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19 April 202313 minute read

European Debt Finance Intelligence Report 2023

Navigating mid-market terms in an uncertain world

2022 was a relatively challenging market, at least compared to a record-breaking 2021. The financial markets were dislocated throughout much of 2022 because of geo-political events. The high yield debt capital markets / bond markets were mainly shut, and several large-cap leveraged deals were hung in syndication. That lack of liquidity saw a number of the larger direct lending funds fill the gap, in turn leaving a partial vacuum in mid-cap liquidity. Additionally, the lack of lender appetite for some assets (or at least at leverage levels seen in 2021), plus the gap between the value expectations of buyers and sellers, saw a number of sales processes flip into recaps/refinancing.

Generally, we saw deals taking longer to commit and/or close, with lenders asking more questions, and taking more time to diligence, potential investment opportunities.

Now we are into 2023, it still feels too early to call.

“Many participants expect a subdued H1 but with momentum picking up as we move through the year. There is just too much dry powder – both debt and equity – for people to stay out of the market for too long.”

Mapping international trends

DLA Piper works on more M&A transactions than any other law firm in the UK, Europe and worldwide, and has done for each of the last twelve years (according to Mergermarket). We have a fully integrated European leveraged finance team operating across all the major financial centres.

Consequently, we have unrivalled access to transaction data. The data referenced in this report is taken from over 100 of our 2021/2022 sponsor-backed European leveraged finance transactions.

In this report, we’ve applied a risk management lens to this data to provide quantitative and meaningful trend analysis and insights on some of the key issues that matter to both lenders and sponsors/borrowers in times of uncertainty.


It comes as no real surprise that it is now relatively common for European mid-market deals to have only one maintenance financial covenant. Documentary convergence between the large-cap and mid-market is by no means a new concept, but our data shows us that the mid-market generally continues to resist the cov-lite structures associated with the large-cap market (save perhaps in some deals in the upper mid-market).

“As a result of the challenging economic environment and the strain this is causing on borrower balance sheets, we expect the upward trend of covenant waivers and resets will continue well into 2023.”


Across the European mid-market, we have seen margin pricing move upwards over the past year, with upfront fees increased in the bank space, and featuring as a competitive negotiation tool in the private credit funds space.

Given current economic conditions, central bank rate rises to try to tame inflation, and consequential increase in reference rates, aggregate interest rates are a critical consideration for all borrowers.


Sponsors have taken advantage of the competitive capital deployment market of recent years to continue to push for increasingly restrictive conditions around loan transferability.

Our data shows that common restrictions include transfers to distressed investors (usually unless a credit-related Event of Default is continuing) or to industry competitors (in all circumstances).


Our deal data shows that equity cures and deemed cures are very much an accepted part of the mid-market landscape. The ability for a sponsor to cure a financial covenant breach by contributing additional capital may be useful in some circumstances (although in practice, in many cases, a sponsor will often look for a broader restructure/reset in return for additional equity).

Mid-market direct lenders: Challenges and opportunities

Lack of quality assets coming to market

“We expect a relatively subdued M&A market in the first half of 2023, with caution in both equity and credit, and participants being very selective in asset choice (where there is even an asset choice available!).”
Neil Campbell, partner

Asset-based lending

“Some of the more interesting opportunities in ABL in 2023 are likely to be seen with the (relatively) new entrants to the market, where credit funds are increasingly prepared to structure facilities using ABL techniques and by reference to a borrowing base, but with more flexibility than some of the traditional ABL providers.”
Joseph Frew, partner
David Ampaw

Special situation-type funds

“In theory therefore private credit funds (not just special situations funds) with sufficient capital, flexibility and appetite have an opportunity to fill the void, attracted by larger average yield spreads than are typically found in traditional mid-market deals.”
David Ampaw, partner

Comparing the approach of lenders

In the European mid-market, banks continue to look for ways to compete with private credit. Despite the potential for a meaningful economic downturn, there is still significant competition in the leveraged lending market, and in part, this is due to the ever-growing market share of funds (and the (still) huge amounts of undeployed capital).

As we look back over 2022, we have continued to see a growing number of banks establish affiliated private credit funds in order to try and compete with their counterparts in the direct lending space, at least in terms of amount of capital available from ‘one’ institution. As we look to the year ahead, we expect competitive tensions to remain, and we may in fact see these tensions rise if market uncertainties result in a softening in deal flow. 

