Smart CFO Capital Moves: Delay and Defer in 2025
Key Highlights
2025 is volatile. High interest rates and global uncertainty make flexible financing a must-have for CFOs.
Stay liquid, draw later. Delayed-draw and contingent capital help secure future funding without immediate costs.
Private credit is evolving. Lenders offer creative terms like PIK interest and covenant-lite loans to support non-dilutive growth.
Optionality is key. Klar Capital recommends building flexibility into your capital structure to manage both risk and opportunity.
Act now. Secure DDTLs, deferred interest options, and tranche-based funding to ride out volatility and unlock growth.
CFO reviewing 2025 capital strategy amid global volatility
Introduction
CFOs and CEOs are facing a high-wire act in 2025. Interest rates remain elevated, inflation is unpredictable, and geopolitical tensions are introducing new volatility into markets.
Many business leaders feel caught between needing growth capital and fearing liquidity risks if the economy falters. In this climate, delayed and contingent capital strategies – such as delayed-draw term loans, payment-in-kind interest options, and tranche-based financing – are emerging as the smart play.
These tools let companies shore up liquidity and pursue opportunities without immediately burdening the balance sheet with costly debt or diluting equity.
This article takes a macroeconomic lens on why flexibility in capital raising is critical now, shares Klar Capital’s strategic insights on navigating uncertainty, and offers actionable recommendations for employing delayed and contingent capital in corporate financing strategies.
Uncharted Waters: Economic & Geopolitical Uncertainty in 2025
Global business conditions in 2025 can be summed up in one word: uncertainty.
Executives are more cautious now than they were even a few months ago, as multiple storm fronts gather on the horizon.
A recent McKinsey survey of nearly 1,000 executives found that sentiment soured notably in early 2025 – almost 70% now expect a recession scenario, with 61% specifically bracing for a demand-driven downturn caused by sagging consumer confidence.
At the same time, inflation remains a concern and central bank policies are in flux.
Geopolitical instability and trade tensions are at the forefront of perceived risks, cited equally as top disruptors to the global outlook. The International Monetary Fund warns that U.S.–China trade disputes have unleashed “off the charts” uncertainty in trade policy, creating extreme financial market volatility.
Even if a worldwide recession is avoided, elevated uncertainty and negative investor perceptions can themselves dampen economic activity.
For companies, these macro pressures translate into very real pain points.
Many firms are confronting rising debt servicing costs as the era of cheap money ends.
Unpredictable revenues complicate planning; volatile consumer demand and input costs make it harder to forecast earnings, yet debt payments can be inflexible. Liquidity buffers are also thin for many mid-market companies, raising liquidity risk if a downturn or supply shock hits.
It’s no surprise that borrowers and their private equity sponsors are urgently seeking ways to build more breathing room – for instance, many sponsors have been negotiating for payment-in-kind (PIK) interest features that allow deferring cash interest to preserve liquidity.
“Flexibility is now as important as price when it comes to capital. In an uncertain environment, optionality in your financing is priceless. We advise clients that being caught with rigid debt and no cash cushion is a greater danger than paying a slightly higher rate for flexible terms. Liquidity = survival in volatility. Businesses should stress-test their capital structure for “what if” scenarios – what if revenue drops 20%? What if interest rates spike another 100 bps? – and ensure they have contingent funding or buffers in place for those cases. In 2025, the cost of being unprepared outweighs the cost of carrying extra liquidity.”
Not all signals are bearish, however.
There is a case for cautious optimism that leaders must also consider. Interest rates may finally plateau or even tick downward in late 2025 if inflation comes to heel. Morgan Stanley projects that “lower interest rates, moderate inflation and modest but positive GDP growth” will set the stage for a rebound in strategic investments and M&A this year.
Indeed, capital markets have a pent-up “cash influx” waiting for opportunities, after deal-making was in a holding pattern during 2023’s volatility. Several forecasts predict an M&A revival by late 2025 as valuations adjust and confidence returns.
Private equity firms in particular are sitting on mountains of “dry powder” capital and face pressure from their investors to put it to work. If base rates edge down and credit conditions stabilize, we could see a flurry of deal activity ignite quite rapidly.
