​​Reshaping Australian Leveraged Finance​

Something quiet, but significant, is happening in the Australian leveraged finance market. The once-distinct lines between stretch senior, unitranche and term loan B ("TLB") products are blurring and merging. Terms that were considered aggressive five years ago (by all sides) are now baseline expectations (again, by all sides). And the driving force behind this shift? Competition both among domestic lenders fighting for mandates and from offshore markets setting new benchmarks for what sponsors can demand in the Australian market.

This article examines the terms being achieved by global private equity firms and leading Australian sponsors, the players who invariably set the trend for the rest of the market, to demonstrate this shift. It considers the three most common financing products in the Australian leveraged finance market: stretch senior, unitranche and TLB, with a focus on the three most hotly negotiated topics: financial covenants, debt incurrence and portability.

Why Terms Are Converging Across Products

The Australian leveraged finance market has never been more competitive. Sponsors now routinely run parallel processes across at least two, sometimes three or more, financing options. A top-tier sponsor bidding on an acquisition might simultaneously pursue a stretch senior option with a major bank, a unitranche with a credit fund, and scope a TLB with an investment bank.

For context, the key products in the market work as follows:

This competitive dynamic has fundamentally changed the negotiating landscape. Traditionally, TLBs offered the most aggressive terms, followed by unitranche, then stretch senior. That hierarchy is collapsing, or at least blurring and merging.

Consider a typical scenario: a sponsor tells a major bank that despite the lower pricing on offer for the stretch senior, they're leaning toward the unitranche because of the flexibility on financial covenants or debt incurrence. The bank, keen to win the mandate, reluctantly matches those terms. In the next deal, those terms become the starting point. And so the ratchet tightens.

The result? Outside of the structural features in the table above, it is increasingly difficult to identify material differences between stretch senior, unitranche and TLB documentation. The convergence is real and competition is its primary catalyst.

One caveat: a handful of TLB financings in Australia by global PE firms are done on "US terms" - essentially a New York law credit agreement with the governing law flipped to Australia. These transactions are a different beast entirely, with terms more aggressive than typical Australian market practice.

But the pressure on Australian bankers is not just coming from other Australian lenders. Offshore markets are increasingly setting the pace.

The Offshore Influence

The Australian market is becoming more sophisticated, and more crowded. Several types of global players are now competing actively for Australian mandates:

• Global PE firms
• Global debt funds
• Alternative capital

Two other factors are accelerating this trend. First, offshore debt capital markets teams are increasingly involved in Australian transactions. Second, muted M&A activity globally has left significant capital looking for deployment, giving sponsors more leverage over their lenders.

The upshot is clear: global PE firms and debt funds, armed with their offshore experience, are driving Australian terms toward more sophisticated international benchmarks. What starts as a one-off concession quickly becomes market standard.

A number of recent high-profile transactions have been heavily influenced by offshore terms. This is no longer the exception; it is becoming the norm.

Financial Covenants: The Push for Flexibility

Across stretch senior, unitranche and TLB transactions, the standard financial covenant is a net leverage ratio: total debt (less agreed exclusions) minus cash, divided by EBITDA. Simple enough in concept, but the action is in how EBITDA is calculated.

The Battle Over EBITDA Adjustments

Until recently, the market position on EBITDA adjustments was relatively settled. Pro-forma adjustments (for restructuring initiatives, cost savings, synergies and growth capex) were subject to clear guardrails: director or CFO certification if any single adjustment exceeded 10-15% of EBITDA, external "big four" certification above 15-20%, and an aggregate cap on all adjustments of 25-30%.

That has changed. In recent transactions, top-tier sponsors are pushing for, and increasingly getting:

• A significantly expanded list of permitted adjustments: not just the traditional categories, but also adjustments for new contracts, new customers, pricing increases, volume growth and other business-specific items (all typically defined broadly);
• Removal of certification requirements: sponsors want to use their own forecasts, sometimes extending two or three years after the relevant event; and
• Higher aggregate caps: 35-40% is now the ask, up from 25-30%.

Our sense is that lenders are increasingly accepting that they won't win the war on individual adjustments. Instead, they're focusing their firepower on negotiating a reasonable aggregate cap. If the total adjustments are capped, the argument goes, individual line items matter less.

The Rise of Cov-Lite

Perhaps the hottest topic in Australian leveraged finance right now is "cov-lite" structures where the term loan has no financial covenant at all. Any revolving facility under the same documentation benefits only from a "springing" covenant: a net leverage ratio that's tested quarterly, but only when a "test condition" is triggered.

That test condition is a key negotiating point. Typically, the covenant springs into effect when cash drawings under the revolver exceed 35-40% of total commitments. Non-cash utilisations, bank guarantees and ancillary facilities are all excluded from the calculation.

Here is the key point for term loan investors: a breach of the springing covenant gives acceleration rights only to the majority revolver lenders. Term lenders have no direct rights arising from that breach. It is a significant shift in the traditional risk-reward balance.

Cov-lite is standard in TLBs and is becoming more common in the unitranche market for the right credit.

Debt Incurrence: Expanding Headroom

Looking ahead, we expect the following offshore-influenced developments to make their way into the Australian market:

• Incremental facilities:
  • "Freebie" baskets (fixed dollar amounts not subject to leverage tests) will become more common alongside ratio-based capacity
  • MFN (most favoured nation) protection, which requires new debt to carry pricing no better than existing debt, will sunset after 6 months (down from 12), apply only to term loans of similar tenor, and carve out acquisition and refinancing debt
  • Maturity restrictions will loosen, allowing incurrence of ratio-based debt or debt up to a fixed $ amount without inside maturity constraints.

• Sidecar debt: Broad permissions for pari passu or junior lien debt outside the facility agreement will become more common.