In its simplest of terms, PIK toggle mechanics enable a borrower to elect to convert cash margin into 'payment in kind' interest – this is then capitalised rather than paid in cash. If such an election is made, the aggregate margin will typically be subject to a premium. Where ability to pay interest is strained, the flexibility to conserve some cash may become a particularly sought-after feature.

The direction of travel in relation to ESG is clear and, given the uncertainty in the market, tackling ESG-related issues might well be the key to unlocking long-term viability for some businesses.

While the LMA Leveraged Finance Facilities Agreement does not yet cater for ESG margin ratchet conditions, margin adjustments linked to the satisfaction of pre-agreed sustainability or ESG objectives have been a hot topic of discussion.

Term under the spotlight

Call protection

A concept first conceived in the US high yield bond market which has, over the years, made its way into mid-market loan documentation as lenders look to protect their yield if a loan is voluntarily prepaid in advance of its stated maturity. While the concept of call protection is a fairly standard market provision, its relevance, scope and application will vary from deal to deal.

In addition, the refinancing risk profile of each deal is inherently different. Lenders may therefore take into account a number of factors before determining the degree of call protection (if any) they deem necessary.

“Arguably, the redeemable nature of a loan is at cross-purposes with achieving a fixed return for investors; however, call protection (among other tools) offers a private credit a way of mitigating that risk.”

Super senior and unitranche lender interactions

Mid-market participants will of course be very familiar with super senior – unitranche structures. This can be a capital structure that works well for all parties – the sponsor gets the leverage it needs from the (usually sole) credit fund, as opposed to a club of bank lenders, and the super senior bank lender benefits from ancillary income, and potentially term facility margin on a FOLO structure, whilst of course being paid first in a downside situation.

“The best outcomes we’ve seen [in distressed situations] – for funders and sponsors – have been on deals when there’s been good engagement with all parties in the capital structure and as a result each one of them has stepped up to provide further support for the borrower.”

Material Events of Default are a separate class of events of default which are solely for the benefit of super senior lenders. These allow the super senior lenders to accelerate despite not having the voting status of a majority lender. Unitranche lenders will typically control enforcement and on the occurrence of a Material Event of Default the super senior lenders will “standstill” for a period of time whilst the unitranche lenders determine what (if any) enforcement action they wish to take.

The list of Material Events of Default for the benefit of the super senior lender will vary from deal to deal but will generally include as a minimum non-payment of amounts owing under the super senior facilities, insolvency related events and breach of a financial covenant. This super senior financial covenant will typically be a leverage test with slightly more headroom than the general leverage test (generally in the region of 10-15%), a leverage test by reference to drawn super senior facilities only or a minimum EBITDA threshold.

A unitranche lender’s option to purchase the super senior liabilities (and, in some cases, the super senior hedging liabilities) at par following the occurrence of an Event of Default or Material Event of Default is a protection that market participants will be very familiar with, providing time and control in any negotiations with the borrower about a potential restructuring.

In a very small number of deals, we have seen unitranche lenders with the ability to step in and provide further debt/equity if the sponsor cannot or will not exercise its own cure right.

Control over an acceleration process is fundamental to a unitranche lender, given the amount of skin they have in the game. Control will typically be afforded to lenders who contribute over two-thirds of the secured debt. But with 38% of our UK deals permitting incremental super senior facilities to be established, the majority senior creditor calculation will always need to be carefully considered.

We typically see unitranche lenders paid out ahead of super senior lenders as part of the mandatory prepayment waterfall under the senior facilities agreement (SFA), reflecting that the super senior RCF is generally only “first pound out on enforcement” and that mandatory prepayments (e.g. from disposals) would usually be applied against term debt and not prepay or cancel the revolving facility used for working capital.

It’s market standard for unitranche lenders to benefit from fair value protections. These protections require that the super senior lenders may only release the unitranche liabilities on the implementation of a distressed disposal if the super senior enforcement is:

  • by way of a competitive sales process run by an internationally recognised  investment bank/accountancy firm;
  • a process approved or supervised by a court; or 
  • where a financial adviser has delivered a fairness opinion (stating that the enforcement proceeds are "fair from a financial point of view taking in to account all relevant circumstances, including, without limitation, the method of enforcement or disposal"). 

Managing portfolios – documentary terms and flexibilities

Notwithstanding the significant macro headwinds, sponsors have to date successfully managed to hold their ground on terms, but we will be watching this space carefully.

The market has certainly become used to the terms and flexibilities driven by sponsors in recent years and, while we don’t necessarily expect to see the market regress back to the days of multiple maintenance financial covenants and a wholesale tightening of terms, we do expect lenders to exercise caution in the coming months.