9Questions is our Q&A series featuring key decision-makers in the corporate credit markets.
Defence has gone from a niche sleeve to a core conversation in European private credit, with government spending accelerating procurement and sponsors pushing capital structures earlier in the lifecycle.
The Security Action for Europe (SAFE) initiative, which provides the EU with up to €150bn in loans to member states to rapidly boost defence production and joint procurement, is just one way that the continent is deploying capital into the sector. The opportunity is real, but so are the frictions: eligibility, export controls, ownership sensitivities, and cash cycle volatility that deviates from standard industrial credits.
Jason Blick, senior private credit counsel at CMS, sits at the intersection of those pressures, advising lenders and sponsors on how to build a position for defence opportunities. In this 9Questions, he explains where documentation expectations most often diverge from reality, why working capital is the real driver for suppliers, how covenant packages are quietly morphing, and what risks the market is still missing as Europe rearms.
1. What’s the single most common mistake you’re seeing lenders make in defence lending?
One of the more significant challenges I observe in defence financing relates to the treatment of contracted backlog. There can be a tendency to approach a defence contractor's order book as though it were ordinary, freely-assignable, and readily bankable cashflow, without sufficiently accounting for the regulatory architecture that governs government contracts and national security considerations.
When underwriting assumptions and credit documentation do not adequately reflect these realities, difficulties may emerge later in the transaction lifecycle.
European demand for defence capabilities is undoubtedly growing, and this presents meaningful opportunities for lenders seeking exposure to the sector. However, the bankability of that demand often depends on careful navigation of procurement frameworks, export-control regimes, and ownership sensitivities. Credit documentation that anticipates and accommodates these complexities, rather than working against them, tends to produce more resilient structures.
For institutions that may be relatively new to defence lending, one consideration worth highlighting is the distinction between contracted backlog in the abstract and backlog that can be legally performed, monitored, and enforced in practice. The former may appear attractive on paper; the latter represents the foundation for sustainable credit relationships.
Lenders who develop fluency in these dynamics may find themselves well-positioned. A nuanced understanding of the defence regulatory environment can enable faster, more confident decision-making on credits, whilst reducing the risk of unwelcome surprises following transaction close.
2. For lenders backing suppliers, what’s the real credit driver you push people to diligence hardest?
When considering credits to defence suppliers, as distinct from prime contractors, the diligence priorities may shift meaningfully. In this segment of the market, the most critical factor to examine closely is often working capital and cash conversion dynamics. These metrics tend to determine whether a supplier can actually deliver on its contractual commitments and navigate the inherent volatility that characterises defence programmes.
The significance of working capital analysis in this context is difficult to overstate. If the working capital assessment proves inaccurate, other elements of the credit analysis may become somewhat secondary. Even an ostensibly attractive backlog can transform into a liquidity challenge if the underlying cash conversion cycle is not properly understood and supported by the financing structure.
This consideration becomes particularly relevant in the context of supplier credits during periods of accelerated demand, such as those driven by initiatives like SAFE. When suppliers are expected to ramp production rapidly in response to heightened European defence investment, their working capital requirements may intensify considerably. In such circumstances, underwriting frameworks and credit documentation may benefit from being structured to actively support contract performance through the practical realities of the cash cycle, rather than assuming conventional working capital patterns will hold.
3. Where do you see the biggest gap between what lenders think they have and what they actually have?
Perhaps the most common area where expectations may diverge from reality in defence lending concerns security over receivables. Lenders sometimes proceed on the assumption that they have obtained a clean charge or assignment over contracted cashflows, only to discover that these cashflows are often not freely assignable in defence contracting contexts, may not be cleanly enforceable, and could prove challenging to realise within practical enforcement timelines.
Information rights represent another area warranting careful attention. It is not uncommon for lenders to draft comprehensive management information covenants, only to realise subsequently that the borrower faces material constraints on disclosure.
Classified information, export-controlled data, and customer-restricted materials may all fall outside what can be shared through conventional reporting channels. The contractual right may exist on paper, but its practical utility often depends on establishing a pre-agreed operating model, whether through clean team arrangements, redaction protocols, or secure data room frameworks.
Change-of-control provisions, by contrast, may sometimes be overestimated as a protective mechanism. Many defence contracts incorporate bespoke ownership and control regimes that do not map neatly onto standard control tests found in syndicated lending documentation.