The paradox of 2025 is that cash is abundant in some corners even as caution prevails in others. Alternative lenders and private credit funds actually have an “unprecedented level of capital available” chasing too few deals.
Middle-market lenders are fiercely competing to deploy funds, resulting in highly aggressive liquidity conditions where issuers can secure favorable terms and flexible covenants.
In other words, well-positioned companies may find that capital is there for the taking – if structured smartly. The key is knowing that conditions can turn on a dime. Geopolitical flare-ups, policy surprises, or a credit event could slam the window shut quickly.
This backdrop calls for strategic agility: Corporates should be ready to pounce on growth opportunities and ready to hunker down, as each week might bring new information.
We believe the rest of the 2020s will be characterized by roller-coaster cycles – brief expansions followed by shocks or corrections.
Our advice? Don’t over-commit in the good times, and don’t under-prepare in the bad times. For example, if your firm is eyeing acquisitions, line up the financing now (perhaps via a delayed-draw facility) but draw it only when the deal is definite and conditions are right.
Conversely, if you’re worried about a downturn, arrange contingent credit lines or equity injections that trigger only if performance slips below a threshold. In short, structure your capital stack so you can dial leverage up or down with minimal friction as conditions evolve.
The Case for Delayed & Contingent Capital: Flexibility in Action
How can companies practically achieve this coveted flexibility?
Delayed and contingent capital instruments are designed for exactly these conditions.
Delayed Capital
Unlike a traditional loan or bond – where you take all the money upfront and immediately start paying interest – a delayed-draw term loan (DDTL) gives you a committed credit line that you can pull when needed, within a defined window, under agreed terms.
Think of it as “dry powder” on your balance sheet: the money is available on-demand, but you aren’t incurring full interest expense until you actually deploy the cash.
Sponsors often use DDTLs to avoid paying interest on debt they might not need right away, structuring future acquisition or capex financing as a dedicated delayed-draw tranche rather than idle cash.
These facilities are common in private equity deals – a standard mid-market leveraged buyout (LBO) might include a term loan for the initial buyout plus a DDTL earmarked for follow-on acquisitions or growth projects.
Crucially, private credit providers specialise in offering DDTLs.
Compared to banks or public markets, direct lenders have been far more willing to build in delayed-draw features as a sweetener for borrowers.
In fact, private credit lenders pride themselves on offering “goodies” like delayed-draw loans that borrowers can use to fund future needs – an advantage that regulated banks don’t typically match.
Real-world example: In September 2024, KKR’s private credit arm led a $1.4 billion financing for USIC, a utility services firm. The deal included both an immediate term loan and a delayed-draw term loan alongside a revolver.
By going with a direct lender syndicate instead of a traditional bank package, USIC was able to negotiate in a PIK interest option, meaning they can defer cash interest payments on part of the debt. The package was also covenant-lite.
This kind of bespoke structuring – a delayed tranche for flexibility and a PIK toggle for breathing room – illustrates the creativity now on offer in private credit deals to accommodate borrowers’ needs in volatile times.
Contingent capital
Takes flexibility a step further as it refers to capital that becomes available or converts only upon certain events or conditions.
Some examples: an equity commitment that a shareholder or investor will inject more equity if performance falls below a target (thereby bolstering the balance sheet in bad times), or a second-lien loan tranche that a lender will fund only if a major capex project arises.
In M&A deals, earn-outs and seller financing are a form of contingent capital – the buyer only pays (or only finances) the additional amount if the acquired business hits performance milestones, thereby sharing risk.
Within loan agreements, we also see incremental facilities structured with free-and-clear baskets and springing features, where additional debt capacity is available contingent on, say, EBITDA reaching a certain level or leverage staying below a threshold.
In sum, contingent capital is about embedding optional upsides or downsides into the financing structure. It aligns the timing of capital deployment with actual needs or with risk materialization.
Delayed draws and contingent tranches offer multiple benefits in the current climate:
Preserving Liquidity. They function as a safety net. You secure the right to capital now, when lenders have money to deploy, but keep it in reserve. If your cash flows remain healthy, you might never draw the additional debt – and that’s fine.
