Fox Legal Training blog

The Provision Kantar Wishes It Had

Sabrina Fox — Thu, 04 Jun 2026 19:00:00 GMT

The Asset Sales covenant doesn't get the attention the Restricted Payments and Debt covenants tend to attract, but the application ofproceeds provisions do a lot of heavy lifting. They determine what the borrower must do with the proceeds of an asset sale, and how much flexibility it has to use them for other purposes.

Kantar's preliminary OM for the 2030 notes is a clear illustration of how much a single provision can change this outcome, so I walked through it in the latest edition of the Primary Market Education Seriesand compared it to the case study deal from our flagship course, the Leveraged Finance Covenant Training.

Kantar's Asset Sales covenant begins in the traditional way. Consideration must be at fair market value, and at least 75% of it must be cash or cash equivalents. The application of proceeds provision itself is pretty lender protective - the borrower can repay certain categories of debt, reinvest in additional assets, or any combination of the foregoing. It can also enter into a binding commitment to do one of those things and then has an additional period to apply the proceeds. The 365 days plus the 180 extension upon signinga binding commitment to apply proceeds is effectively the longest period lenders must wait to see what the issuer is going to do. Following this, if proceeds remain above the Excess Proceeds threshold, they must be offered at par to bondholders.

After that it does get more borrower-friendly compared to traditional high yield bonds (e.g., the ones I drafted in the “baby lawyer days”). Kantar is permitted to apply just 50% of the total amount if it can meet the 4x ratio test, and the other 50% it could apply to other purposes, including to make Restricted Payments. But on its current leverage, it's a ways off from being able to avail itself of this flexibility.

Our case study deal, Modulaire, is a different story altogether. The fair market value requirement is still there, as I'd expect, but the 75% cash requirement is completely removed - so it doesn't apply to any asset sale. The application of proceeds lists a litany of options the borrower can choose from. Two of them are similar to Kantar - a provision around repayment of debt and one around reinvestment in assets. But the third option is far more favorable to the borrower, as it allows those proceeds to be used for Restricted Payments or Permitted Investments. It would need the available RP capacity to do that, and in Modulaire there's quite a lot, so with this provision it could use the proceeds for that purpose straight away.

That one application of proceeds clause makes a huge difference to the outcome. If Kantar had it, the issuer could apply proceeds from the asset sale straight to available RP capacity. As it stands, the only way for it to unlock that RP capacity is to de-lever to 4x or less, or wait for the Excess Proceeds process to play out and see what’s left over.

It's a concrete example of how vastly different outcomes can arise from the presence or absence of one of these provisions - in this case, the option to apply asset sale proceeds to Restricted Payments and Permitted Investments. It's easy to miss, but it determines whether those proceeds are available for sponsor distributions right away or only after a real reduction in leverage.

This is one of the topics we teach in the Leveraged Finance Covenant Training course, our flagship offering for levfin professionals. To find out more, contact us at info@foxlegaltraining.com.

Notes from NCPERS: Pension Trustees Query What’s Actually in Their Private Credit Books

Sabrina Fox — Thu, 28 May 2026 21:00:00 GMT

I recently attended the Annual Conference and Exhibition of National Conference on Public Employee Retirement Systems (NCPERS) in Las Vegas. NCPERS is the leading voice and resource for the public pension industry in the United States. At the event, a packed room of trustees and investment staff from public pensions across the country attended panels and engaged with service providers across three days of programming.

I attended three panels focused on how private markets and related investments are interacting with this industry, curious about how pension fund trustees - most of whom are not trained investment professionals - discern quality among private credit managers pitching their platforms.

There was a clear theme running through each of these panels: speakers were keen to reassure conference attendees that the headlines about private credit and the actual risk sitting in allocator portfolios are not the same.

One speaker walked through the three top risks in private credit, and each of them was a documentation question more than a portfolio question. If you sit on a public pension board or oversee private credit allocations for an institutional investor, these are the points to be clear on, and to press your private credit manager about.

When the deal was done matters

The vast majority of private credit "stress" headlines trace back to a specific vintage of the market: floating-rate loans originated before the Fed raised rates, almost all from 2019, 2020, 2021, and 2022. Borrowers priced their cash flow models around six or seven percent yields. They have been paying twelve or thirteen percent for three years. While that is a key risk area to focus on, it is not the entire asset class.

Legacy vintage loans on floating rates are stressed because rates rose. Future originations are different. If your external manager's book skews to 2021 originations and direct lending, you should know, and there are a list of questions you should be asking. If it does not, the headlines may be entirely irrelevant to you.

Direct lending and asset-backed finance are not the same asset class

The three trillion dollar private credit market splits roughly in half: direct lending on one side, asset-backed finance on the other. They get bucketed together in industry shorthand and on most quarterly reports, but they very behave differently.

