1. Market
1.1 Major Lender-Side Players Market Players
The Dutch acquisition finance market is traditionally divided into three market segments based on debt quantum, being:
- small (up to approximately EUR30 million) – often lent by traditional (Dutch) commercial banks and on a bilateral basis (and increasingly by a direct lender);
- medium (from approximately EUR30 million up to approximately EUR250 million) – often lent by a direct lender or a club of (Dutch) commercial banks; and
- large (in excess of EUR250 million) – often lent by larger syndicates consisting of ((non-) Dutch) commercial banks (or direct lenders).
Over the last few years, the Dutch acquisition finance market has become crowded in terms of the number of debt providers active in the small, medium and large financing space. Even though traditional commercial banks are still active, direct lenders (often private credit funds) have grown their market share in the Netherlands. New direct lenders are still entering the Dutch debt market, but there have also been the occasional direct lenders that have decided to exit. Direct lenders typically operate outside the scope of EU banking supervision, affording them exemption from regulatory pressure.
As this trend of the increasing market share of direct lenders is developing over the years, we see direct lenders exploring new market areas, such as the financing of working capital (including asset based lending), financing of (stretched) senior solutions (rather than unitranche), financing based on recurring revenue as opposed to EBITDA and financing of smaller–sized private equity transactions (ie, companies with an EBITDA around EUR10 million or less). As such, traditional bank-led leveraged loan financing is no longer the predominant source for funding private equity transactions in the Netherlands.
Impact of Types of Investors
Different types of investors have different preferences, risk appetites and business models that impact the negotiation and structuring of loan agreements. Compared to direct lenders, commercial banks often impose more traditional and conservative covenants and financial ratios to mitigate their risk. On the other hand, direct lenders, often seeking higher yields, are comfortable with a higher debt quantum and are willing to offer more flexible structures and documentary terms, such as fewer interim repayment
obligations and more headroom on the financial covenants. Direct lenders are often flexible on equity cure mechanics, normalisation provisions with respect to financial covenants, access to incremental lines and the use of grower bas- kets that are linked to financial performance or size of the borrower. As a result of this flexibility, borrowers are less likely to default under these financing arrangements, which in turn minimises interference from debt providers.
Although the level of negotiation strongly var- ies per transaction and debt provider, key areas of negotiation typically revolve around what is permitted under the general undertakings (even more so in light of buy-and-build strategies), equity cures, financial covenants and financial reporting. As to financial covenants, an impor- tant area of negotiation between the borrowers and the lenders is the use of equity cures and calculations of the structuring EBITDA (including normalisations).
Market Performance
In 2024, the Dutch acquisition finance market slowly started to emerge from the slowdown caused by a challenging environment of rising interest rates in 2023 and inflation and geopoliti- cal uncertainties that had dampened investment appetite. While deal activity picked up in 2024 after hitting a low point the previous year, overall deal volume remained below initial expectations.
Throughout 2024, refinancing activity remained the primary driver of volume in the debt finance market, while low M&A volumes endured due to elevated cost of debt and delayed sponsor exits. Despite some stabilisation, the "value gap" (the difference between what a seller expects and a buyer is willing to pay) still presents a chal- lenge within the market. Ongoing economic uncertainty makes buyers more cautious, leading them to review asset valuations, while sell- ers often expect prices to stay at levels seen before the 2023 increases. In particular, this has affected larger transactions and the high-yield bond market, which primarily remains open to strong sponsors and high-quality assets. This mirrors general private equity transaction mar- ket activity, although market participants in the medium and smaller-sized space are still con- sidered active.