In practice, the more consequential risk may relate to potential loss of regulatory clearances or security approvals rather than sponsor changes in the traditional sense.
For contract-led defence credits, receivables security is arguably the area where lenders most frequently overestimate the practical strength of their position.
A constructive response to this challenge may involve shifting emphasis from assignment as a primary recovery mechanism towards a framework built around robust cash control, thoughtful contract governance, and genuinely usable information rights.
4. Where do you see the biggest geographical differences in defence credits and what risks are lenders currently underestimating?
The UK market typically employs LMA-style unitranche or term loan B structures, with share and all-assets security packages that are comparatively straightforward to enforce through administration or share enforcement mechanisms. Nevertheless, diligence on National Security and Investment Act considerations, security clearances, and export-control constraints remains essential, as enterprise value can deteriorate before enforcement becomes relevant.
Across continental Europe, particularly in France, Germany, and Italy, the distinguishing features often relate to state involvement and insolvency framework complexity. Foreign direct investment screening and national security interventions occur more frequently, whilst restructuring frameworks and moratoria can materially delay or shape enforcement outcomes. Security packages also tend to be more jurisdiction-specific and may prove less transferable than UK or US equivalents.
From a risk perspective, continental European markets may warrant closer attention than some lenders currently afford them, particularly for supplier credits and US-sponsored platforms. The risk profile often extends beyond traditional credit analysis to encompass sovereign and procurement constraints, alongside regulatory and industrial policy dynamics that can alter cashflow profiles, restrict transfers or controls, or necessitate localisation or capital expenditure at pace.
5. Where does defence sit on the covenant spectrum right now?
Defence lending in Europe has not, to date, developed a distinctly separate covenant regime. The market in my experience has broadly followed the wider drift toward covenant-lite structures, albeit with targeted defence-specific protections rather than comprehensive maintenance packages.
This outcome may appear counterintuitive given the sector's sensitivity, but it reflects certain market realities. Defence demand enjoys considerable political support, and with initiatives such as SAFE accelerating procurement activity, order books often present favourably. Sponsors have leveraged these dynamics to secure greater documentary flexibility.
In response, lenders have adapted their protective frameworks. Rather than relying primarily on financial maintenance covenants, there has been a discernible shift toward event-risk, regulatory, and contract-focused controls. This evolution recognises that the factors most likely to erode value in defence credits are often non-financial in nature: loss of security clearances, debarment from government contracting, export-control breaches, disruption to key programmes, or working capital shocks.
For sponsor-backed defence platforms, structures tend toward incurrence-based or covenant-lite arrangements without tight leverage maintenance tests. However, lenders typically seek to negotiate robust operational controls as a counterbalance.
These commonly include tight restrictions on distributions and leakage mechanisms, often coupled with cash sweep provisions; comprehensive change-of-control undertakings and ownership or clearance compliance obligations; event-driven defaults and enhanced reporting obligations tied to key contracts, licences, and security clearances; and strengthened representations and undertakings concerning sanctions compliance, export controls, and foreign direct investment requirements.
6. In defence-related credits, what collateral packages actually work in practice?
Several principles tend to hold across defence credits when structuring security packages.
Cash control as the primary lever: where contract cashflows cannot be reliably assigned, control becomes paramount. A tight account charge combined with springing cash dominion or lockbox mechanics often represents the most consistently enforceable protection across jurisdictions and contract types.
Receivables financing requires genuine financeability: commercial receivables from prime contractors and non-sovereign counterparties can prove highly bankable, provided the borrowing base incorporates realistic reserves for set-off, chargebacks, disputes, and acceptance risk.
Inventory collateral depends on realisability: finished goods, standardised spares, and non-bespoke components with clear title and healthy stock turns can support meaningful value, particularly where third-party logistics or field warehousing arrangements provide control. Inventory that is bespoke, programme-specific, export-controlled, or located behind classified-site access often represents paper value rather than practical liquidation value.
Structural control over contract security: in many defence credits, the most practical enforcement route is control of equity and cash rather than theoretical assignment of contract rights. Share security combined with structural cash control frequently offers greater certainty than contract-level security.
