Covenant protections for new-issue private credit loans (PCs) have improved in 2023 amid tighter lending conditions, following the trend in the broadly syndicated market.
On average, the Documentation Score of private credits tightened to 2.84 on Covenant Review’s scale of 1 (most protective) to 5 in the year to Oct. 31 (YTD) from 2.94 in 2022. Likewise, the average Score among Broadly Syndicated Loans (BSLs) strengthened to 3.64 YTD from 3.75 in 2022.
The trend toward stricter PC protections in 2023 was driven, in part, by few loans with covenant-lite structures. YTD, 20% of PC loans in Covenant Review’s sample cleared without maintenance financial tests, down from 30% in 2022 and a peak of 31% in 2021. In the BSL market, by contrast, the share in the YTD was unchanged from 2022’s level at 93%. The decline was felt across the size spectrum as the chart on the right illustrates.
Other underlying factors at work here include less generous baskets as well (left chart) as well as a falling proportion of highly negotiated terms such as MFN sunsets and asset-sales-sweep step-downs (right chart).
Large PC vs BSL Loans
The jumbo PC loan of $1 billion or more is a relatively recent phenomenon. Starting in 2021, the first year for which there is a statistically significant sample, the trend in private credit follows the syndicated market as the charts ahead show. For example, the average Documentation Score of PCs improved to 2.9 in the YTD from 3.3 in 2022. In the BSL market, likewise, the average trended to 3.7 from 3.9.
We have pulled some key insights from Covenant Review’s proprietary database of more than 1300 private credit institutional loans going back to 2017. Private credit loan documentation remains strong, even considering the recent trend towards mega private credit tranches. In fact, new issue private credit covenants strengthened in 2023 with the share of covenant-lite private credit loans falling from 30% in 2022 to 20% YTD. Our analysis is available to subscribers across CreditSights’ three content sets – CreditSights Fundamental Research, Covenant Review, and LevFin Insights.
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Steve Miller
CEO of Fulcrum Financial Data
