Subordinated Debt in M&A: Case Study 2 Firms

Subordinated debt in M&A isn’t a footnote. It has become a core tool for risk allocation, balance sheet shaping, and deal certainty in a world where senior debt sits under evolving covenants and private credit players push for upside. I’m Angie Reed, Compliance Analyst, and I’ve watched this space tighten up since 2020. Subordinated debt is a strategic driver in post-close capital structure.

Let me cut to the chase. Subordinated debt in acquisitions acts as a cushion for the operating company when senior facilities are stressed or when the buyer needs to preserve liquidity for execution risk. In practice, lenders receive higher yields, up-front fees, and sometimes primed first-lien claims in exchange for accepting a more junior standing. For buyers, it means more flexible leverage stacks and a pathway to closing a deal that would stall if you relied only on senior debt. For sellers and minority lenders, it signals negotiated certainty, but it also brings governance risk if the structure isn’t watertight.

The Serta Simmons Bedding case set a boundary. In 2024, the Fifth Circuit ruled that Serta’s open-market purchase exception for non-pro rata exchanges breached the credit agreement terms. The court stated the execution did not respect pro rata sharing among lenders.

The takeaway is plain: private, selective debt exchanges framed as open-market buys come under scrutiny when they bypass pro rata rules. This has immediate consequences for deal structuring, because if you can’t rely on open-market exchanges to reprice or rebalance, you lean more on preemptive amendments or clearly permitted privately negotiated purchases.

On the same day, Mitel Networks presented a different behavior under a contract that explicitly allowed privately negotiated debt purchases, sparking a split precedent. This shows the importance of precise drafting: a few words in the debt instrument determine whether you can pursue an uptier or a buyback privately, or you’re back to boardroom fights and creditor committees. It’s a reminder that language drives outcomes in complex debt restructurings, and buyers should insist on clear, covenanted language that aligns with their execution plan.

Grover’s Q1 2025 restructuring in Berlin adds another layer. The tech rental platform executed a debt-for-equity swap led by Fasanara Capital and M&G, converting senior secured loans into deeply subordinated obligations. They injected $34 million in fresh capital, and lenders took equity plus “hope notes”, upside participation instruments designed to capture upside if Grover hits milestones.

This is a textbook example of how subordinated debt can be used to recapitalize a business while preserving operational flexibility. It also demonstrates investor appetite for equity upside as part of a debt-led restructuring, an arrangement that can align incentives across creditor and borrower groups.

From the debt market perspective, Q1 2025 continued the trend of complex liability management transactions despite the Serta ruling. The market showed resilience: recovery estimates for newly issued first-lien debt remained steady even as deal volumes rose. Subordinated debt spread compression emerged as a positive catalyst for 2025, supported by stronger bank capital positions and improved liquidity in the syndicated market. Banks, looking at improved capital metrics, are more comfortable backing subordinated notes when there’s a clear path to collateral protection or enhanced yield.

In parallel, the insurance sector saw M&A activity that leveraged equity swaps as part of strategic combinations in asset management.

Think AXA IM with BNP Paribas Cardif, ir Banco BPM Vita with Anima. These deals show how cross-sector capital structure moves can incorporate subordinated instruments to bridge timing gaps between closing and funding, especially when public equity swings are a concern or when regulatory considerations push for non-dilutive financing where possible.

This environment has also seen a broader, steady increase in billion-dollar-plus deal activity in acquisition finance in early 2025. Debt market conditions improved, liquidity in syndicated markets expanded deal certainty for larger transactions, and private credit remained a central player. Yet the playbook is evolving: parallel-tracking with syndicated market options is now common in large-cap and upper-middle-market spaces. Community banks, in particular, are expected to see higher M&A and capital markets activity in 2025 due to stronger equity valuations and stable debt markets. That dynamic matters because subordinated debt often sits atop these community-bank-led financings, absorbing near-term risk while enabling the larger financing stack.

A few data points I track closely. Grover’s $34 million capital infusion signals that subordinated pieces can serve as seed for new equity-like upside without fully sacrificing corporate control.

In many recent deals, majority lender groups offered incentives like priming first-lien claims, higher interest, upfront fees, or better exchange rates to secure support for subordinated layers. Non-majority lender participation typically comes with more punitive terms for those lenders, including worse exchange rates or lower-ranking structures, which keeps the deal moving while protecting the majority lenders’ leverage positions.

Preemptive amendments also matter. The ability for majority lenders to rewrite open-market purchase provisions or add privately negotiated debt repurchase clauses without requiring all-lender consent is increasingly common. This reduces stagnation time in negotiations and helps borrowers execute quickly in a volatile market. When structuring a deal, you want to identify the major “gotchas,” and this is a major one to anticipate.

In terms of deal mechanics, many acquisitions in today’s market involve debt securities with mandatory redemption at 101% of par for investment-grade issuers, or 100% plus accrued interest for non-investment-grade. That is a practical detail that affects the economics of a deal and the post-close capital structure. The SunGard approach, reducing reps and warranties to básico items, also keeps financing lighter on the covenant side, which can speed up closings but requires tighter post-close risk monitoring.

Bridge loan facilities remain a market practice for securities-based acquisition financing in the USA. They provide a bridge between signing and closing, especially when the timing of a larger equity or debt issuance is uncertain. It is a reminder that subordinated debt is part of a broader toolkit rather than a standalone solution.

Looking ahead, the landscape calls for disciplined documentation and clear alignment between deal rationale and capital structure. The market’s constructive carry in subordinated debt combined with improved market liquidity means more options for capital-efficient financing in large transactions. But it also means more potential for disputes if the contract language isn’t precise or if lender groups push for terms that reallocate risk after closing.

Practical notes for practitioners

• Build explicit language around open-market purchases and privately negotiated debt repurchases. If you want flexibility, spell it out with pro rata mechanics, or lock it in with a defined process and consent framework.
• Align the subordinated layer with the sponsor’s value creation plan. Ensure the upside instruments (like equity swaps or note instruments) have clear milestones and redemption mechanics.
• Use incentives strategically. If you are the borrower, structure incentives for the majority lenders that avoid pro rata dilution surprises while preserving a clear exit path for minority holders.
• Monitor market signals. Subordinated debt spread compression and bank capital improvements matter for pricing and demand. Track private credit activity as a parallel path to reduce funding risk.
• Prepare for potential disputes. The Serta decision informs how courts interpret market practice. Document every step of the exchange process and ensure compliance with the credit agreement’s pro rata and consent requirements.

In short, subordinated debt remains a meaningful lever in M&A financings, but it requires precise drafting, transparent governance, and disciplined execution.

As I’ve learned, the best deals come from early conversations about capital structure and a plan that stands up under regulatory and contractual scrutiny. This space isn’t about chasing the next hot move; it is about building a credible, executable structure that supports a solid close and predictable post-close performance.

If you want more on how these terms translate into real-world deals, keep reading the Matactic glossary. And if you’re up for it, sign up for our free M&A course to deepen your understanding of acquisition finance, subordinated debt, and liability management in today’s market. Peace out.