Private Credit Did Not Delete Covenants. It Put Them in a Smaller Room With Fewer Witnesses.

Private credit did not arrive, glance at the credit agreement, and politely throw the covenants into the canal.

It did something far more characteristic of finance.

It moved them from a large committee room into a small one, removed several witnesses, issued everybody bespoke stationery, and made the conversation vastly more important once the trading numbers turned unfriendly.

The old caricature has the bank loan governed by rigid maintenance covenants and the private loan governed by vibes, add-backs, and a sponsor assuring everyone that the integration plan is proceeding splendidly.

The real arrangement is less romantic.

A sponsor buying a mid-market components business funds roughly half the enterprise value with a first-lien term loan, keeps a revolver available, uses some existing cash, allows for fees and refinancing, and calls the balance from its fund.

The sources and uses balance, because arithmetic remains regrettably unimpressed by underwriting optimism.

The structure opens at 5.0 times gross debt to EBITDA. Debt above equity, secured on the operating company’s collateral, serviced by the operating company’s cash.

The sponsor owns the holding structure, appoints the board, and may have excellent plans for pricing, procurement and a bolt-on acquisition. The lender has a narrower interest: whether the borrower can pay.

Those interests agree beautifully on closing day.

The trouble starts later, which is why the documents devote so much prose to a moment nobody intends to reach.

The covenant package does not make that moment less likely. It decides whether you get a chair when it arrives.

Seven Levers, Not Seven Words for Leverage

There are seven sponsor-debt levers in a transaction like this: purchase price, equity cheque, leverage, covenant package, collateral, amendment right, and exit proceeds.

That is the complete set, and it is annoyingly interdependent. Which is why your deal team can spend an afternoon celebrating the multiple and then discover that the working-capital facility has formed a more practical view of the business.

Purchase price sets the initial claim on the enterprise. The equity cheque sets how much ordinary capital sits beneath the debt.

Leverage sets how much cash has to satisfy the term loan before equity reaches its preferred state of affairs, namely receiving money.

Those are the closing levers.

They produce a capital structure.

They say nothing about how it behaves in month eighteen, when a customer pays late and somebody has found an add-back.

The covenant package answers that.

It specifies interest, maturity, mandatory prepayments, collateral, representations, reporting, permitted debt, permitted acquisitions, restricted payments, events of default and remedies.

The security documents, guarantees and intercreditor agreement decide which borrower and guarantors are bound, which assets are charged, and which creditor may act when the same inventory supports more than one ambition.

Calling that a flexible package is not wrong.

It is incomplete, in the manner of a menu that omits the prices.

Collateral is the fifth lever, because a covenant is markedly more persuasive when the lender can point at the thing it expects to realise.

An asset-based revolver converts eligible receivables and inventory into availability only after advance rates and reserves have had their say, and the gap between a reported asset and a drawable one is where a sponsor discovers that the two belong to different social classes.

The sixth lever is the amendment right, and the ability to negotiate it.

A borrower might cure a late statement, seek consent for an acquisition, amend a definition, or ask for a waiver after a financial-covenant breach.

These are not synonyms in better tailoring.

A waiver excuses one late statement, or permits a specified transaction for a stated period.

An amendment changes definitions, rights or conditions.

An equity cure is a contractual right to contribute qualifying equity to remedy a financial-covenant breach, on the agreement’s own conditions.

The sponsor’s willingness to write another cheque matters.

The lender’s willingness to decide what that cheque buys matters rather more.

Exit proceeds are the seventh lever, and generally the only one presented in the pitch deck without footnotes breathing heavily nearby.

In a good year five, a higher EBITDA meets a lower net debt and a respectable sale multiple.

Repay the debt and the transaction costs, and what remains goes to equity holders, before allocation among management rollover, follow-on equity, prior distributions and reserves.

Enterprise value is not the sponsor’s distribution.

It is the number from which everybody else is paid, before the champagne acquires legal significance.

Where EBITDA Acquires a Second Career

At closing, a leverage ratio is arithmetic.

Debt over EBITDA.

Nothing in it requires interpretation.

Three years later, operating improvement and cash conversion have both arrived and been introduced to one another, debt has fallen, and 5.0 times has become 3.2.

That is the pleasant version.

The less pleasant version begins with the definition.

A maximum leverage test at 4.00 times looks comfortably met on the borrower’s reported figures, at 3.60. Include the earn-out obligation as debt and disallow the projected cost savings, and the same quarter arrives at 4.33.

The difference is not a debate about what sophisticated markets usually mean by EBITDA. It is an argument about the agreement’s defined terms, its add-back caps, its acquisition dates and its testing period.

Which is to say, an argument about who wrote the small print while everyone else admired the model.

Which is also why the private-credit version of flexibility can genuinely improve a workout.

A lender that knows the company’s monthly reports, cash forecast, collateral reporting, management incentives and acquisition plan can tell a temporary timing problem from a business that has begun misrepresenting its own metabolism.

A certificate discrepancy then has a path.

Certificate, lender review, information request, corrected certificate, and where necessary a field examination or an independent appraisal.

The OCC’s Asset-Based Lending handbook expects examination of borrowing-base compliance, and of the frequency and results of field examinations and receivables verification.

Dry work.

Essential work.

The sort that stops we had no idea from becoming an expensive corporate philosophy.

It can also simply concentrate power.

The lender may be entirely right about an eligibility question.

The borrower may have a defensible classification argument.