Direct lending is corporate credit - cash flow lending against a borrower. These appear in tiered levels of potential risk - ask yourself whether the deal is from a private equity sponsor-backed leveraged buyout. Once that question is ticked off, consider the industry that the borrower is in - software exposure alone makes up around thirty percent of the direct lending market, which is why software disruption risk and private credit risk often end up in the same conversation.

Asset-backed finance is collateral-driven. The lender is underwriting the value of underlying assets: airplanes, equipment, loans, leases, receivables. Some of it is high-quality cell tower paper. Some of it is subprime consumer with effectively zero recovery in default. Asking whether your manager does "asset-backed finance" is not enough. The sub-asset matters as much as the sector.

The liquidity in evergreen and interval funds is a design choice, not a guarantee

Evergreen and interval fund structures are becoming the dominant way pension allocators access private credit. The five percent quarterly redemption cap that defines most of them is not magic. It is engineered around three things: the natural runoff of a three-and-a-half-year average holding period, a liquidity sleeve sitting alongside the credit portfolio, and undrawn credit facilities the fund can tap on a daily basis.

That design works when the three layers actually exist and are sized correctly. It does not work when the fund is over-concentrated in one slice of the market, over-levered against subordinated borrowing, or holding so much cash in the liquidity sleeve that you are paying for private exposure you do not have. When headlines announce evergreen failures over the coming years, this is where those stories will begin.

All three risks live in the loan documents

The documentation is what pulls all of these risks together. The covenant package, the eligibility criteria, the security, the events of default, the call protection, the financial maintenance terms. The 2021 vintage software LBO loan, the subprime consumer ABF facility, the over-levered interval fund: the risks inherent in each one lies in what’s actually in the documents, not in its category label or its quarterly performance report.

The documents are where the risk is. They are also where the disclosure obligations sit, which means they are where a fiduciary should look first when something doesn’t feel right.

What trustee fiduciary duties ask of you

A longtime trustee from Birmingham, Alabama, made a stark point: untrained trustees risk being set up as scapegoats, and I agree with him. Documentation literacy is not just a credit specialist's job. It is a fiduciary one. You do not need to read like a finance lawyer to allocate pension funds to a private credit portfolio, but you do need to know what questions to ask your external managers, and you need to recognize when the answers suggest pockets of risk that put your funds at risk unnecessarily.

This is why we built our allocator education program, and our existing allocator clients tell us they feel more confident engaging in talks with private credit managers. If you sit on a public pension board, run private markets oversight for an allocator, or sit on an investment committee asked to sign off on private credit allocations, this is a discipline worth investing in before the 2021 vintage hits a default cycle.

The Co-op Under Attack: Reflections from our New York Roundtable

Sabrina Fox — Sat, 23 May 2026 00:15:00 GMT

This week I sat down for breakfast with a small group of senior credit professionals in New York. It was the eighth stop in the documentation risk roundtable series, part of the Covenant Exchange initiative. It came after Amsterdam, Los Angeles, Paris, Seoul, Tokyo, Sydney, and Melbourne. New York is the city where the cooperation agreement was born, and it is now the city where the cooperation agreement is starting to come apart.

Up to now, co-op agreements have allowed lenders to build an in-group large enough to resist non-pro rata deals. Now we’re beginning to see what happens when that in-group fragments.

Several recent restructurings have featured the standard pattern but with a twist - a steering committee (which expects to get the best economics), a larger group of general co-op members (signing up so as not to be left behind), and a group of creditors who refuse to join.

This latter group may receive terms better than the standard members because the threat of litigation forces the steering committee to offer enough to make the case go away.

A recent deal showed four distinct tiers of treatment. The original promise of cooperation - that everyone in the in-group gets treated alike - has come apart. This is causing a political problem that’s destroying the co-op from the inside out. When you watch creditors who refused to join the co-op receive better terms than you did, the next time you might not pile in.

The threat of litigation has become leverage in its own right, even if the case never gets filed. When a sponsor is trying to execute an exchange at 95% consent and a sufficiently large group of creditors threatens to sue, the steering committee has a strong incentive to settle.

This isn’t the only threat to co-ops. I’ve written before about how Optimum is putting the question of whether the agreements are anti-competitive before the courts, with facts that are more favorable to the challengers than in Selecta. A finding against the construct in either case could reset the entire framework.

But none of this is a free option. When a borrower files for bankruptcy in spite of the LME, recoveries are reduced and legal fees are spent with no benefit to show for either.