My general approach is to treat defence asset-based lending as a liquidity instrument underpinned by cash control, eligible receivables, and sellable inventory, with conservative reserves for set-off, acceptance, and dispute risk. I would not recommend underwriting enforcement on the assumption that contracts can be freely assigned or that a lender can step into programmes.
7. Are you seeing sponsors try to put defence assets into fund level or holdco leverage structures earlier than lenders are comfortable with?
There are indications that some sponsors are seeking to bring defence assets into NAV or holdco leverage structures at an earlier stage than has historically been typical, often as soon as contracted backlog provides sufficient visibility. The momentum behind SAFE-driven procurement appears to be reinforcing sponsor confidence in the durability of defence demand, which in turn increases the push for earlier leverage. Some lenders may still be calibrating their understanding of how rapidly value can be impaired by regulatory or contract events in this sector.
From my perspective, several protections warrant particular attention in these structures. Robust value leakage controls at the top of the capital stack are essential. Generic material adverse change language may prove insufficient; a tailored defence event concept that captures the specific risks in this sector is preferable. Such events might include debarment, suspension, or exclusion from tendering processes; material adverse action under FDI or national security regimes, including failure to obtain requisite approvals for relevant changes; export-control breaches or licence denials affecting material programmes; and loss or suspension of key licences, security clearances, facility accreditations, or approved supplier status. These are the circumstances in which value tends to deteriorate most rapidly, and NAV lenders operating at the holdco level have limited ability to remediate them.
8. In a downside, what’s the first thing that tends to break in these credits?
In defence credits, the first indication of stress typically manifests as delayed payments leading to a working capital squeeze. This pattern emerges for several interconnected reasons.
Cashflow in defence contracting is frequently milestone or acceptance-driven, and prime contractors or government customers may have the ability to extend payment timing or exercise set-off rights in respect of quality issues, liquidated damages, or audit findings. Such delays can affect liquidity immediately, well before any leverage covenant, if one exists, would be tested.
Suppliers in the defence sector tend to be particularly working capital intensive, given the combination of long-lead inventory requirements, work-in-progress accumulation, testing and acceptance gates, and the need to post bonds or letters of credit. In this context, even modest slippage in acceptance or invoicing can create a substantial funding gap relatively quickly.
Once liquidity begins to tighten, second-order effects may follow: delivery slippage can lead to disputes and claims, which in turn generate further set-off, tighter payment terms, and a compounding cycle that becomes increasingly difficult to arrest.
For these reasons, defence credits may benefit from underwriting the cash cycle as the primary focus, encompassing availability mechanics, appropriate reserves, liquidity covenants, and cash dominion triggers. Where liquidity is adequately addressed, the cascading problems that can ultimately narrow the buyer universe and impair enterprise value may often be avoided. Where it is not, other elements of the credit structure may become somewhat academic.
9. What is an under-discussed defence lending risk and how should lenders protect themselves?
In my view, the less visible risk over the next 12 to 24 months relates to industrial policy and eligibility dynamics transforming what appears to be strong demand into what might be termed permissioned demand. Contracts and growth plans that look robust today may become more difficult to win, perform, or refinance as localisation and content rules under initiatives such as SAFE take hold, foreign-control sensitivities intensify, and supply-chain constraints compress margins whilst extending cash cycles.
From a lender perspective, several considerations may merit attention in this environment. Eligibility resilience could usefully be treated as a core credit metric, alongside more traditional financial measures. Credit documentation may benefit from incorporating industrial-policy triggers that capture the specific ways in which eligibility constraints can crystallise.
Given that eligibility shocks tend to manifest as cash shocks, liquidity-first structures may prove more resilient than those oriented primarily around leverage metrics. Valuation and basket mechanics might appropriately haircut for concentration risk and political dependency. Finally, exits and refinancing may benefit from advance planning to pre-agree a clean perimeter that remains viable under evolving policy constraints.
The market risk in European defence lending, as I see it, is not principally about demand. Demand appears well-supported by political commitment and fiscal reallocation. The more salient question concerns deliverable, eligible demand under SAFE, localisation requirements, and tightening industrial policy frameworks, with supply-chain constraints amplifying the credit impact of any shortfall. The protective framework that appears most fit for purpose combines rigorous eligibility diligence with appropriate documentary triggers, liquidity-first covenant and structural design, and thoughtful exit-perimeter planning.
