Private credit continues to assume mandates once dominated by banks, fueled by insurer capital and bank-provided facilities. Regulators in the United States and European Union are intensifying their scrutiny of funding sources, liquidity, disclosure, and risk transfer. These evolving dynamics are already impacting certainty of funds, pricing, and deal documentation. This article explains what has changed, how it is affecting deals now, and the protections borrowers, sponsors, and managers should build into term sheets and commitments.
What’s Changed—and Why It Matters
Bank capital is tightening: The United States’ “Basel III Endgame” has increased capital and market-risk requirements for large banks effective July 1, 2025, with a full phase-in through June 30, 2028. Even before calibration is finalized, the direction supports migration of leveraged and acquisition finance into private markets and club structures. Banks will likely maintain their roles as arrangers, hedgers, and providers of subscription and liquidity lines to private-lender platforms—while transferring more risk to nonbank entities.
Bank/private credit linkages have grown: U.S. banks’ committed credit lines to business development companies and private debt funds have expanded rapidly. While these facilities provide critical liquidity for managers, they also represent a potential conduit for stress if credit conditions tighten. Sponsors and borrowers relying on private lenders should diligence these backstops with the same rigor applied to a bank’s underwriting book in a syndicated transaction.
Insurers are the funding engine: Insurer-owned platforms and annuity capital are defining this cycle. Funding Agreement-Backed Notes (FABNs) provide large, steady term financing. The regulatory lens centers on liquidity and valuation: long-dated liabilities are a strength, but supervisors are watching how illiquid private assets back those liabilities and how stress could affect secondary liquidity.
The EU rulebook is maturing: The Alternative Investment Fund Managers Directive II (AIFMD II) and associated standards are now being implemented, introducing stricter controls for loan-originating AIFs concerning liquidity management tools, leverage, and risk concentration. For global sponsors, EU fund-level governance (e.g., redemption and stress-testing) will increasingly appear in deal-level undertakings and side letters—even for non-EU borrowers.
Insurance capital and data treatment are shifting: In the U.S., risk-based capital (RBC) and service valuation office (SVO) initiatives are tightening how privately rated or filing-exempt assets are classified and capitalized. Re-filings, changes in rating-mapping, or loss of filing-exempt status can alter economic returns mid-life. Managers also face more granular reporting obligations (Form PF and allocator templates), driving a push toward standardized portfolio-level disclosures.
The transparency push is real: Market utilities and data partnerships are standardizing performance, exposure, and pricing metadata for private markets. Expect more frequent and comparable reporting. Borrower confidentiality regimes and manager NDAs should evolve to avoid collisions with regulatory and investor reporting mandates.
How Will This Show Up at the Deal Table?
These changes show up at the deal table in three key ways: (1) in funding certainty and execution risk; (2) in pricing, covenants, and liquidity requirements; and (3) in disclosure and reporting.
Commitment dynamics are being impacted by the change in funding certainty in that lenders are seeking broader market-flex and regulatory changeouts tied to capital or RBC treatment. Borrowers can preserve “certainty of funds” by: (i) narrowing material adverse changes (MACs) to objective, deal-specific items, (ii) using deemed-satisfaction mechanics for deliverables, and (iii) limiting flex to specified grids and baskets. Where tranches are held across bank, insurer, and fund “pockets,” deal teams can include alternative funding mechanics (e.g., swingline takeouts, eligible-assignee substitutions) to ensure deals close even if one pocket becomes non-permitted or uneconomic. If a private lender relies on a bank liquidity line, borrowers may require representations and ongoing notices regarding availability, key covenants, and termination triggers—and negotiate a yank-a-lender right if regulatory change forces repricing or invalidates a commitment.
EU vehicles are more likely to focus on liquidity-aware undertakings and will seek to reference AIFMD II liquidity governance. Borrowers should calibrate information covenants to provide useful stress-testing outputs without creating backdoor business-plan control or disclosure creep. To manage liquidity and capital cost implications in the secondary market, borrowers are also tightening transfer restrictions on vehicles whose regulatory status could trigger higher capital charges, re-filings, or liquidity haircuts. As a result, lenders may utilize a “most-favored assignment” clause (prohibiting transfer on worse economics than broadly offered to similar assignees) to guard against backdoor repricing via the secondary market. Where funding agreement-backed notes (FABNs) finance the relevant platforms, borrowers typically seek rating-based triggers that do not result in automatic repricing, and negotiate to exclude mark-to-market (MTM) representations tied to temporary valuation changes not indicative of actual cash-flow impairment.
