Private credit is starting to look a lot more like Wall Street. Direct lenders are increasingly agreeing to “covenant-lite” terms — loans with fewer financial restrictions and tests; once the preserve of leveraged loans — as they compete for large, high-quality borrowers, Bloomberg reports. Safeguards that helped private credit sell itself as safer than banks are quietly being dropped.

This marks a break from the model: Traditional private credit relied on maintenance covenants — regularly tested leverage limits that allowed lenders to step in early when debt rose. This approach has also been safer for their balance sheets — private borrowers are estimated to have a default rate of around 2-3%, lower than for leveraged loans made by banks.

Now, large sponsors with leverage are pushing for looser documentation, and lenders are conceding to secure mandates.

By the numbers: S&P data shows middle-market collateralized loan obligations now allow up to 25% covenant-lite exposure, up from about 16% in 2021 — weakening protections beyond marquee transactions.

Lawyers now expect the trend, which is now appearing regularly in upper-market private credit transactions, to accelerate this year, according to the business news information service.

Not everyone is playing along: Some lenders say they still walk when terms slip too far. “We are not afraid to walk away from [agreements] where we are not comfortable with the documentation,” wrote ICG Managing Director Peter Lockhead. But for now, the direction of travel is clear: to secure agreements, private credit is giving up what once made it different.

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