Credit teams now have to decide which path to take long before the situation arises. If you’re not on the steering committee, signing the standard co-op might mean trading certainty for the worst of the eventual terms. Holding out means accepting the litigation risk if the sponsor would rather file than settle. Selling down before the situation develops crystallizes losses but may be the only choice for some lenders - particularly CLOs.

I heard yet again that pushing back on docs has a cost - reduced allocation - that makes engaging with terms in primary a no-win situation. The “negotiation” is starting from looser documents than ever. The agency gap on the primary side is widening at the same time as the holdout story on the secondary side. The two are not unrelated - when primary engagement weakens, the secondary game becomes the only game.

Meanwhile, advisors are pitching solutions to borrowers earlier than ever - and lenders are joining co-ops earlier too. It’s hard to ignore the irony that the documents once designed to protect lenders - to ensure that they receive par back at maturity - have now been weaponized against them, undermining that same promise.

Capsugel's initial terms demonstrate the fifteen-year shift in lender protections – Part 2

Sabrina Fox — Fri, 15 May 2026 21:45:00 GMT

In Part 1, I walked through what fifteen years did to the Optional Redemption, Debt, and Restricted Payments covenants in Capsugel's documentation, comparing the 2011 unsecured bond against the senior secured deal marketed last week. In this part 2, we continue the review of how, provision by provision, the borrower gained flexibility with the loan market's fingerprints all over the bond.

Below I review key changes to Asset Sales, Change of Control, and a handful of individual differences and defined terms. As before, I'm not going to tell you whether these terms are good or bad. Instead, my intention is that when the next preliminary DoN lands on your desk, you are equipped to decide which terms stay and which are worth resisting.

Asset Sales – The box springs a leak

Think back to the box from Part 1 – the idea that some portion of value stays inside the restricted group for the benefit of lenders. The Asset Sales covenant also protects those walls, and it’s developed some leaks.

In 2011, proceeds from an asset sale had somewhere value accretive to go. The borrower could repay senior debt, reinvest in the business, or fund capital expenditure. If it did none of those things within 450 days, the leftover cash - Excess Proceeds - had to be offered to bondholders at par. Restricted Payments were not on the menu. You could not sell an asset and use the cash to pay dividends.

In 2026, subject to Restricted Payments capacity (see Part 1), you can. The application of proceeds litany now includes Restricted Payments right alongside debt repayment and reinvestment, an option at the borrower's sole and absolute discretion. The old version was more like a one-way valve – value didn’t leave, it got redistributed within the box. This single change turns the valve into a door, and the borrower holds the key.

That’s not all. The portion of proceeds required to be offered back to bondholders now steps down with leverage - just like the mandatory sweep in a leveraged loan. Above 4.65x senior secured net leverage, the full amount is swept. Between 4.40x and 4.65x, half. Below 4.40x, nothing at all - there is no offer. On top of that, the reinvestment runway stretched from 450 days to 545, with two further 180-day extensions available if the borrower has signed a commitment. Add in the declined and waived amounts that loop back into the Restricted Payments baskets, and the picture is complete: asset sale proceeds in this deal are far more likely to leave the box than to stay in it.

Change of Control – Mind the backdoor

Change of Control protections are amongst the most sacred to lenders. If the company is sold, or someone takes a majority of the voting stock, bondholders get the right to revisit their investment decision - if they don’t like the new owners, they can put their bonds back at 101%. On its face, in Capsugel's 2026 deal this remains.

Mostly.

The 2026 documentation carves a long list of Permitted Transactions out of the Change of Control definition entirely - holdco insertions, debt pushdowns, IPO pushdowns, tax restructurings and the steps that go with them. A sponsor can move the structure around above the issuer, and provided it travels through one of those defined channels, no put is triggered. On the whole, I’m not too bothered.

However, if the Merger covenant is the channel of choice, the picture looks a bit different because it has been loosened as well. The financial test that used to stand as a condition for an issuer-level merger is just gone - the relevant clause reads "reserved" - a clue that some protection has been removed. The menu of jurisdictions a successor entity can be incorporated in grew to include the United Kingdom, Japan, Australia, Switzerland and Norway. If a transaction is structured within the Merger covenant, no Change of Control.

None of this means the put will never pay out. It means the put protects against a narrower set of facts than it appears to, and the gap between what it looks like and what it does is much wider than before.

The Rest of the Story – Small print, real consequences

Let’s not forget defined terms and a handful of other important differences…

Start with EBITDA, because EBITDA is used for every ratio and soft cap, so a generous EBITDA definition loosens capacity across the covenants. The 2011 deal let the borrower add back cost savings from actions taken within twelve months. The 2026 deal extends that window to thirty-six months, adds in "Approved Adjustments" drawn from the offering memorandum and any quality of earnings report without further diligence, and even contemplates adding back the projected value of contracts the borrower hopes to win. Every one of those additions makes the same EBITDA figure bigger, and capacity in the deal moves with it.