Either way, the operating company experiences the result long before the committee minute has acquired its final commas.

The civilised response is to reconcile the specifics: invoices, eligibility definitions, reporting dates, reserve authority.

Credit memos after the reporting date, unaccepted goods, affiliate invoices, disputed amounts, shipment records without delivery, and cash posted to the wrong account are not six versions of the lender being difficult.

They are six different factual questions, each with its own answer.

A Waiver Is Not a Small Amendment

The practical economy of bespoke credit sits precisely here.

Your initial pricing pays for the expected credit, funding, capital, personnel, systems, agency and loss cost. It is not a prepaid consent for whatever the borrower later discovers it would like to do.

When the borrower wants relief, amendment economics begin.

The lender can ask for a waiver fee, an equity cure, reduced availability, new reporting, different collateral, amended restricted-payment capacity, or accelerated repayment.

The agreement may also require lender votes and respect pro rata sharing, so a consent fee offered to some lenders and not others can itself become the argument.

Several professionals will then explain that the real issue is governance, while ordering dinner around the real issue, which is that the money is not large enough for everyone to stay equally patient.

The documents need the distinction because repeatedly waiving a covenant can impair later enforcement.

That is not an argument for enforcing every breach with a helmet and a trumpet. It is an argument for preserving the affected period, the conditions, the calculation version, the consent and the reservation of rights.

A waiver is a priced risk decision.

An amendment is a rewrite of the rule.

An equity cure is a specified calculation mechanism.

Treat all three as relationship management, and the relationship will eventually be managed by people carrying forensic copies of old emails.

Secured Is Not Collected

A lien over inventory is not a promise that you recover in full. Realisable value arrives after legal, storage and sale costs, and after senior claims, guarantee value, elapsed time and the amount actually drawn have all been consulted.

Collateral is not insurance against the business ceasing to be worth its own overhead.

Nor does a first-lien label settle priority.

The borrower may have granted interests to a landlord, a supplier, a depositary bank, a purchase-money lender, a tax authority or another secured creditor.

A lender expecting clean first priority over the inventory can find a supplier interest or a warehouse-access dispute sitting exactly where the assumed cushion used to be.

Under the UCC, a security interest is perfected once it has attached and the applicable perfection requirements are satisfied, and conflicting perfected interests generally rank by earlier filing or perfection, subject to exceptions.

The words generally and subject to exceptions have saved the profession from the vulgarity of certainty.

The cures are correspondingly documentary.

A landlord waiver.

An intercreditor amendment.

A continuation filing.

An inventory move.

A debtor-name correction.

An account control agreement.

None of them entitles a lender to seize anything merely because a credit officer has developed a troubled expression.

Legal priority and cash-flow distress are related.

They are not the same meeting.

Who Got the Smaller Room

Sponsors did, whenever a bespoke package delivered more certainty than a standardised loan could.

A bolt-on can be funded by a revolver, a delayed-draw facility, additional equity or seller consideration, provided the agreement permits it or the pro forma leverage test is satisfied.

So the sponsor keeps its operating plan without reopening the whole capital structure every time the company wants a regional distributor or a system that has become overly expressive.

Lenders did too, and rather plainly.

They receive spread and fees for committing capital.

They also receive information rights, certificate discipline, collateral reporting, remedies, and a seat at the table whenever the business changes.

Undrawn capacity is charged for, because it still consumes balance-sheet capacity, liquidity planning, monitoring and readiness. Bespoke control is part of what the lender is being paid to supply.

The quieter benefit is workout capacity.

A lender holding current data and contractually defined levers can decide whether a late customer payment, a missing delivery record or a failed add-back deserves a correction, a reserve, a waiver, a cure, or a very much firmer conversation.

That can preserve a viable operating company.

Private credit has not made you wise.

It has made it considerably harder for you to claim you never received the certificate.

Who Paid for the Stationery

The portfolio company paid first, in cash friction and lost discretion.

Cash dominion applies a day’s collections to revolver debt on the day they arrive, even where the money is redrawn that afternoon for replacement inventory. Field examinations, appraisals, lockbox arrangements, agency administration and more frequent reporting all consume money and management attention.

A quarterly field examination may be charged to the borrower, but its larger purpose is to reduce loss and availability error. The company experiences both purposes, usually on the same invoice.

Junior creditors paid whenever senior controls narrowed the room left for a later negotiation. A second-lien claim cannot assume it may enforce shared collateral on the first-lien timetable, because the intercreditor agreement has already allocated rights, payments, priority and remedies.

Employees and suppliers paid more indirectly, whenever cash was diverted to debt service, availability fell, or a lender’s enforcement options started shaping management’s choices.

Not an allegation of villainy.

Simply how a priority structure works once enterprise value stops accommodating everybody.

So the verdict is neither that private credit abolished covenants nor that bespoke documentation is a sinister substitute for banking.

When U.S. supervisors withdrew the leveraged-lending guidance and returned banks to general safe-and-sound principles tailored to risk, that did not erase the credit agreement, the security documents, the guarantees or the intercreditor agreement.

It left the actual allocation of control exactly where it had always been most operationally alive: in the contract between the people who financed the company and the people who have to run it.

Private credit made that contract more tailored, and frequently more usable in a workout. It also made the negotiators fewer, the information more private, and the consequences for anybody outside the room a good deal less optional.

Not a scandal.

A design choice.

A covenant package is not boilerplate; it is the map of who negotiates from strength after performance breaks.