How private credit uses covenant-lite borrowing debt

Private credit firms’ efforts to reap leveraged debt business from Wall Street is coming at a steep cost — safeguards that made them less vulnerable to an economic downturn.

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Once rare, the same kind of permissive terms that are widespread on leveraged loans are becoming increasingly common in the $1.7 trillion private credit market.

Large borrowers with more clout are pushing for — and getting — so-called “covenant-lite” terms. And the trend is only set to accelerate, if a spate of recent deals is any indication. 

Private equity firm Permira Holdings negotiated loans free of standard protections for two of its companies, a U.K. education software firm and a corporate services provider, people familiar with the situation said. The buyout of German insurance broker Global Gruppe had elicited offers for covenant-lite loans of €1 billion ($1.2 billion), before the sales process was put on hold, according to separate people familiar with the matter who declined to be identified.

“In 2026, I expect some private credit lenders will increasingly agree to looser or no covenants in order to win business,” said Ben Davis, partner and head of private credit at law firm Eversheds Sutherland. Covenant-lite loans have become more prevalent in “larger mid-market deals for top credits,” according to Davis.

The safeguards, along with access to nonpublic financial information, are part of why industry chiefs like to claim private is safer than bank credit. They also say that they vet deals more carefully. While the rates at which private borrowers default is up for debate, they’ve been reported in a range of 2% to 3% — lower than for leveraged loans made by banks.

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‘Looser terms, lower pricing’

Traditional private credit carries maintenance covenants — limits on leverage that are tested regularly. As soon as a borrower breaches its limits, a lender can seek an equity injection from shareholders or private equity owners, push them into asset sales for the good of lenders, or demand more collateral. If a lender favors a debt restructuring, or even wants to take over a company, a covenant breach would be the starting point.

The right to curb unhealthy debt levels is also a way for private credit firms to hedge risks like recession or tariffs that can zero corporate profits.

But now direct lenders are making deals on the same terms as banks — breaking long-standing convention that gave them more rights to manage a borrower’s debt.

“Top-quality borrowers will command looser terms and or lower pricing,” according to Hadrien Servais, a partner at Simpson Thacher & Bartlett.

Permira, along with Canada Pension Plan Investment Board, financed the acquisition of services provider JTC on covenant-lite terms from lenders including Blackstone, CVC Credit and Singapore’s GIC, a person with direct knowledge of the deal said. Spokespeople for the institutions declined to comment.

Permira also secured covenant-lite terms on a loan it took for the buyout of UK education software firm The Key Group from lenders including Goldman Sachs Asset Management, Macquarie and Apax Credit. Representatives at Permira and its lenders declined to comment. 

Officials at Global Gruppe weren’t immediately available to comment on the company’s sale or its financing.

Lenders on the largest U.S. deals have been gradually giving up covenants even before 2023, according to analysis by Moody’s, which showed terms weakening as the size of transactions increased.

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Packaging private credit into bonds

Covenant-lite loans have more recently been making their way into middle-market transactions. One measure can be seen in the collateralized debt market, where funds package private credit into bonds.

Funds known as middle-market CLOs have steadily boosted the amount of covenant-lite loans they’ll accept, to 25% in the first quarter of 2025 from about 16% in 2021, according to S&P research. These thresholds don’t reflect current exposure, but rather the maximum that a fund is allowed to hold.

Many mid-market lenders are still able to secure more conventional covenants, Eversheds Sutherland’s Davis said. And some prefer to err on the side of safety. 

“We are not afraid to walk away from deals where we are not comfortable with the documentation,” Peter Lockhead, managing director and portfolio manager at ICG, wrote in an Alternative Credit Council report last year.

Loose terms based on good faith between lender and borrower may be storing up trouble down the road, warned Amin Doulai, a partner at King & Spalding.

“At the end of the day, nothing beats proper covenants and contractual protections when things get difficult,” Doulai said. “Some lenders will tell you that their fundamental protection is understanding the credit and maintaining the direct line into management teams. But when a company starts to underperform and it’s defaulting on its loans, you’ll find that the direct line isn’t open anymore.”