In private credit, the covenant is the product

Ask most allocators how a private credit manager is performing and they will quote you a yield. It is the wrong question, or at least an incomplete one. Yield is the compensation; documentation is the asset.

What "covenant-lite" actually transfers

A maintenance covenant is a scheduled conversation. It obliges the borrower to demonstrate, quarterly, that the business still resembles the one you underwrote. When it is breached, you get a seat at the table while the enterprise still has value to negotiate over.

Remove it, and you have not merely loosened a term — you have exchanged an early warning system for the right to be informed after the fact. In a deteriorating credit, the difference between intervening at four turns of leverage and intervening at six is very often the difference between par and a restructuring.

Spread compensates you for the risk you can see. Documentation determines what happens on the day you were wrong.

The definitions that matter more than the headline

Where value quietly leaks is rarely the covenant level. It is the definitional architecture underneath it:

• EBITDA add-backs. Uncapped, unaudited synergy add-backs can manufacture a full turn of headroom out of a spreadsheet. We cap add-backs and require them to be run-rate verifiable.
• Permitted investments and restricted payments. The mechanism by which collateral leaves the box you lent against. We have declined otherwise attractive credits over unlimited investment baskets in unrestricted subsidiaries.
• Equity cure rights. Reasonable in principle. Unlimited in frequency, they convert a covenant into a formality.
• Collateral release triggers. Frequently buried, occasionally decisive.

The cost of the position

Holding this line has a price and we should be honest about it. We are outbid regularly. In competitive processes, a sponsor choosing between two funds at similar pricing will take the looser paper almost every time, and they are not being irrational — they are buying flexibility with someone else's downside.

Our answer has been to concentrate on the part of the market where documentation is still negotiated on the merits: mid-market operators between $8m and $60m, frequently non-sponsored, where we are the relationship rather than one of eleven lenders in a syndicate.

It is slower to deploy. Our realised loss rate since inception is 0.31%. We think those two facts are the same fact.