To address shifts in regulatory data disclosures and reporting, lenders will try to align confidentiality provisions with anticipated manager reporting (Form PF and analogous regimes) and with investors’ standardized templates; they can utilize a hierarchy of disclosures by aggregating where feasible, providing borrower-level data only when necessary, and including tailored access and timing protections. Borrowers might try to manage additional burdens resulting out of adjustments to disclosure requirements by pushing for a single consolidated reporting package acceptable to all lending pockets. All parties may want to avoid “side letter drift” by requiring that bespoke add-ons offered to one holder be offered to all on a non-discriminatory basis.
How Should I Tackle This?
For borrowers and sponsors, tightening conditions precedent, building alternative funding mechanics, using yank-a-lender transfer controls, and aligning internal controls can provide crucial safeguards to protect their interests in private credit transactions. Conditions precedent should feature concise and objective closing lists and narrowly-drafted MACs specific to the target and transaction. They should explicitly exclude general market or regulatory shifts so funding obligations remain unless a change makes the commitment unlawful (not merely more capital-intensive) and include reasonable cure periods and mutual commercially reasonable efforts to restructure if needed. If a holder becomes ineligible (due to RBC, SVO, AIFMD, or internal guideline changes), building alternative funding mechanics which allow the borrower to: (a) bring in an eligible replacement at par, (b) convert exposure into a permitted alternative tranche or delayed draw, or (c) trigger a swingline backstop from a designated arranger to close on time, with post-closing sell-down rights, leaves borrowers with more flexibility to pursue the best course of action for their business when circumstances inevitably change. If pricing shifts due to regulatory cost or rating fallout, borrowers can also incorporate yank-a-lender and transfer controls. These may include hardwiring optional prepayment at par of a lender’s share, securing consent rights over transfers to non-traditional vehicles, and using blacklist/whitelist tools to address jurisdictions or capital regimes that trigger re-filing risk. Internal controls should then be aligned with confidentiality obligations by matching disclosure to manager and investor reporting and by adopting market-standard templates. Finally, borrowers should implement clear policies for diligencing and monitoring bank lines and insurer conduits, supported by ongoing notice requirements, to ensure liquidity backstops remain reliable over time.
Managers and lenders can safeguard their interests by routinely assessing liquidity and information undertakings, avoiding MTM and ratings triggers in their deal documents, and standardizing guardrails.
Managers and lenders should meticulously map capital and liquidity dependencies and pre-clear transfer pathways to avoid RBC/SVO tripwires. They should also provide periodic portfolio-level liquidity stress-testing outputs, a summary of redemption tools (if any), and notice of material changes to subscription or liquidity facilities. It is important to avoid automatic margin ratchets based solely on non-credit MTM movements and limit rating triggers to sustained downgrades linked to borrower credit impairment, rather than platform technicals. Upfront negotiation of regulatory change and increased-cost clauses ensures terms are workable across banks, insurers, and funds, avoiding costly midstream renegotiation. Though potentially time-consuming upfront, lenders can benefit significantly from standardizing investor and borrower reporting with aggregated metrics and targeted look-throughs on request. This involves maintaining secondary readiness with clean assignment mechanics, consent playbooks, and a bench of pre-approved eligible assignees, and including a most-favored information covenant allowing borrowers to adopt later market-standard templates in place of bespoke packages. Lenders can balance transparency with confidentiality by utilizing secure portals, redactions, and aggregated views.
What to Watch Next (Q4 2025–2026)
- U.S. bank capital calibration and phase-in: Final tweaks and transitional relief will shape banks’ hold levels and warehousing appetite.
- Financial Stability Oversight Council (FSOC)/Treasury posture on nonbanks: Expect continued focus on data, interconnections, and liquidity. Recommendations could nudge disclosure or promote stress-testing norms across private credit.
- AIFMD II national transposition and European Securities and Markets Authority (ESMA) standards: Country-level implementation of loan-fund liquidity tools and leverage caps will matter for cross-border structures and EU-based lenders.
- National Association of Insurance Commissioners (NAIC) RBC/SVO adjustments: Changes to filing-exempt categories or mapping could alter who can hold what, at what capital cost—and with what secondary liquidity.
- Market-led data standardization: Allocators and consultants will keep pushing for comparability. Managers that standardize early will win diligence speed.
The opportunity set in private credit remains substantial—so does the scrutiny. Deals that close cleanly in 2025–2026 will be those that: (i) treat funding sources as a design problem, with built-in redundancy; (ii) price certainty explicitly, beyond just the headline margin; and (iii) harmonize disclosure so regulatory and investor data needs do not conflict with borrower confidentiality.
If you are launching a financing this quarter, engaging competent/experienced legal counsel can translate these market and regulatory dynamics into concrete term-sheet language and executable timelines.
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