Private Credit: Off-Balance Sheet Liabilities
John D. Kim - Director, Covenant Analyst, Covenant Review
7 November 2025
Insights into the complex world of off-balance sheet financing in private credit markets—exploring structural approaches, documentation nuances, recent developments, and credit implications shaping how these liabilities are evaluated and managed:
- Market Approaches to Off-Balance Sheet Treatment: Explore how private credit documentation varies significantly from broadly syndicated loans in handling factoring, receivables financing, and securitizations, with approaches ranging from blanket carveouts to restrictive caps across different market segments.
- Covenant Architecture and Basket Structures: Understand the intricate interplay between debt definitions, investment capacity, and asset sale provisions that determine actual flexibility for off-balance sheet arrangements, revealing how structural permissiveness often differs from initial appearances.
- High-Profile Cases and Accounting Complexities: Examine recent bankruptcy filings and the emergence of opacity concerns in off-balance sheet financing structures, including how “true sale” treatment under GAAP creates divergence between reported leverage and actual obligations.
- Credit Assessment and Leverage Visibility: Investigate how off-balance sheet liabilities create “black box” scenarios for evaluating true leverage and liquidity positions, with implications for understanding borrower financial health beyond traditional balance sheet metrics.
- Documentation Review and Protective Parameters: Learn about the multi-layered provisions that govern off-balance sheet transactions—from recourse versus non-recourse distinctions to fair market value requirements and ordinary course limitations that investors should scrutinize in credit agreements.
Executive Summary
The collapse of U.S. car parts group First Brands exposed over $4.65 billion in off-balance sheet financing arrangements. These included extensive factoring programs and supply-chain finance structures that created significant leverage opacity.
The First Brands bankruptcy appears to have resulted from fraudulent practices rather than documentation weaknesses. This distinguishes it from concerns about structural vulnerabilities in private credit markets.
Private credit documentation takes varied approaches to off-balance sheet liabilities, unlike the broadly syndicated loan market’s permissive stance. Treatment ranges from blanket carveouts and capped baskets to no dedicated provisions, requiring reliance on general capacity.
This report examines how these liabilities are addressed across different credit structures. Subscribers should work closely with legal and professional advisors to assess off-balance sheet treatment in their specific documentation.
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