Analysing the growth of Private Credit in the Middle East: A Comparative Study against the UK position
8 min read
Following the successful completion of a number of key private-credit transactions across the Middle East in 2024 (including the recent transaction White & Case acted on for Property Finder, named "Impact Deal of the Year" at the 2024 IFLR Awards), a number of trends in Middle East private credit transactions are now able to be observed, as "market positions" start to be established.
In this article, we provide a summary of the key terms that we are frequently seeing adopted in Middle East based private credit transactions and consider how such provisions differ to the approaches taken in transactions across the UK's private credit market.
Key Indicative Terms
| Terms | United Kingdom | Middle East |
| Conditionality in Commitment Documents |
On the basis that borrowers are required to demonstrate certainty of funding on any acquisition-related financing, commitment letters typically contain very limited conditionality. Increasingly, the only conditions to funding that would be included are the execution of the finance documents. Lenders are expected to sign off on the form of all conditions precedent in advance – delivery of the final or signed conditions precedent documents automatically satisfies the relevant condition precedent requirement provided that, in the case of certain conditions precedent (for example, reports), any amendments are not materially adverse to the interests of the lenders. A condition relating to any material adverse changes in the market and/or the financial condition of the borrower is not customary (particularly, in an acquisition financing context) and we would expect borrowers to strongly resist the inclusion. |
Middle East commitment letters are often not provided on a fully or even partially underwritten basis. Most commonly, Middle East commitment letters are provided on a highly confident / highly interested or best-efforts basis – in each case with extensive levels of conditionality – including material adverse change (both with respect to the market and the financial condition of the borrower), the inclusion of break fees and extensive indemnities in favour of the arranging bank. |
| Covenant Package |
As terms have become increasingly more borrower friendly over the years, private credit lenders are also adopting covenant-lite terms, which used to be more prevalent in the syndicated market. The key feature of a "cov-lite" facility refers to the removal of ongoing maintenance covenants which require the borrower to comply with certain performance metrics on a monthly or quarterly basis. Instead, there will typically be a single springing financial covenant that is for the benefit of the revolving credit facilities lenders only. In some instances, private credit lenders are providing "covenant loose" terms whereby a limited maintenance covenant is included which is typically accompanied by sufficient headroom. |
We continue to see extensive maintenance covenants (typically extending to leverage, debt service, interest cover and often gearing or capex, as applicable) in the Middle East private credit market. Covenants are typically for the benefit of all creditors, with minimal or no EBITDA adjustments. Whilst equity cures are common, creditor friendly limitations on how cures are able to be applied and restrictions on over-cures continue to be frequently adopted. |
| Grower baskets |
It is customary for any basket permissions in finance documents to include a "grower" concept whereby any cap that is required to be met shall be limited to the higher of (i) a numeric cap and (ii) a percentage of EBITDA (or another agreed metric). This provides borrowers with additional flexibility to run the business and is particularly important for growing companies where the day one numeric cap may be insufficient to meet the group's operational needs in the future. On large capital transactions, "high watermark baskets" are increasingly being requested in documentation. Unlike a traditional grower basket that would be capped at the pre-agreed numeric cap where the EBITDA of the group decreases over time, the basket threshold that applies for the life of the loan will be fixed at the highest percentage threshold that is achieved irrespective of any subsequent reduction in EBITDA. For example, if the grower is set at the greater of $50 million and 10% of EBITDA and EBITDA grows such that 10% of EBITDA is equal to $75 million, the relevant cap going forward will be $75 million even if EBITDA subsequently decreases. |
Whilst increasingly stronger borrowers are obtaining flexibility on grower baskets generally, often such requests faces strong levels of pushback from private credit financiers, with limited hard cap baskets more frequently adopted. |
| Synergies | Borrowers continue to seek to obtain favourable adjustments to the EBITDA calculation to boost any financial covenant calculations and to increase capacity under any basket permissions. Over the years, borrowers have requested an increased number of add-backs, including in respect of projected synergies and cost savings. In recent months, borrowers have tried to request an uncapped amount of costs savings and synergies, which the market has generally pushed back on. Key negotiated items therefore include the inclusion of caps (and the relevant thresholds, which is typically set around 25%), the relevant threshold that shall trigger a requirement for management or an independent third-party to verify the cost savings or synergies and the relevant timeframe during which the synergies or cost savings will need to be realised (typically 24 months). | As is the case with grower baskets – we have identified a growing trend of stronger sponsor backed borrowers proposing the inclusion of these terms – however at the time of writing, they are ultimately not common or customary in the Middle East market. |