Then there is the slow disappearance of guarantees. The trigger that forces a subsidiary to guarantee the bonds was narrowed so far that a subsidiary can guarantee a good deal of the borrower's other debt without ever guaranteeing yours. An investment grade rating, even if it comes and then goes, can still release operating company guarantees on the way through.

Finally, look at who controls the bonds in a stress scenario. The 2026 deal introduces Net Short provisions, which can disenfranchise a holder who is hedged or short, and a close-out mechanic that treats a 75% tender as binding on the remaining 25%. Neither existed in 2011, and both shift bargaining power away from a dissenting minority and toward the borrower and the majority.

Part 2 Conclusion: The prelim is the opening position

Let’s think back to how this comparison started. Everything I described across both parts came from the preliminary description of notes, and several of the most aggressive terms were pared back before the deal was priced. The contribution debt multiple, the ability to draw debt capacity from the Restricted Payments covenant on a 2x basis, the carry-forward on the 10% at 103% basket - all negotiated out by lenders.

That is the lesson, and it is a hopeful one. These terms are not handed down from on high. They are negotiated documents, and the borrower and its sponsor understand every line of them. The lender who understands them just as well is the lender who gets to push back.

Take the next preliminary draft you read as an opening position, not the final word.

Capsugel’s initial terms demonstrate the fifteen-year shift in lender protections

Sabrina Fox — Fri, 08 May 2026 17:30:00 GMT

We keep hearing that covenants have erodedover the past 15 years, but how many of us know what that really means in practical terms?

Apart from the rhetoric about the danger sof flexible terms, and the very clear and present risk of liability management transactions, we rarely have the opportunity to see precisely how far terms have shifted from the market standard in place a decade and a half ago – until now.

In a recent conversation with a market veteran, I was reminded that Capsugel, which just issued a senior secured bond, actually debuted on the high yield market back in 2011. Though that issuance was unsecured, this is one of the least interesting differences between the covenants in that 2011 bond and the one that was marketed last week.

I chose the word “marketed” carefully – as some will be aware, the covenants were tightened significantly during the road show. The initial suite of contractual provisions were tilted significantly in favor of the borrower, including a two-year non-call on a seven-year maturity.

While several provisions were pared back in the end, the preliminary description of notes reads like a who’s who of sponsor terms and inspired me to describe the precise implications of these additional flexibilities. My intention is to provide context to lenders for when they’re reviewing the next deal – the terms that were changed, and every other term in the preliminary DoN, are always up for negotiation.

Let me tell you why it matters – in two parts. Part 1 will cover Optional Redemption, Debt, and Restricted Payments. Part 2 will cover Asset Sales, Change of Control, and various other individual differences.

Optional Redemption – Investors protect their economics

Let’s start with optional redemption provisions, in part because these economic protections are some of the most important to high yield bond investors. The headline difference was the shortening of the non-call period from 3 years to 2 on a 7-year bond.

One year might not seem like much, but it hits the bottom-line returns for every investor. This is a battle that investors have been holding the line on for years, and despite the continued convergence between loans and bonds, the non-call protection has remained by and large intact – for now.

But that’s not all that shifted over the years – as the Capsugel case study shows, the equity claw increased from 35% to 40% so long as 60% remain outstanding (or 50% in deals with a 10% at 103% provision).

On top of that, language has made its way into many deals that would allow the borrower to combine this provision with the make-whole to achieve a cheaper blended redemption price (look for the words “redeemed substantially concurrently”).

And this story would not be complete without mentioning that bastion of a frothy market, the 10% at 103% redemption provision, which allows the borrower to redeem up to 10% of the bonds (either outstanding or original principal amount, the latter being more borrower friendly) at a price of 103%.

The provision wasn’t present at all in the 2011 deal, and Capsugel’s most recent offering marketed a provision that would also allow the borrower to carry over amounts not used in any given year (though this particular aspect was removed).

Debt Capacity Reaches New Heights – Loan convergence continues

The Debt covenant has certainly evolved compared with its humble beginnings.

In 2011, Capsugel’s Credit Facilities basket contained a simple hard cap – no grower, no ratios. The most recent deal, on the other hand, incorporated several distinct fixed-and-grower baskets in addition to a range of ratio tests stacked on top of each other. It’s a formulation that’s very familiar for high yield bonds these days and mirrors the approach taken in most broadly syndicated loans.

The other loan concept that made its way into bonds is the ability for the borrower to draw in debt capacity from the Restricted Payments covenant. In Capsugel, this aspect of the Debt covenant didn’t exist at all in the 2011 deal, yet in 2026 it was not only present, it was marketed on a 2x basis (that is, for every 1 unit of Restricted Payments capacity, the borrower could incur 2 units of debt).