• "Super senior" ratio debt: TLB documentation will increasingly allow incurrence of debt that ranks senior in priority to the TLB, subject to a tighter first lien leverage test.

• "Builder" or "available amount" baskets: Unitranche and TLB documentation will incorporate capacity that accumulates over time, comprising:

  • Retained excess cash flow - accumulated excess cash flow not applied to mandatory prepayments
  • Contributed equity - 100% (or more) of equity contributions received
  • Starter amounts - a significant "starter" available from closing, often 50% of closing EBITDA; and
  • Declassified restricted payments - amounts that could have been used for dividends or distributions but were not.

Of course, the ability to actually incur this debt depends on resolving the intercreditor challenges discussed below.

Intercreditor: The Practical Bottleneck

Here's the tension: debt incurrence permissions in Australian facility agreements have become increasingly flexible, but the underlying intercreditor and security frameworks have not kept pace. The result is that borrowers may have theoretical capacity to incur significant additional debt outside the facility agreement, but find themselves practically constrained by what the existing security package will accommodate.

In most transactions, only limited financing arrangements can share the primary security package under the intercreditor agreement: incremental facilities raised within the facility agreement, transactional facilities up to an agreed cap, and non-speculative hedging. Everything else is typically excluded.

The practical consequence is that, despite having covenant headroom to incur material additional debt, a borrower may only be able to do so on an unsecured basis, with a lender willing to accept subordination to the existing lender group, or through equipment financing where the financier obtains super priority over the financed assets under Australia's Personal Property Securities Act.

The obvious solution is to build more flexibility into the original intercreditor agreement, accommodating a broader range of potential future financing arrangements, as is standard in offshore transactions. But this presents real challenges in the Australian context. Domestic lenders are generally unfamiliar with the more sophisticated intercreditor structures common in Europe and the US and often need considerable time to get comfortable with them. And even where existing lenders agree, future financiers must accept pre-approved intercreditor terms, an assumption that holds in offshore markets with established regimes, but which has no equivalent market standard in Australia.

Despite these challenges, we anticipate that Australian intercreditor agreements will gradually converge with offshore practice. In time, these structures will likely align closely with English law precedents, but it will take time and education.

Portability: Flexibility for Exit

Portability is a provision that allows existing debt to remain in place following a change of control, typically a sale to a new sponsor, rather than triggering a mandatory prepayment. It is a concept that has featured in offshore leveraged debt markets for years but is a recent arrival in Australia.

Traditionally, a change of control requires the borrower to repay outstanding debt or give lenders an option to require repayment (a "put" right). Portability creates an exception: the incoming buyer "inherits" the existing financing on its current terms.

Why has portability become attractive in the Australian leveraged finance market now? In the current environment, it reduces execution risk and financing costs for potential acquirers. Rather than negotiating new facilities, which may be more expensive or on less favourable terms, a buyer can proceed with the debt already in place.

The first Australian transaction to include portability was in 2022, where Gilbert + Tobin acted for the sponsor. In that deal, the facilities were nearing maturity and a sale process was on the near horizon - there was a clear, deal-specific rationale.

True, it remains unusual to include portability in day-one acquisition financing. However, the majority of amend-and-extend, repricing and refinancing transactions for top-tier sponsors now include it. And these amend-and-extend arrangements have formed the vast majority of the work for leveraged finance lawyers in Australia in 2025 and into 2026.

Portability is never unconditional. Common requirements include:

• Minimum equity: A minimum equity requirement (typically 40%) calculated on a pro forma basis, consistent with day-one requirements.
• Acquirer criteria: The new owner must be on a pre-approved list, typically 50-100 names, including both domestic and offshore sponsors. This list is largely settled, resulting in it being a ‘copy and paste’ exercise to take this list between loan documents.
• Time period: Available for the first 2-3 years only, and may be exercised only once.
• No default: No continuing event of default.

We expect portability to become all but standard in amended documentation, and to increasingly feature in day-one acquisition financings. We also expect conditions to relax in line with offshore markets: minimum equity requirements may disappear; the list of pre-approved sponsors will expand (or be replaced by objective criteria such as minimum funds under management); fees will be negotiated away; and the "no default" condition will narrow to material defaults only (non-payment or insolvency).

Despite the market's current focus on portability, we have not seen it actually exercised in Australia. Even where available, the incoming buyer often chooses not to use it:

• Bespoke capital structure: The new sponsor may want different facilities, tenors, currencies or covenant packages tailored to their business plan.
• Relationship banks: Sponsors typically prefer to work with their own lending relationships and reward those banks with new mandates. Often, the incoming buyer is larger and can command better terms.
• Better pricing: In favourable market conditions, the buyer may be able to refinance at tighter margins than the inherited debt.
• Different leverage appetite: The buyer's investment thesis may assume a different quantum or mix of debt.* M&A complications: Portability can complicate the M&A process by raising risk-allocation questions, including the treatment of pre-completion defaults.
• Funding certainty risk: Portability conditions may include lender "outs" that can only be satisfied after signing the SPA, meaning a consent process is still required. This can undermine the certainty that portability is intended to provide.

As a result, portability functions primarily as a form of insurance; it provides flexibility in volatile or closed markets where refinancing may be difficult or prohibitively expensive.

The Road Ahead

The Australian leveraged finance market is at an inflection point. The convergence of terms across products and alignment with offshore markets will only accelerate. For sponsors, this means greater flexibility and negotiating leverage. For lenders, it means adapting to, and educating themselves on, a more competitive landscape where yesterday's aggressive position is tomorrow's market standard.

This chapter was originally published in the Chambers and Partners: Global Guide (Acquisition Finance 2026) Australia: Trends and Developments.