| Security Package |
The security package offered to Lenders is getting increasingly more limited over time. The credit support provided by the Group will be based on the relevant transaction and the credit strength of the borrower group; however, this will customarily consist of:
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Security packages in transactions in the Middle East market are typically extensive, with all asset security packages (often supported with extensive corporate guarantee structures and in limited occasions, personal guarantees from founders). While private credit providers have typically obtained extensive collateral packages, these are often not on the basis of heavily negotiated "agreed security principles", contained in European leveraged finance transactions. Material assets are typically required to be secured by all members of the relevant borrower group, with limited ability for security release apart for negotiated permitted disposals (often subject to prepayment requirements). |
| Call Protection | Loan agreements typically include an obligation of the borrower to pay a pre-agreed fee to the extent that the borrower prepays all or part of the facilities within a specified period. It is common to see a soft call protection whereby the fee payable by the borrower reduces over a period of time. Typically, we would see 2% apply in the first-year post-closing and then 1% in the following year. In some instances, and depending on the credit, Lenders may require the inclusion of a "non-call period" whereby any prepayment of the facilities is subject to making lenders whole. | Strong non-call protections are commonly adopted in the Middle East market. Whilst the quantum of prepayment premiums has varied, we have often seen these start at 2%, and only reduce after 24 months – with make-whole premiums and "non-call" periods also common. |
| Portability | Increasingly, sponsors are requesting portability features to be included in financing agreements permitted the sponsor to sell the relevant group with the debt in place without triggering a mandatory prepayment obligation under the change of control provisions. Historically, portability was typically only included in US yield bonds. While this is not viewed as a standard feature in loan agreements, sponsors are increasingly requesting this flexibility, and this has been accepted on some transactions in the market. | The inclusion of portability features is also not commonly seen in the Middle East market, but we would expect this to change as the number of sponsor backed financing arrangements increases in the region. |
| Transferability | The consent of the company is typically required in respect of any transfer of Lender commitments other than where such transfer is to an affiliate or related fund, to an entity on an approved lender list or where a material event of default is continuing. Typically, this is also coupled with a general prohibition on transfers to industry competitors, sanctioned lenders, loan-to-own or distressed investors. |
We have seen varied positions being adopted in respect of transferability in transactions in the Middle East market. We have seen a number of transactions where consent of the relevant borrower is required in respect of any transfer of Lender commitments other than circumstances where such transfer is to an affiliate or related fund, to an entity on an approved lender list or where an event of default is continuing (in addition to the general prohibition on transfers to industry competitors or distressed investors). Frequently, deemed consent periods and restrictions with regards to consent being unreasonably withheld are included. However, we have also seen an increase in the number of transactions where private credit lenders have been able to negotiate further concessions to the above positions, including restrictions on industry competitors and distressed investors falling away on an event of default. |
As predicted in our earlier article, private credit has continued to grow in importance within the UAE and the wider Middle East in 2024. This continued development of the regional private credit market has attracted a number of international institutions, resulting in a number of high-profile private credit transactions successfully closing in 2024. While a number of the terms that were adopted in these transactions reflected the positions most commonly seen in regional bank led deals, a number of trends are now starting to establish around the regional private credit market. In 2025 we expect to see a further increase in the number of private credit transactions across with wider Middle East and a continued development of the above-mentioned market trends.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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