But if a shock hits, that committed capital could be a lifeline. “Everyone suffers if financial conditions worsen,” warns the IMF’s Managing Director, so having pre-arranged liquidity can be the difference between survival and bankruptcy during a sudden credit freeze.
Avoiding Opportunity Cost. In a more positive scenario – say an acquisition opportunity or expansion project appears – delayed capital lets you pounce quickly. You don’t have to scramble for financing or dilute your shareholders by issuing new equity in a hurry.
By tranching your growth capital (raising some now, with an option for more later), you only pay for capital when you actually use it. This was not lost on direct lenders, who often pitch their ability to “move quickly” with tailored solutions as a reason to partner with them.
Mitigating Interest Rate Risk. A DDTL in effect gives a borrower a built-in hedge against interest cost. If rates fall in the future, you might end up drawing that loan at a lower effective rate (if it’s floating or if you refinance at draw time).
If rates rise, you’ve at least postponed paying the higher rate on the undrawn portion. Many central banks are in “wait and see” mode right now. Companies similarly may want to wait and see before fully loading up on debt. Some are even hedging future fixed-rate debt issuances because of “heightened volatility in yields” and “substantial global uncertainty” around policy.
A delayed-draw loan is another way to hedge timing: take what you need now, delay what you might need later.
Improving Borrower Terms. In the current borrower-friendly private credit market, lenders are agreeing to features once rare in loans.
For top-tier borrowers, we’ve seen “synthetic PIK” structures, where effectively a portion of interest can be paid by increasing the loan balance (often via a DDTL used specifically to pay interest). This is a clever way to give the company relief on cash interest without technically PIK-ing the main loan (which could breach some covenants).
As one Reuters analysis noted, direct lenders in 2024 were offering not just DDTLs but also PIK interest through those DDTLs to the most creditworthy borrowers. Interest deferral flexibility like this can tide a company through a temporary cash crunch without defaulting.
Non-Dilutive Growth Capital. Crucially, delayed and contingent debt is non-dilutive – it doesn’t require giving up equity.
For business owners who have already seen valuations swing wildly in recent years, raising equity capital in a down market is a painful last resort. It’s far better to use debt with equity-like flexibility.
Private credit has evolved specifically to provide this: loans that behave almost like equity in their patience and subordinated payout (e.g. mezzanine debt with PIK interest and long maturities), but still keep ownership intact. “Non-dilutive funding” can include revenue-based financing, venture debt, NAV loans, and other creative instruments.
The common theme is to grow or stabilise the company without diluting founders or early investors. Given that private markets investors believe in the long-term outperformance of private companies, there is capital willing to take that bet in structured ways.
For CFOs, it means more menu options: you can raise cash to seize an expansion opportunity without selling a stake at a low valuation or losing control.
These strategies are not just theoretical – they are already being put into practice.
Borrowers in 2023-24 have been actively refinancing bank loans into private credit loans with delayed draw and PIK features to weather the higher-rate environment.
Direct lenders also stepped in with add-on DDTL loans to help companies cover interest on existing debt when rates jumped.
In one case, a $475M delayed-draw add-on was provided to a middle-market company (Higginbotham Insurance) purely to fund interest payments and buy the company runway.
This kind of creativity – essentially capitalizing interest through a separate facility – shows how far private credit will go to prop up a borrower, in stark contrast to banks that might simply tighten the leash.
As Frost Brown Todd’s M&A report observed, when banks pulled back in 2023 due to regulatory concerns and economic uncertainty, private credit funds filled the gap with “more flexible and more borrower-friendly” loans that kept deals moving.
Speed, certainty, and custom structuring are where private lenders shine, and in a world of uncertainty, companies value those attributes highly.
“Use today’s liquidity to buffer against tomorrow’s volatility. We counsel clients to secure commitments while the market is liquid, even if they don’t need the money today.
In 2025, private credit funds and even banks (to a lesser extent) are flush with capital and eager to lend – perhaps too eager, as evidenced by record-tight credit spreads and covenant-light term. This won’t last forever. Now is the time to arrange a delayed-draw term loan, an accordion feature, or a standby equity line that you can tap on your terms. Think of it as buying insurance.
