As European debt markets continue to evolve amid a subdued M&A landscape and heightened competition among private credit lenders, several key themes have emerged that are reshaping financing strategies across the region. This Q3 2025 update explores the growing prevalence of dividend recapitalizations, the resurgence of staple financing, and the strategic loosening of call protection clauses. Each trend reflects a broader shift toward flexibility, speed, and proactive engagement, as sponsors and lenders adapt to a market defined by liquidity challenges, limited deal flow, and the pursuit of value creation.
Tapping into the debt market to fund dividend distributions has gained significant traction over the past 12 months. While concentrated in the large-cap market with high-profile deals such as Clarios, Belron, Froneri, Restaurant Brands, and Diot-Siaci, the mid-market is also experiencing an increased interest in dividend recapitalizations to address liquidity challenges in a subdued M&A environment. These transactions allow sponsors to return capital to shareholders without selling assets, enhancing IRR and DPI metrics whilst de-risking investments.
The trend is evident in both large-scale distributions and smaller, embedded dividend payments within refinancing or amendment-and-extension deals. 2025 is on track to set a record for dividend recapitalizations, with data showing higher volumes in the first seven months than in any of the previous five years. Mid-market sponsors are increasingly executing dividend recapitalizations due to the flexibility they provide in terms of exit timing and, given the low M&A environment, the private credit market has proven to be highly supportive of such “money-out” transactions, offering aggressive and attractive financing structures tailored to meet liquidity needs while maintaining operational stability. This approach not only provides immediate liquidity but also underpins future valuations at exit.
Baird’s Debt Advisory team would be delighted to discuss how we can support you in achieving your dividend recapitalization ambitions.
Private credit lenders are no longer waiting to be invited into the financing process—they’re showing up early, terms in hand, well before the sale process begins. In today’s competitive and deal-sparse environment, staple financing has emerged as a key tactic for lenders to gain an edge and sell-side advisors to present an aggressive process. Once considered a last-ditch effort to limit execution risk, staples are now being proactively offered by lenders to secure a foothold in transactions. Starting from near non-existence, “soft staples” are now becoming a more common practice rather than more standardized lender education processes, especially as lenders are competing to keep assets in the portfolio and for a limited pool of high-quality assets.
Staples are particularly effective in giving incumbent lenders a head start. For example, if a lender already knows the credit and wants to remain involved post-sale, offering a staple allows them to lock in terms before new entrants can compete. Baird has explored this dynamic in recent processes and there are several deals that have also used this tactic. Staples offer sellers speed and fewer surprises, while buyers benefit from optionality and early clarity on terms. In volatile markets, this certainty is increasingly valuable, even if buyers ultimately choose to run their own financing processes or have specific commercial terms that they wish to negotiate / tweak.
The rise of staples underscores a broader shift in private credit, where the line between deal preparation and execution is blurring. Lenders are being brought into the process earlier, with or without formal staples, as part of a broader effort to educate and position them ahead of auctions. While staples remain niche, they are no longer viewed as uncommon. Instead, they are becoming a strategic tool for advisors and lenders to shape the process, particularly in a market where high-quality opportunities are scarce. Whether through competitive pricing, re-leveraging strategies, or sheer speed of execution, staples are enabling private credit proactive lenders to stay ahead of the pack.
Baird Debt Advisory has strong experience tailoring lender education processes to involve staples and facilitate best-in-class outcomes.
In a competitive and subdued M&A financing environment, private credit lenders are increasingly sacrificing call protection to secure and retain deals. Historically, call protection clauses, which impose penalties on borrowers for early repayment, were a standard feature to safeguard lender returns. However, with increased competition and the search for alternative ways to differentiate, private credit funds are loosening these protections to appeal to borrowers.
This shift has also led lenders to proactively approach sponsors with repricing offers to retain assets. New financings in the upper middle market are testing margins with a 4-handle, reflecting heightened competition. Borrowers, keen to capitalize on these favorable rates, are actively repricing their debt. By waiving call protection premiums, lenders avoid losing quality credits (especially when an exit may be in the near-term) and maintain strong relationships with sponsors. Additionally, borrowers are increasingly exploiting contractual loopholes, such as carve-out clauses of prepayment language known as "transformative transactions / events”. That event may be an add-on acquisition if it falls within the size parameters of the credit agreement and, once triggered, it results in a negotiation of the structure which may include a repricing without triggering any penalties.
While these changes offer borrowers greater flexibility, they also highlight the periodic shifts in private credit terms. As base rates decline and repricings accelerate, lenders are responding by loosening documentation and offering more competitive terms. However, this approach carries inherent risk for the lenders. Some lenders are thus holding firm, reluctant to reduce pricing to the lowest market levels in an effort to balance competitiveness with investor return and asset retention.
Despite these challenges, the strategic relaxation of call protection, tighter pricing, and proactive repricing strategies reflect lenders’ efforts to navigate an increasingly competitive landscape and sustain market positions.
Baird Debt Advisory would be delighted to discuss capital structure options and consider refinancing possibilities.
