Leveraged Finance Trends and Predictions 2025

What’s on the horizon for leveraged finance in 2025? 

2025 is well and truly underway, and the leveraged finance market continues to grapple with ongoing challenges and emerging opportunities. 

High interest rates, persistent geopolitical tensions and a perceived valuation gap were key characteristics of 2024 -and they’re still influencing the landscape.

But what lies ahead? Will the long-awaited rebound in mergers and acquisitions finally materialise or is that just wishful thinking?

Our global leverage finance specialists have identified several key trends and predictions for the year ahead. 

Here’s what we anticipate for 2025:

1. M&A Rebound? 

Despite continued geopolitical tensions, the market appears optimistic about a long-anticipated uptick in M&A and leverage buyout activity in the coming year.

• Encouraging signs for growth: Recent fundraisings have reached record highs, demonstrating heightened investment levels. Sponsors have accumulated record-high dry powder, and are under pressure to deploy the funds and return capital. 
  
• Improved market conditions: Factors like improving valuations, growth in exits, reduced interest rates and lower inflation are expected to further improve conditions for LBOs. 
  
• Sector-specific activity: Certain sectors, such as healthcare, technology and energy are anticipated to further spark M&A in 2025. At the same time, other sectors (such as retail) face increased challenges, with the loan default rate expected to further increase in 2025. This environment will increase the likelihood of restructurings and bankruptcies for some borrowers. 
  
• Refinancing and repricings: Refinancings and repricings are expected to continue to drive market activity as despite reductions, interest rates continue to remain high. 
  
• Alternative structures: To navigate the evolving market conditions, borrowers may turn to other financing structures such as:
  
  • Asset-based lending
    
  • Mezzanine financing
    
  • (Holdco) PIK financings
    
  • Net-asset-value (NAV) facilities

2. Private Credit 

Direct lenders continue to take a dominant role in the leveraged finance market. However, the landscape is becoming increasingly competitive as traditional banks are also trying to regain market share. 

• Increased competition: Traditional banks are trying to regain market share by showcasing more flexibility in pricing and other terms in an effort to attract borrowers. 
  
• Direct lenders’ response: Direct lenders are adjusting their strategies by offering lower margins, providing higher leverage and other flexible terms. Some direct lenders are diversifying into other asset classes to help drive their competitive edge. 

3. Sustainability in focus 

Sustainability remains a key focus area for borrowers, largely driven by the implementation of ESG regulations, investor demands and global geopolitical shifts. 

Although volumes of sustainability-linked loans remain steady, we expect no further increase and have also seen some borrowers replacing their sustainability-linked loans with regular facilities. 

The Bird & Bird Leveraged Finance team is here to guide you through 2025. If you would like any further information, please contact a member of our team.