Private Credit M&A in Defense & Government Contracting: Lending Against Certainty While Managing Political Time

Private Credit Advisory
Defense & Government Contracting
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Private credit’s continued engagement with defense and government contracting in 2024–2025 reflects neither complacency nor renewed risk appetite. It reflects a recalibration rooted in experience. While the sector retains characteristics lenders value, including multi-year contracts, sovereign counterparties, and mission-critical demand, private credit committees no longer underwrite defense as a non-cyclical refuge. They underwrite it as exposure to political time, where revenue certainty and liquidity certainty diverge in ways that materially affect capital survivability.

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From an advisory perspective, this distinction is central to why transactions clear or stall. Government contracts provide assurance of eventual payment, but they do not eliminate timing risk, administrative friction, or budgetary intervention. Continuing resolutions, program reprioritization, audit delays, and procurement reform routinely disrupt cash conversion even as backlog remains intact. Private credit has adapted by shifting its focus away from headline contract value toward enforceable mechanisms that allow lenders to manage through delay rather than assume continuity.

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The evolution of defense credit underwriting is visible when viewed across vintages. Earlier cycles relied heavily on backlog and counterparty strength, with leverage justified by long-dated contracts and an implicit belief in steady appropriations. Control provisions were lighter, and working capital stress was treated as transitory. As consolidation accelerated and contract structures shifted toward fixed-price and performance-based awards, margin volatility increased, but leverage largely persisted, supported by geopolitical tailwinds and expanding defense budgets.

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The post-2020 period disrupted those assumptions. Labor clearance bottlenecks, supply chain dislocation, and delayed appropriations exposed how quickly liquidity could tighten even in businesses with fully booked revenue. Credit committees absorbed those outcomes directly. Today’s structures reflect accumulated caution. Defense credit is no longer underwritten on whether cash will arrive, but on when it arrives and who retains authority over the business during periods of delay. That change, more than pricing, defines the current market.

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Modern private credit documentation in defense and government services embeds political and administrative risk directly into the capital structure. Backlog remains relevant, but it is discounted aggressively where billing mechanics, audit histories, or contract modifications have introduced unpredictability. Working capital is modeled as structural rather than temporary, with facilities sized to accommodate prolonged collection cycles rather than assume normalization. Covenants increasingly prioritize liquidity visibility through minimum cash thresholds, fixed-charge coverage, and reporting triggers tied to contract performance rather than leverage alone.

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M&A activity within defense platforms is also treated differently than in prior cycles. Acquisition pacing, integration risk, and clearance continuity are scrutinized closely, with lenders limiting discretionary growth that could disrupt compliance posture or customer relationships. Change-of-control provisions have become more sensitive, reflecting concern that ownership transitions can trigger review processes that slow billing or complicate renewals. Refinancing assumptions are underwritten conservatively, with private credit increasingly positioned as long-tenor capital expected to span multiple budget cycles rather than a bridge to bank markets.

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These dynamics shape transaction outcomes in ways boards and sponsors often underestimate. Defense businesses frequently stall in credit committee review not because of doubts about demand, but because capital structures fail to account for misalignment between political calendars and financing obligations. Leverage sized to nominal EBITDA rather than stressed cash conversion compresses quickly under scrutiny. Growth strategies that assume uninterrupted billing or rapid working capital release encounter resistance, regardless of backlog visibility.

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Effective private credit advisory in defense therefore centers on structuring for political time rather than contract time. Transactions that clear consistently are those where leverage is sized to absorb extended collection delays, liquidity covenants are designed to trigger early engagement rather than punitive action, and acquisition financing is clearly separated from contract execution risk. Amendment economics are addressed upfront, reflecting recognition that delays are not hypothetical but probable. These structures do not diminish the sector’s appeal; they make it financeable under realistic conditions.

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For boards and sponsors, the strategic decision to use private credit in defense and government contracting is not simply a financing choice. It is an acceptance of active oversight during periods of administrative delay and political uncertainty. Where that oversight is anticipated and embedded thoughtfully, capital clears efficiently and supports durable ownership transitions. Where it is resisted, even strong backlogs struggle to sustain leverage.

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In defense, the risk is rarely whether the government ultimately pays. It is whether the business, and its capital structure, are built to endure the wait.

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