Our view is that the credit markets in 2025-2026 will be two-tier: strong borrowers with pre-arranged capital will sail through, while weaker or unprepared firms could find the funding doors shut if conditions worsen. Don’t be in the latter group. Even if it modestly increases your cost of capital to have these options, the option value in volatile times is well worth it.”
What The Next 2–3 Years Holds
Looking beyond the immediate horizon, Klar Capital sees a couple of likely trajectories unfolding – scenarios that inform how you should craft your capital strategy now.
1. Volatility is Here to Stay, Even as Rates Ease Moderately.
We expect that global central banks will gradually reduce policy rates over the next 2–3 years (the U.S. Fed, for example, may cut rates by perhaps 100 basis points from current levels by 2026), but interest rates will remain higher than the ultra-low averages of the 2010s.
The IMF expects global inflation to fall closer to 4% in 2025, which should allow some easing of monetary policy.
This means the pressure valve on interest costs will loosen slightly – a welcome relief for companies with floating-rate debt. However, any relief will be slow and uneven. We anticipate continued high volatility in both interest rates and currency markets due to geopolitical risks (trade conflicts, elections, even conflict flare-ups).
Geopolitical tensions – whether a tariff war or regional instability – can cause sudden risk-off swings in capital markets. So while the average cost of capital might drift downward, the risk premium for uncertainty will stay baked in. Corporate strategists should interpret this as: hope for lower borrowing costs, but don’t count on stability.
What it means for you: Use periods of optimism (e.g. when rates dip or credit spreads tighten) to refinance and term out debt – take chips off the table when you can. But concurrently, maintain those backup liquidity facilities for surprise turbulence. Essentially, treat volatility itself as a constant in your planning.
This also implies that financial flexibility – covenants, headroom, multi-scenario contingencies – will remain at a premium. We expect more companies will adopt rolling scenario planning for treasury management, updating funding plans quarterly as new data comes in.
2. Private Credit Will Become a Mainstay of Corporate Finance (and Competition Will Drive Even More Creative Terms).
The boom in private credit isn’t a one-off fad – it’s a structural shift.
Private credit (non-bank direct lending) will be an even larger slice of corporate funding, with banks partnering more with alternative asset managers to co-lend.
As Reuters Breakingviews pointed out, direct lenders’ share of highly leveraged loans jumped from 7% in 2018 to 17% by 2023, and even as banks recover some risk appetite, private funds are here to stay. They have raised enormous funds (estimates suggest private credit AUM could reach ~$2.8 trillion) and must deploy that capital.
For mid-sized and even larger firms, this means a new universe of financing options beyond the traditional bank loan or bond markets. Expect private lenders to continue offering borrower-friendly features – for example, we foresee interest-only periods, PIK toggles, and flexible amortization becoming standard in many middle-market loans, not exceptions.
We also anticipate hybrid financing (debt with attached warrants, convertible features, or preferred equity) becoming more common as companies look for equity-like capital without immediate dilution. The competitive dynamic (private debt funds vs. banks vs. public markets) will empower well-advised borrowers to demand better terms.
What it means for you: Don’t hesitate to shop around for capital. Middle-market CEOs in 2025 should be as familiar with private credit term sheets as they are with bank term sheets. This also means that relationships matter – building ties with a reliable lending partner (be it a private credit fund or a unit of a larger asset manager) can give you assured access to rescue financing or growth capital when you need it.
Actionable Recommendations for CFOs: How to Leverage Delayed & Contingent Capital
Facing the current volatility, what concrete steps can a company take? Here are practical moves to consider in your 2025 financing strategy:
Secure a Delayed-Draw Credit Facility - If you anticipate any major expenditure (acquisition, expansion, large capex) in the next 12–24 months, arrange a delayed draw term loan now. This could be an incremental tranche added to your existing debt or a new stand-alone facility dedicated for future uses. Ensure the availability period is sufficiently long (many DDTLs offer 3–4 years availability).
Result: You lock in financing at known terms and give yourself optional liquidity. You’ll pay a small undrawn commitment fee, but avoid paying full interest until you actually need the funds.
