This article is second in a series of five which look at some of the deal and document trends the Shoosmiths leveraged finance team have seen in the mid-market in 2025. Please get in touch with Shoosmiths’ leveraged finance team if you would like to discuss anything in this article.
Purpose, structure and the evolution of ARR covenants
Revolving Credit Facilities (RCFs) in the mid-market have traditionally been available to predominately plug gaps in cashflow. On a number of recent transactions we have seen permitted uses extended to include new acquisitions and the refinancing of incremental facilities or new shareholder injections which were used to fund acquisitions. Often equity funding is used initially to get deals over the line in short order, with lenders then willing to refinance those where they meet the certain criteria. Incremental facility provisions which allow for additional or increased RCFs are also becoming a feature albeit usually with certain financial RCF only covenants prebaked into their availability.
There has been an increase in split exchange and completion in recent months, possibly due to the market fluctuations referred to in our first article but also because of the increase in M&A activity involving professional services, which often require regulatory approvals to be obtained pre-completion. In turn, the LMA’s Certain Funds concept is featuring more regularly and needs to be applied to future acquisitions if those are likely to be subject to similar approvals. What constitutes a ‘material breach’ and therefore one of the limited drawstops between exchange and completion is being focussed on in more detail and negotiated deal by deal.
Again, potentially driven by increased activity in the professional services space, the popularity of ARR (Annual Recurring Revenue) covenants outside of SaaS businesses has increased. These businesses can often de-risk otherwise lumpy cashflows and a competitive market by utilising regular management fees and memberships. Calculation methods and testing still vary depending on business type, with testing against flat ARR numbers often still used for SaaS businesses but, for example, ARR as a percentage of turnover might be used for businesses with more varied revenue streams.
Disclaimer
This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2025.