The 2025 Credit Playbook

What’s Ahead for the Middle Market?

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Dane Adelman, Danny Goldstein, Eric Wolf, Andrea Petro & Joel Adelman
March 26, 2025

After a whirlwind 2024, middle-market lenders are bracing for another dynamic year ahead. What will interest rates do? How will underwriting standards evolve? And what’s the outlook for M&A activity? AdCap just dropped some key insights—and we’re breaking it all down for you.

💡 In today’s edition:

  • Why 2025 is shaping up as a busy year for M&A

  • How lenders are handling “diligence light” underwriting

  • The inflation vs. interest rate battle: What’s next?

Let’s get into it.

 📉 The Rate Cut Reality Check

If you were hoping for a flurry of rate cuts in 2025, you might want to adjust your expectations. While interest rates have already dropped about 100 basis points from their 2024 highs. The reason? Inflation is still lurking, and the Fed is likely to stay cautious.

What this means for lenders and borrowers:

  • Lower borrowing costs will give M&A a boost, but don’t expect a free-for-all.

  • The Fed’s caution could keep private equity firms on edge, especially those waiting for lower rates before making moves.

  • Firms that locked in aggressive deals in 2020-2021 may struggle, as rates aren’t dropping fast enough to bail them out.

🏗️ M&A Activity: The Market is Thawing

After a slow couple of years, middle-market dealmaking is picking up. AdCap expects a 20% increase in M&A activity this year, thanks to:

  • Lower interest rates—making deals more attractive.

  • Private equity pressure—LPs want to see returns, and that means more exits.

  • More realistic sellers—Valuation expectations are adjusting, especially for companies with complex credit stories.

The deal landscape:

  • Premium businesses are fetching EBITDA multiples in the low-to-high teens.

  • More cyclical or complex companies are trading at 6.5x–7.5x EBITDA—down from the 8x–10x they expected last year.

🚀 The takeaway? Expect a stronger market for buyers and sellers alike, but only for companies with solid fundamentals.

🔎 The Rise of ‘Diligence Light’ Lending

In the rush to close deals, underwriting standards have loosened—especially in the upper middle market. AdCap describes a growing trend of “diligence light” transactions, where lenders:

  • Conduct minimal due diligence (sometimes in just a few days).

  • Rely on sponsors’ EBITDA adjustments—even when they don’t reflect actual cash flow.

  • Accept covenant-light or covenant-wide structures, where a company can hit a payment default before triggering a covenant breach.

How does this compare across market segments?

  • Lower middle market & non-sponsored deals: Still have traditional diligence and stricter underwriting.

  • Upper middle market & large deals: Looser covenants, aggressive add-backs, and less lender protection.

📉 Why it matters: Some lenders are taking bigger risks in a bid to win deals—but if the economy shifts, these looser deals could cause trouble down the line.

🚨 The Next Credit Risk? ‘Liability Management’ Transactions

A growing concern in the credit markets? Liability management transactions—where companies restructure debt in ways that push senior lenders further down the repayment line.

Why this is a problem:

  • Instead of injecting equity, sponsors raise new debt that takes priority over existing lenders.

  • This weakens lender protections and could lead to higher losses in a downturn.

📌 The good news? This practice is mostly confined to larger, syndicated loans, while middle-market deals remain more protected.

⏭️ What’s Next? Predictions for 2025

🔮 Inflation will remain a wildcard. Policies on tariffs, labor, and tax cuts could keep price pressures alive, limiting the Fed’s ability to cut rates aggressively.

🔮 Some 2020-2021 deals will struggle. Companies that were barely hanging on in 2024 may need restructuring if rates don’t fall fast enough to ease debt service costs.

🔮 Private equity will stay active. Expect strong M&A activity as sponsors look to deploy capital and realize returns.

🔮 The lower middle market will stay disciplined. Unlike upper middle market deals, lenders here aren’t compromising on diligence or covenants.

💡 Final Thoughts: Stay Strategic

2025 will be a year of opportunities—but also risks. Smart lenders and borrowers will focus on:

  • Selective M&A—pursuing quality assets with strong fundamentals.

  • Conservative underwriting—avoiding deals built on aggressive add-backs and unrealistic projections.

  • Navigating the interest rate landscape—adapting to a slower pace of rate cuts.

 What’s your take? Are you seeing signs of optimism in your industry, or is uncertainty still looming? Reply and let us know—we’d love to hear from you!

Until next time, stay sharp and stay ahead.

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