Build In Interest Payment Flexibility: When negotiating new debt, seek interest deferral options. This could be an explicit PIK toggle (where you can elect to roll up interest to the loan balance for a period), or a separate interest reserve facility (similar to how project finance deals often have an interest reserve account). Private lenders have shown willingness to include PIK components – like the USIC deal that allowed deferring cash interest – especially if it’s a short-term liquidity bridge.
Result: If your cash flow dips unexpectedly, you won’t immediately default; you have a mechanism to temporarily reduce cash outflow for debt service.
Tranche Your Capital Raises: Rather than raising one large lump sum (and sitting on unused cash or incurring cost), consider a series of smaller raises linked to milestones. For example, raise an initial debt round to fund this year’s needs, but negotiate an “accordion” feature or an agreement that allows a second tranche next year at a predefined pricing.
Many credit agreements now include incremental facilities that can be tapped under certain conditions. Alternatively, structure an equity raise with a contingent second closing – investors commit now to a follow-on investment if, say, revenue hits $X or if you land a certain big contract.
Result: You minimise dilution and interest expense in the near term, but still have capital lined up for growth or contingency without additional negotiations later.
Hedge and Buffer: While not a financing instrument per se, risk hedging is a cousin of contingent capital. Ensure you are hedging key financial risks – e.g., use interest rate swaps or caps to guard against rate spikes (interest rate volatility has been so high that even one-month moves can be 20+ bps). Also, maintain a larger cash buffer than in stable times. It may be prudent to have, for example, 12 months of operating expenses in liquidity (cash + undrawn credit) instead of 6.
Result: Hedges and liquidity reserves act as self-insurance, reducing the odds that you’ll need emergency capital at a bad time.
Engage Your Lenders Early: Don’t wait until you’re in a cash crunch to discuss flexibility with lenders. Proactively communicate your desire to build resilience. Often, banks and lenders will work with a proactive borrower to amend terms or add a delayed draw option before it’s urgently needed – it’s when liquidity is already tight that negotiations become harder. If you have bonds or other fixed debt, consider asking bondholders or private placement investors about adding a springing maturity extension (contingent on a refinancing event) or other contingency plans.
Result: By being upfront, you position yourself as a savvy, risk-aware operator. Lenders prefer to accommodate that than to enforce covenants on a distressed, surprised borrower.
Above all, integrate these tools into an overall capital strategy.
Delayed and contingent capital isn’t a magic bullet on its own – it works best as part of a broader playbook of financial resilience. This includes scenario planning, continuous monitoring of markets, and agile decision-making.
For instance, if you secure a delayed-draw loan now but conditions improve markedly by Q4, you might choose a cheaper funding route and never draw it. That’s a good outcome! Optionality preserved value. On the other hand, if a recession hits, you draw it and possibly extend its maturity to ride out the storm.
In conclusion, 2025 is not a year for “set it and forget it” finance. It’s a year to expect the unexpected.
Klar Capital’s core philosophy in times like these is to stay liquid, stay flexible, and stay opportunistic.
Delayed and contingent capital can provide the liquidity and flexibility; the opportunism is up to you and your management team. With the right funding strategy, you can not only survive the volatility but turn it into an advantage – using your capital agility to outmaneuver less-prepared competitors.
In the end, that is why delayed and contingent capital is the smart play: it gives you control over timing, which in business can make all the difference between merely reacting to the future or actively shaping it.
FAQ
How does contingent capital reduce downside risk for mid-market companies in uncertain environments?
Contingent capital reduces downside risk by allowing funding to activate only when specific thresholds are breached—such as EBITDA declines or market shocks. This approach preserves equity during strong periods and injects liquidity during downturns, making it an effective volatility hedge.
Why is a delayed draw facility considered superior to holding idle cash for future acquisitions?
A delayed draw term loan avoids the opportunity cost of uninvested capital and prevents earnings dilution caused by unused liquidity. It offers committed capital without the balance sheet drag, letting firms stay agile without wasting resources.
In what scenario should a company prioritize building a PIK toggle into its credit agreement?
If a company has seasonal revenue cycles or faces potential revenue compression, a PIK toggle can allow temporary relief on interest payments, maintaining solvency without restructuring. It's particularly strategic in bridging cash flow gaps or when preparing for expansion under uncertain conditions.
Disclaimer
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