Highly Leveraged Transactions (HLT) in Australia: 2025 Guide

In 2025, Highly Leveraged Transactions (HLTs) are once again drawing attention from investors, regulators, and corporate Australia. With economic growth forecasts turning cautiously optimistic and interest rates stabilising, the appetite for risk and reward in the leveraged finance sector is shifting. Whether you’re a corporate decision-maker, an investor seeking higher yields, or a curious observer of the Australian finance scene, understanding HLTs has never been more crucial.

What Are Highly Leveraged Transactions?

Highly Leveraged Transactions (HLTs) refer to corporate deals—often mergers, acquisitions, or buyouts—funded with a significant proportion of borrowed money compared to equity. In Australia, these transactions typically involve companies taking on debt that is more than five times their annual EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation).

• LBOs (Leveraged Buyouts): A classic example, where a private equity firm acquires a company using mostly borrowed funds, hoping to boost returns through operational improvements and financial engineering.

• Recapitalisations: When companies issue new debt to pay dividends or buy back shares, increasing leverage.

HLTs can deliver outsized returns, but they also amplify risks. If cash flows falter or interest rates rise, highly leveraged firms may struggle to service their debt, risking default or even insolvency.

HLTs in the 2025 Australian Economic Landscape

After a surge in dealmaking during the low-rate era of the early 2020s, the landscape for HLTs shifted as the Reserve Bank of Australia (RBA) raised interest rates to combat inflation. As of 2025, the RBA’s cash rate sits at 3.85%, with expectations of only modest adjustments in the coming year. This environment has led to:

• Increased Scrutiny: APRA and ASIC have tightened oversight on bank lending practices, especially for deals exceeding six times EBITDA. New guidelines in early 2025 require lenders to stress-test HLTs against higher rates and slower economic growth.

• Selective Deal Flow: Private equity firms are still active, but are focusing on sectors with resilient cash flows—think healthcare, infrastructure, and renewable energy—rather than highly cyclical industries.

• Shift in Financing Structures: Syndicated loans and private credit funds are stepping up as banks pull back from the riskiest end of the spectrum.

Real-World Example: In March 2025, the $1.6 billion buyout of an Australian data centre operator by a global private equity consortium was financed with a debt package equal to 5.7x EBITDA. Lenders demanded stricter covenants, including quarterly leverage tests and cash sweep requirements, reflecting a more cautious approach in the current climate.

Risks and Rewards: What Investors Need to Watch

For investors, HLTs can offer attractive yields—loan margins in 2025 are averaging 400-600 basis points above the bank bill swap rate (BBSW). However, the risks are equally pronounced:

• Interest Rate Risk: Even with rates stabilising, the elevated cost of debt means a misstep in revenue or margin projections can quickly erode equity value.

• Default Risk: Moody’s and S&P have warned that default rates for highly leveraged borrowers could tick higher if economic growth slows or if refinancing becomes more difficult.

• Regulatory Risk: APRA’s 2025 guidelines require banks to hold more capital against HLT exposures, which could limit access to credit for the most aggressive deals.

Investor Tip: Look for deals with strong underlying assets, robust cash flows, and conservative leverage levels. Covenants and transparency matter more than ever.

Outlook: Is the HLT Boom Sustainable?

While HLTs are unlikely to disappear from the Australian finance scene, the era of easy, cheap leverage is over—at least for now. The market is maturing, with a greater emphasis on quality, discipline, and risk management. For investors and corporates alike, the key in 2025 is to balance ambition with prudence.

Watch for continued innovation in deal structuring, increased competition from non-bank lenders, and ongoing regulatory tweaks as policymakers strive to keep the market healthy and resilient.