European Leveraged Loans 2025 Year in Review: Market Technicals and Limited New Money Overshadow Covenant Concerns; Investors Focused on LME-related Terms
Jane Gray, Solicitor - Head of European Research, Covenant Review
16 December 2025
- How universal reallocation clauses completely undermine covenant frameworks creating impossible capacity calculations for investors.
- Which transfer restrictions and voting threshold changes facilitate future liability management transactions favoring sponsors. Furthermore, discover retroactive disqualification provisions potentially disenfranchising lenders entirely.
- What EBITDA adjustment permissions allow for virtually uncapped projected future benefits across multiple corporate actions.
- How asset sale proceeds and non-obligor debt provisions create structural subordination risks throughout capital structures. Meanwhile, weakened collateral protections exacerbate effective subordination exposing lenders to operating asset claims.
- Where market technicals and investor demand will drive covenant quality evolution throughout upcoming refinancing cycle.
Executive Summary
Strong market technicals drove European leveraged loan issuance to record levels this year. Heated investor demand enabled sponsors to negotiate increasingly borrower-friendly documentation terms successfully.
Covenant protection quality deteriorated significantly as permissive provisions became normalized across the market. Documentation scores reached their weakest levels since comprehensive tracking began years ago historically.
Transfer restrictions expanded considerably with extensive limitations on secondary trading and lender qualification. Furthermore, liability management blockers were introduced but often included materiality thresholds diluting effectiveness.
Voting thresholds weakened substantially with super majority requirements dropping to two-thirds consent levels. Sacred rights protections eroded allowing security releases and ranking changes with reduced approvals.
Portability provisions surged dramatically with extended windows and relaxed leverage testing requirements throughout. Meanwhile, strong collateralized loan obligation demand will likely sustain aggressive covenant terms continuing.