This 2x aspect was the key difference between the Contribution Debt baskets in the 2011 deal versus the 2026 deal. For each of these two baskets, the final terms reduced capacity to 1x.

The ability to calculate capacity other than at the time of debt incurrence is another notable shift between the 2011 and 2026 bonds – the concept of the Reserved Indebtedness Amount made its way into the typical high yield covenant package and allows the issuer to establish a high water mark for debt incurrence any time it receives a commitment to incur debt.

The result: when it comes time to actually draw down on the commitment, it doesn’t matter whether the calculations would permit it – the capacity has already been grandfathered by this provision.

Restricted Payments – We’re not in Kansas anymore, Dorothy

Of all the provisions in the comparison, the Restricted Payments covenant has shifted the most. Not only has dividend capacity increased and become more easily accessible – even when the borrower is stressed – but the convergence with loans is most readily apparent.

Back in what I lovingly call the “baby lawyer days” when I was learning about high yield covenants, I remember being taught that the builder basket was designed around a bargain struck by the borrower and lenders (largely to benefit sponsors) – half of cash profits could be distributed to junior stakeholders or outside of the restricted group, but half would stay in “the box” for the benefit of lenders.

That’s what the 50% Consolidated Net Income metric is designed to proxy for – if you read the definition, you’ll notice lots of exclusions of non-cash inputs (among other things). This is not your balance sheet net income figure, and it would be reduced by 100% of losses, holding sponsors accountable should cash profits fail to materialize.

As the builder basket would become the most significant source of capacity over time, it would be subject to some conditions, or guardrails as I like to call them: the borrower could not be in default or have an event of default outstanding, and would have to comply with a 2x fixed charge coverage ratio (or whatever ratio the ratio debt basket in the Debt covenant employed).

Capsugel’s terms illustrate clearly how far these provisions have shifted in favor of the borrower and sponsor. First, the builder basket no longer reduces from losses at all – it will build from 50% of CNI plus some other standard components, plus a starter amount and some Asset Sale concepts (also fairly new). If there are losses, these will be counted as a zero on a quarterly basis – meaning that the 50% CNI builder never gets dinged by losses.

Then there’s the guardrails – the 2011 deal contained the two standard ones, while the 2026 deal watered them down to such an extent that the borrower need not comply with any condition at all in order to make investments (including to Unrestricted Subsidiaries).

The 2026 deal also includes additional Permitted Payment baskets and concepts that weren’t even invented in 2011 – the ratio-based Restricted Payments clause, Restricted Payments based on the Available Amount (another loan concept), and more Restricted Payments derived from Asset Sale concepts.

In all, the Restricted Payments covenant is unrecognizable in its current form, and that traditional bargain struck all those years ago has dematerialized, leaving a very sponsor-friendly source of dividend and investments capacity in its place.

Part 1 Conclusion: The additional flexibility is instructive

I am not saying any of this is intrinsically good or bad – contracts are neutral documents on their own. What I am saying is that this borrower, and many others in the leveraged finance and private credit markets, have vastly more flexibility and capacity to take actions under their contracts than they ever have before.

The well-informed lender is well served to understand and absorb these shifts – because you can be sure that the borrowers and their private equity sponsors know this very well.

The boiling frog: documentation risk meets the Australian market

Sabrina Fox — Tue, 05 May 2026 18:45:00 GMT

On the last day of April, I sat down for breakfast with a small group of senior credit professionals in Melbourne. It was the second of two Australian sessions in the documentation risk roundtable series, part of FLT’s Covenant Exchange initiative. It was the sixth stop after Amsterdam, Los Angeles, Paris, Seoul, Tokyo, and Sydney.

The boiling frog metaphor came up again here, having surfaced initially in Sydney. It is true that Australian documentation has a stronger starting point than the US or the UK. On top of that, director duties, the bias toward bank lending, the reluctance of the local market to tolerate aggressive sponsor behavior, the memory of Healthscope, and the moral weight that the four-pillar banking system places ondoing the right thing all combine to give Australian lenders meaningful protection.

But none of it is a guarantee. Erosion happens little by little, each individual concession appearing reasonable at the time. The concessions accumulate, just as they have in the U.S. and European markets. By the time anyone notices the temperature has changed, the protections that everyone assumed were there have already disappeared.

And this is not hypothetical - it is already happening at the top end of the private credit market. Global private equity sponsors coming into Australian deals are pushing for the same flexible terms they get everywhere else. Some of those terms are resisted, but some of them make it through. And the Australian mid-market, where stronger documentation still exists, is just at the margins of a market that has already invited in global sponsor terms.

