Understanding the complexities of covenants is tough, especially when every document is different. The nuances matter, and without a like-for-like comparison system it’s hard to tell where protections are strong or weak. To solve this problem, in 2019 Covenant Review introduced an innovative loan documentation scoring framework to break down complex leveraged finance documents. Since then, LMEs and other market developments have increased complexity and heightened the need for clear, consistent evaluation. That’s why we’ve upgraded our Documentation Scoring to a more transparent, unified framework that brings sharper comparability and actionable insight across deals and regions. This new framework builds on our original groundbreaking scoring system delivering enhanced clarity and actionable insights for leveraged finance professionals worldwide.
Behind these enhancements is a blend of robust empirical data and qualitative legal judgment from seasoned practitioners. Documentation Scoring captures covenant nuances from ratio calculations/basket flexibility and EBITDA adjustments to mandatory prepayments and flexibility provided by named loopholes and other provisions that facilitate LMEs, ensuring a comprehensive assessment of lender protection.
What’s changed from the original scoring?
Documentation Scoring 2.0 goes beyond the original framework by integrating new data points, refined weighting, and advanced scoring techniques. The main additions to the process includes:
- Value Leakage Protection: A dedicated sub-score that quantifies the potential for value to move away from the credit. It assesses flexibility around transfers to unrestricted subsidiaries, investments and joint ventures, dividends and distributions, asset sales and leakage mechanisms, and related carve-outs and baskets.
- Ratio Calculations and Basket Flexibility: A new Quality Factor that includes egregious exclusions of debt, high watermark features, and reclassification provisions, so that you can better ascertain calculation manipulations.
- Reporting Protection (Now Available in the US): Already part of our European scoring, Reporting Protection scoring is now included for US documentation. It evaluates covenant features such as delivery frequency and timeliness of financials, audited statements, compliance certificates, KPI and add-back transparency, and other reporting safeguards.
What stays the same?
- Our core pillars: Collateral Protection, Default Protection, Liquidity Protection (EU), and Lenders’ Repricing Optionality remain central to our review process.
- Methodology: We continue to blend detailed empirical inputs with qualitative legal judgment from experienced practitioners, capturing nuances from structural subordination and EBITDA adjustments to mandatory prepayments and transfer provisions.
- Consistent outputs: Sub-scores roll into a transparent, document-level score designed for like-for-like comparisons across regions and over time.
Why the change?
The upgraded scoring system provides a transparent, unified framework for evaluating documentation risk across regions. You can now access a more consistent and actionable view of covenant strength, supporting better decision-making in a fast-evolving market.
The result for leveraged finance professionals:
- More complete risk picture: Directly scoring value leakage and reporting discipline surfaces key drivers of recoveries, documentation discipline, and monitoring.
- Better comparability: Extending Reporting Protection to US deals aligns regional coverage, simplifying cross-border screening and portfolio monitoring.
- Actionable insight: The refined coverage supports quicker triage, tighter comps, and clearer escalation when negotiating terms.
Documentation Score 2.0 is available now within Covenant Review reports via CreditSights.
