Covenant Package

Definition

Covenants are contractual terms that restrict borrower actions (negative covenants) or require certain financial conditions (affirmative covenants). They can include leverage limits, interest coverage requirements, reporting obligations, and restrictions on asset sales or additional debt. Covenants matter because they influence lender control and recovery outcomes when a borrower deteriorates. Allocator Context Allocators evaluate private credit not only on yield, but on downside protection. Covenant strength is a key contributor to that protection. Covenant-lite structures may offer higher spreads but can reduce lender leverage in restructurings and increase loss severity. Decision Authority Loan documentation and covenant standards are often reviewed during diligence for private credit strategies. Institutions may require confidence that underwriting and documentation practices are consistent and not weakened for deal volume. Why It Matters for Fundraising Private credit managers should explain their covenant approach: what is standard, what is non-negotiable, and how they handle competitive pressures. Allocators are sensitive to managers that sacrifice documentation quality to maintain deployment pace. Key Takeaways A primary driver of downside protection Covenant-lite structures increase loss risk Documentation discipline matters to institutional LPs Underwriting quality includes legal terms, not just credit metrics