This is important, because as one practitioner in Melbourne noted, you only need one loophole. You don’t need fifty. A document that looks water tight but contains a single uncapped basket can be enough for a motivated borrower to dispose of every meaningful asset through repeated transactions, each one falling under the basket, each one technically permitted. Documentation discipline isn’t about closing every loophole. It is about closing the ones that actually matter, and being willing to walk away if they remain.

Having said that, the Australian market has already pushed back against a deal in which a sponsor used embedded flexibility. Brookfield attempted to release collateral at Healthscope by restructuring a subsidiary, and the response from the Australian lender community was firm enough that the transaction was unwound. No significant liability management exercise has been attempted in the Australian market since. That was partly due the legal framework, as collateral provisions that do not auto-release on permitted transactions and director duties that act as a brake on aggressive board decisions. It is also partly the cultural backdrop of the market - the same market participants see each other across deals over the years, and a sponsor who behaves badly in one transaction will find capital raising harder in the next one.

There are work arounds. Some Australian companies, mostly in resources, have raised through the Nordic bond market in recent years specifically because it offers covenant-light terms that the local market would not accept. The yield is high, sometimes fifteen percent, but the absence of maintenance covenants is worth the cost to a borrower with cyclical cash flows.

A stress event in private credit has not yet arrived in any of the cities Covenant Exchange has visited thus far. Melbourne agreed with Sydney that when it does, the managers applying strict governance - doing daily mark-to-market valuations, holding the line on maintenance covenants, and saying no when capital is chasing them - will look very different on the other side of that event from those who did not hold the same line.

Australia - and other cities on my APAC tour - has a different market structure offering real protections that the U.S. and European lenders cannot rely on. However, the risk is treating those protections as a substitute for documentation discipline rather than asupplement to it. The frog doesn’t notice the temperature is changing until it is too late.

Documentation gets you to the table. Position decides what you take home.

Sabrina Fox — Thu, 30 Apr 2026 21:30:00 GMT

This week I convened a Covenant Exchange roundtable in Sydney. Participants from private credit, super fund, family office, asset management, and legal shared views on documentation risk, and the conversation ranged across jurisdictions and case studies. The repeating theme, which we’ve seen at each of these events, was that documentation matters, and so does everything that sits on top of it.

The most striking case study came from a high-profile Chapter 11 of an Australian-headquartered healthcare business with US operations. Lenders who thought they were lending to an Australian company with US assets ended up in a Chapter 11 process they had not modeled, governed by a roll-up structure many had never experienced. New money came in at the top of the stack and existing debt that participated in the roll-up moved up with it - everyone else was left behind.

One attendee shared their fund's experience. They were in the deal for years and when the workout began they were not the largest holder, but they got onto the ad hoc group early through long-standing relationships with funds leading the process. They took the roll-up, took an equity piece, and have now recovered above par. Other Australian lenders called them looking for information. Some had already sold at distressed prices. CLO holders had been forced out by ratings-driven concentration limits before the recovery story even started. The lesson: Reading the documents told you what was possible, but knowing the right people told you what was actually going to happen.

The conversation shifted to cooperation agreements. In the US and Europe these have become one of the strongest tools lenders have, and the sponsors know it. Patrick Drahi is suing co-op lenders for anti-competitive behavior in connection with the Optimum LME. Selecta is another active case.

The tool is being attacked on another front as well - sponsors are inserting anti-coop provisions into credit agreements. Some are drafted broadly enough that, on one reading, lenders coordinating to call an event of default would be in violation. I am hoping 2026 brings final decisions on the merits rather than another round of settlements.

What was unique about the Sydney conversation was the structural counterweight Australia still has. Banks tend to hold senior secured deals from cradle to grave. White lists, a smaller market, and APRA oversight reinforce a culture where deteriorating terms get pushed back are less likely to take hold. ASIC and APRA are now scrutinizing retail-facing private credit funds on governance, mark-to-market practices, and the use of waivers to keep defaults off balance sheets. Regulators will make public examples of those falling afoul of these warnings.

But the global money is here, and global terms travel with it. One participant predicted that the first big Australian LME may come from a founder-owned business. As Europe learned the hard way, when permanent reputational damage is the cost of staying alive, founders make different choices than fund managers do.

For the allocators in the room, the conclusion of the conversation was that knowing your private credit manager has documentation discipline is not the same as knowing they will be on the right side of the table when the workout starts. Ask about the protective terms they require, and ask how they got onto the last ad hoc group they were part of. The answer will tell you more than the IM ever will.