The continuing market volatility has forced cer- tain lenders to reassess their capital require- ments and financing strategies. Most lenders have become more risk-averse, and are closely monitoring portfolio-company performance to determine the impact of inflation, labour costs and supply-chain issues. Longer timelines for deal closures have resulted from increased due diligence and a need for lenders to assess and mitigate potential risks associated with geopo- litical events and economic changes. Due to a longer process and risk-shy investors, parties were less likely to come to a deal or deals came to a (temporary) halt or stopped altogether. In addition, commercial banks need to cope with capital requirements which often affect debt quantum and pricing. As a result, borrowers in the Netherlands may face increased costs and stricter terms when accessing finance.
(Borrower-Friendly) Terms
Although the current market can still be classified as borrower-friendly, lenders do seek additional protections amid ongoing economic uncertain- ties by tightening conditions on certain types of transactions. For example, they may demand tighter financial covenants and enhanced report- ing requirements, or require higher equity contri- butions from sponsors to manage risks. In addi- tion, lenders have become more selective, and focus on a higher quality threshold for credits and borrowers prioritising strong cashflow and lower leverage ratios. As long as interest rates remain relatively high (compared to the years preceding 2022), the expectation is that lenders will remain focused on free cash flow instead of growth (EBITDA).
1.2 Corporates and LBOS
Cautious Buyers and Decreasing Interest Rates
Higher pricing of debt products has caused borrowers to drop (part of) their planned debt financing and explore alternative forms of financ- ing, such as vendor loans and subordinated financings. These include back-leverage such as Holdco financing or, in the private equity space, financings at fund level. Certain borrowers financed acquisitions without third-party debt, hoping to obtain a debt financing in the future whenever markets, pricing and terms improve.
The economic environment has resulted in some borrowers being unable to fulfil obligations under their financing documentation. In these cases, this was with regard to payment obligations and financial ratios. In return for waiving certain defaults, lenders often impose additional condi- tions on borrowers that can lead to amending the financing documentation, such as agreeing to new financial ratios, limiting flexibility for bor- rowers on general covenants, or imposing more extensive information undertakings and charging amendment fees.
That said, the European Central Bank's monetary policies led to a decline in interest rates during 2024, which is expected to make debt servic- ing more manageable for borrowers. In addition, there is an increasing willingness among lend- ers, particularly in the unitranche and direct lend- ing market, to accept lower margins in order to secure deals. Looking ahead, the Dutch acquisition finance market is expected to benefit from the improving economic environment and easing financial conditions (eg, lower interest rates and subdued inflation), although challenges such as geopolitical conflict, trade restrictions and inflationary pressures are likely to continue to influence market dynamics. Lenders and bor- rowers alike will need to adapt to these evolving conditions to navigate the acquisition finance landscape effectively.
2. Documentation
2.1 Governing Law
Save for investment grade corporates, there is not much difference between corporate loans, acquisition finance or leveraged buyout loans. The larger deals are often documented under US or English law especially where syndication is relevant. For mid-market and smaller deals, Dutch law is often used, especially if EU com- mercial banks or debt funds are involved. Given that Dutch law is rather creditor friendly (the position of the lender under Dutch, English or US law does not materially differ) and for smaller and/or mid-market deals, most often assets are located in the Netherlands or the EU, in which case Dutch law facilitates enforcement. The level of "borrower friendliness" of the documentation often depends on the strength of the corporate or sponsor.
2.2 Use of Loan Market Association (LMA) Agreements or Other Standard Loans
The basis for the finance documentation in an acquisition finance transaction is, in most cases, the documentation as published by the Loan Market Association (the LMA), but especially large deals often deviate heavily from the format. In addition, commercial banks often stay closer to the format (also for syndication purposes), while private credit funds given more tailored solutions.
In some medium and small financings, alternative lenders have been willing to work off short(er) form documentation which is often a strippeddown version of the LMA format. Dutch commercial banks also offer short form documentation for smaller transactions where, at the offset, syndication of the product is not considered part of the bank's strategy nor commercially likely
Eventually, the level of negotiations strongly depends on the size of the deal, type of lenders, type and size of borrower/sponsor and the borrower's/sponsor's strategy and financial performance.
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