Acquisition legacy debt

A significant volume of UK acquisition finance was arranged between 2018 and 2021. At that time base rates were at historic lows and liquidity was abundant. Much of that debt was lent on a typical five – seven year term. Thus, a substantial amount of that debt has and will mature by 2028. This piece considers what happens as acquisition debt approaches maturity.

A different credit environment

Debt put into place between 2018 and 2021 was often priced off near-zero base rates, with margins and leverage multiples reflecting a very different credit environment. Since then:

• Interest rates have risen and wider margins means a substantially higher cash interest pay.
• Leverage tolerance has tightened and lenders (excluding direct lenders) are generally underwriting lower EBITDA multiples.
• EBITDA quality faces more scrutiny, add-backs, pro forma adjustments and “run-rate” synergies that sailed through a few years ago now draw much harder questions.
• Trading for many corporates has been uneven and unpredictable. Inflation, input cost pressure, black swans and softer demand mean some borrowers’ EBITDA has grown less than modelled or fallen widening the gap between debt outstanding and what the business can now support.

Together, these factors mean sponsors and corporates facing maturity in 12 – 18 months may find that the debt they can raise is materially smaller than the debt currently outstanding and in any event new debt is more expensive.

Options available to borrowers

1 – Amend & extend

Amending and extending avoids a full syndication process, preserves existing intercreditor and security arrangements and can be executed faster and more cheaply than a wholesale refinancing. The amend & extend route will require sufficient lender consent and typically all lender consent for maturity extension. This route typically extends maturity by one to three years in exchange for a margin increase (often 50-150bps, sometimes more), tightened or reinstated maintenance covenants, pricing in an extension fee (often 25-75bps of the facility amount) and often requiring additional sponsor equity support which is often structured as new preferred equity or a shareholder loan.

Amending & extending is a fit for sponsors that find exiting difficult at preferred multiples and aligns well with sponsors rolling investments into continuation funds.

2 – Refinancing

Replacing the maturing facility on current market terms with the incumbent lender group, a new bank syndicate, or a switch to direct credit. This requires a set of new finance documents with the related prepay and release documentation.

3 – Sale of the business

Sponsor-backed acquisitions typically run on a five – seven year hold, shorter or matching the term of the acquisition debt. That means maturity often lands squarely within, or just after, the sponsor’s natural exit window, so a sale is frequently on the table alongside refinancing options rather than a fallback. Where trading has held up and the business can command a price that clears the debt stack with an acceptable equity return, a sale sidesteps the refinancing gap altogether.

4 – Equity injection / deleveraging

Sponsors may inject equity or convert shareholder debt to equity, reducing the debt quantum to a level the market can refinance, this is increasingly common as an alternative to a distressed process, and generally preferable for sponsors protecting equity value and lender relationships for future deals.

5 – Spin-off assets

Selling a non-core business unit, subsidiary, or asset (e.g., a sale-and-leaseback) can generate proceeds to pay down debt ahead of refinancing, reducing the refinancing quantum and improving leverage ratios.

6 – Hybrid and structured solutions offered by direct lenders

Borrowers increasingly turn to unitranche direct lending combined with a smaller super-senior revolving facility, payment-in-kind (PIK) instruments to reduce near-term cash interest, or preferred equity/hybrid capital sitting behind senior debt but ahead of ordinary equity, providing runway without the dilution of a straight equity raise.

7 – Alternative lenders – challenger banks and direct lenders

Where traditional banks have pulled back, because of sector concentration limits, leverage appetite, or the credit quality of the underlying business, challenger banks and direct lenders are increasingly stepping in to fill the gap.

Practical considerations for corporates

1. Credit process: given the lead times involved, boards should assess refinancing risk at least 18–24 months ahead of maturity, folding it into annual business planning and going concern assessments.
2. Financial modelling: stress-test the capital structure against current market leverage multiples and pricing, not the terms under which the original debt was raised, to identify any funding gap early.
3. Engage advisers: advisers experienced in both bank and direct lending markets can help identify the most efficient route and manage a competitive process to preserve negotiating leverage.
4. Incumbent lender relationships: incumbent lenders are often the fastest, most cost-effective route to a solution, particularly via amend and extends but it’s still worth running a dual competitive process.
5. Covenant compliance: any refinancing or restructuring process should be coordinated with existing covenants. A breach shortly before or during a refinancing process significantly weakens the borrower’s negotiating position.

How we can help

Thomson Snell & Passmore’s Banking & Finance team has extensive experience advising lenders, borrowers and sponsors on acquisition finance, refinancing and debt restructuring. We help clients navigate changing market conditions and find practical solutions as acquisition debt approaches maturity.