Tokyo Investors See Europe Through a Documentation Lens

Sabrina Fox — Thu, 23 Apr 2026 17:45:00 GMT

The LMA's first Tokyo conference welcomed over 300 people to hear from European credit managers and Japanese LPs. Documentation was center stage, and in this market it matters at two levels: the loan agreements between borrowers and lenders, and the CLO indentures between issuers and noteholders. Japanese investors are paying attention to both.

Loan documentation and the LME divergence

At the loan level, the US and European markets look similar on the surface but behave differently under stress. Same collateral pools, same sponsor universes, often the same lenders. The divergence shows up in liability management.

One panellist estimated US LME activity at around $45 billion in 2025. European activity was a fraction of that, and panellists said the reasons were structural. They pointed to Europe's multiple bankruptcy jurisdictions rather than one. Director duties were described as stricter, with criminal exposure possible in Germany, France, and the UK. Restructuring tools like schemes of arrangement meant Chapter 11 equivalents were not the only route. European LMEs that had happened were characterized as more consensual. Panellists expected courts to reject transactions designed to abuse minorities.

The effect is that senior secured loan documentation in Europe holds up better when borrowers get into trouble. The covenants mean more because the enforcement environment backs them up.

CLO documentation and what Japanese AAA buyers police

A Japanese CLO investor mediates their exposure to the loan book through the CLO indenture: eligibility criteria, OC and IC tests, WAL tests, reinvestment rules, diversity score requirements, step-up conditions for upgrades. That is the documentation they actually negotiate.

The Japanese investor panel walked through how they evaluate managers. The qualitative lens came first: team stability, investment philosophy, key-person risk, which panellists described as heightened in Europe because platforms often run with a single PM and single-digit analyst teams. The quantitative lens came second: style consistency and whether that style delivers both senior returns and equity distributions.

The third lens was the one I found most interesting. Senior investors expect managers to accept their CLO documentation requirements. For AAA buyers, structural robustness is governed by the indenture, so a manager unwilling to meet docs standards is unlikely to win a long-term relationship. The investor panel described this as relationship-driven and long-term: managers who share their investment philosophy and accept their documentation standards get repeat business.

The 2028 software maturity wall

One panellist commented that around $200 billion of software debt matures in 2028 or earlier across US and European loans, high yield, and private credit - and this is the scenario where both loan-level and CLO-level documentation discipline matter.

CLO manager panellists said amend-and-extend was the base case for performing names. Terminal value is hard to underwrite while AI's impact on software business models is still being priced, and forcing restructurings on businesses that are currently cash-generating would crystallize losses that might not need to be taken. Several framed the renegotiation window as a chance for lenders to take back control of borrower cash flows: sweep the cash the business is generating now, and tighten covenants as the price of the extension. That is where loan-level documentation is critical.

The CLO-level question is what happens to portfolios holding those loans while the renegotiations play out. Triple-C buckets, WAL tests after resets, recovery assumptions on defaulted software names where collateral is thin - all of these are governed by the CLO indenture. Panellists noted European CLO portfolios already carry lower Triple-C concentrations than the market overall because managers have been selling tail risk earlier rather than waiting for restructuring outcomes. That is where CLO-level documentation operates.

Panellists put tech at roughly 8% of the European loan market, around 20% of US BSL, and 30-35% of US private credit. Some European direct lending funds were described as 75% software. The exposure is uneven by manager, so the 2028 conversations will play out differently across platforms - bringing differentiation across both levels of documentation discipline to light.

The LMA's inaugural Tokyo conference looks set to be an annual event, and I am excited to see how these themes develop in 2027.

Japanese Covenant Discipline Is Structural

Sabrina Fox — Wed, 22 Apr 2026 13:45:00 GMT

The Japanese LBO market still has what disappeared from the US and European markets a decade ago: a commercial bank on the senior piece and a maintenance covenant still in the deal. Last night at the Andaz in Tokyo, we sat down for the second Covenant Exchange dinner of this APAC run to work out how long those things will hold. I was delighted that the conversation went deep into Japanese market structure - I had so much to learn.

The most striking observation of the night was that Japanese LBO senior loans still sit primarily on commercial bank balance sheets. That single structural fact produces a lot of downstream discipline. Maintenance covenants survive. Two-year holidays and loosened measurement mechanics are creeping in, but the quarterly temperature check is still there. The private debt funds that have reshaped US and European deal terms have not taken the senior piece of the Japanese LBO market. When they try to compete, they meet commercial banks that are eager to lend and can refinance the LBO loan with cheaper corporate credit two years in.

Corporate bonds are a different story. The room explained that Japanese corporate bonds historically have no change of control protection at all. Change of control is one of the most tried and true promises in a Western credit document. In Japan it has been almost entirely absent from listed bonds. The fact that this has not produced damage is a function of the market structure around them, not the documents themselves.

