If you’ve ever borrowed money to grow a business, you already understand the basic idea behind ‘leveraged finance.’ Leveraged finance simply refers to loans made to companies that already have a fair amount of debt or whose credit rating is below ‘investment grade.’ These companies may still be healthy and growing, but lenders view them as higher-risk, so the loans usually come with higher interest rates and more detailed rules about how the company must operate.
In 2025, leveraged finance looks very different from what it did just a few years ago. Interest rates are higher, the economy is uneven, and lenders are being more careful by tightening the rules for borrowing and writing smarter guardrails into loan documents around liability management transactions. These shifts mean borrowers face more rules, more financial tests, and closer monitoring of cash flow. At the same time, new players, especially private-credit lenders, are giving borrowers more choices.
Because many growing companies rely on this type of financing to expand, invest, or buy competitors, understanding the current trends helps business owners and advisors make smarter choices about when and how to borrow.
2025 Deal Activity
Currently, larger acquisitions, often called ‘platform deals,’ are harder to get done because buyers and sellers can’t agree on valuations.
“There’s been a little bit of a rebound, but it’s still slower; there’s still a pretty wide bid-ask spread,” notes Ethan Konschuh of Sidley. In other words, deals are happening, but not at the pace lenders or buyers would like.
Instead, many private equity firms are focusing on ‘add-on acquisitions,’ i.e., smaller purchases that fit into a business they already own. These smaller add-on deals often use flexible funding tools like delayed-draw term loans (DDTLs), which allow a business to borrow money only when it needs it. They’re helpful because the company doesn’t need to refinance its whole debt package just to close a small acquisition.
Even though lenders are cautious, middle-market companies with strong performance are still able to negotiate attractive terms with some deals including only one financial covenant, typically a leverage test. These ‘single covenant’ deals are easier for borrowers to manage and give them more breathing room.
Notable Trends in 2025
Private Credit Keeps Growing
Private credit lenders continue to take market share from traditional banks. These lenders are typically investment funds rather than banks. They can move faster, customize loans more easily, and are often willing to underwrite larger deals. They often work closely with borrowers and can be more flexible when problems arise.
According to Andrew Hutchinson of Much Shelist, P.C., private credit lenders are now regularly competing in spaces once reserved for traditional banks.
Borrowers Push for EBITDA Adjustments
EBITDA is one of the most important numbers in leveraged finance because it helps determine how much a company can borrow, whether it passes its covenants, and how lenders view future performance.
In the context of leveraged financing, borrowers are continuing to push for larger EBITDA adjustments, often called ‘add-backs,’ including one-time costs, integration expenses, restructuring charges, and cost-saving initiatives. These adjustments can make a company appear healthier than it really is, so regulators like the SEC are paying closer attention. Lenders are also becoming more skeptical and are negotiating tighter limits on what counts as an adjustment.
Preferred Equity
Many companies are turning to ‘preferred equity’ to fill funding gaps. Preferred equity sits between debt and common equity. It usually doesn’t require immediate cash payments, and it gives the lender or investor certain rights that common shareholders don’t have. Preferred equity offers a borrower more creative, flexible payment options. This flexibility is extremely valuable when traditional loans are too expensive. Preferred equity can help close a deal without putting extra pressure on the company’s cash flow.
Priority Revolvers
Another trend gaining traction is the use of priority revolving facilities within larger ‘unitranche loans.’ These arrangements give revolving lenders, often banks, priority in getting repaid if something goes wrong. This priority encourages banks to keep offering revolvers alongside private credit term loans.
However, these structures raise important questions:
• Who gets repaid first?
• Who controls enforcement if the company defaults?
• How are cash proceeds split?
• How does the borrowing base interact with the rest of the structure?
In the end, these structures only work when everyone understands exactly how they operate in stressful situations, which is why clear documentation is critical.
Looking Ahead
Most experts expect interest rates to fall gradually, but not dramatically. Borrowing will likely remain relatively expensive, private credit will continue growing, and lenders will keep pushing for protections that help them respond quickly if market conditions worsen.
Borrowers, meanwhile, will continue looking for flexible financing structures that allow them to complete acquisitions and manage liquidity without overburdening cash flow.
Through all of this, one thing remains constant: companies that understand their financing options, and communicate openly with lenders, tend to navigate challenges more successfully. Leveraged finance may be complex, but with good guidance and careful planning, it can be a powerful engine for growth.
To learn more about this topic, view Current Trends in Leveraged Finance. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested in reading other articles about borrowing & lending.
This article was originally published here.
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