es/refinancings including for Affinity Equity Partners/ScotPac, BGH/ForHealth, Permira/i-Med, EQT/Icon Cancer Care, Paine Schwartz consortium/Costa Group, EQT/Fitness Passport, Navis/Device Technologies, Morrison/Qscan and CVC-DIF/Rail First and Goldman Sachs on Australian Technology Innovators.

We hope your 2026 is Gonna be Gonna be Golden!