That is starting to shift. The Japan Securities Dealers Association issued guidelines in 2025 requiring underwriters to verify change-of-control and reporting covenants on certain rated issues, and the Ministry of Economy, Trade and Industry’s interim report on the future of the corporate bond market, published the day before our dinner, proposes amending the Companies Act to make bondholder consent easier to gather and to lower the ¥100m minimum investment unit that has kept smaller institutional investors out of the market. These are the types of developments that Covenant Exchange will monitor and table for future discussions.

What runs through both observations is that Japanese documentation discipline rests on who holds the debt and what the holders value, more than on what the contracts themselves say. That is a real answer to a question I have been asking all year. In our Seoul conversation last week, the discussion settled on documentation as a governance problem rather than a legal one. Tokyo built on that idea. The governance here is structural, established in the main bank system, cross-shareholdings, reputational weight, and a government posture that has historically preferred capital injection to creative destruction.

Two pressures are now working against that structure. Western sponsors are active in Japan and bring their playbooks with them, and the room was clear that refusing their terms is not a realistic posture when the next lender in line will accept them. Private equity is also flowing into succession-driven deals as an aging population produces a long queue of founder-led companies without a clear next chapter. The Toyota Industries buyout came up as a live example, with US hedge funds taking activist positions.

Will Tokyo’s structural covenant discipline hold as foreign capital and foreign terms push harder, or will the documents eventually have to do the work that the institutions have been doing for them? The question is certainly not settled and Covenant Exchange will be back.

Arc of the Covenant: Dispatches From Seoul Advocate for Documentation Discipline

Sabrina Fox — Thu, 16 Apr 2026 11:30:00 GMT

I was delighted to attend the PDI Seoul Forum this week. Two hundred and fifty attendees, fourteen countries, and a program built around the question every allocator in the room was already asking. What is behind the recent private credit headlines, and should it change how capital gets deployed from here?

The headlines had done the work of setting the mood. Recent high-profile defaults at names that had been passed around the lending market for years. A blown merger and redemption queues at one of the largest open-ended vehicles. BDC trade-downs after the US rate cuts. Morgan Stanley forecasting 8% defaults. The chair of a major US bank telling the market that where there is one cockroach, there are more.

Inside the room, the tone was more measured. Every panel reached the same conclusion within the first ten minutes: these are retail-structure and manager-selection problems, not asset-class problems.

One European manager cited two decades of internal loss data showing their junior credit losses running at roughly a ninth of market rates. Another panelist pointed out that the ten largest global managers have 30 to 40% portfolio overlap with each other, which makes allocating across them a concentration trade dressed as diversification. On the cockroach point, one GP noted dryly that one of the deals in question was originated by the very bank now warning about infestations.

The diagnosis was widely shared. The fixes all circled back to documentation.

Some compelling numbers from CEO Cate Ambrose’s presentation of the Global Private Capital Association report “Private Capital Outlook: Assessing Opportunities Beyond the U.S.” (in the blog image):

Cov-lite share outside the US and Western Europe runs at 2% of transactions. In US mid-market it is 25%, and in the US broadly syndicated loan market it is 90%.
Fund-level leverage 0 to 20% in the same non-Western sample, against roughly 100% on the Cliffwater Direct Lending Index for US middle-market loans.

A US manager warned that recoveries on cov-lite large-cap deals will disappoint when the cycle turns. Another panelist made the point that EBITDA definitions permitting 30% pro-forma run-rate add-backs render covenant cushions largely decorative. The work, then, is in the drafting. Covenant cushions, EBITDA definitions, fund-level leverage, and side letter terms carry the real risk.

The Asian LP angle matters here. A government strategy academic previewed a more risk-tolerant Korean policy environment, including direct capital-market routes and tax-deferral structures tied to growth-fund investment. A senior allocator described a deliberate tilt toward European mid-market and secondaries, citing structural features rather than yield-chasing. A European fund-of-funds shared that its private credit book runs roughly 30% Europe and 70% US, with a migration toward lower mid-market where spreads still compensate for the work involved. Korean LPs are asking sharper questions about FX hedging, side letters, and EBITDA definitions than the market gives them credit for.

Three takeaways for credit documentation specialists:

The default conversation has moved past “will defaults rise” to “what will recoveries look like.” That is a covenant question.
Cross-manager portfolio overlap at the top of the market means single-deal documentation analysis can understate portfolio-level risk. LPs holding multiple large funds may be underwriting the same borrowers several times over.
AI disruption risk in software credits is a maturity-wall and covenant-cushion question. Most at-risk names can adapt, but they will refinance on terms that matter to lenders.

The consensus in Seoul was that the next twelve months will reward managers who can read documents and penalize those who cannot. That is the conversation Arc of the Covenant was built for.