We recently reviewed a US first lien TLB/RCF credit agreement in connection with a refinancing and dividend recapitalization whose original terms managed to raise a few eyebrows. In this special report, we reflect upon the more notable provisions that were subsequently modified by the borrower.

A word of warning for our readers. These pushbacks should not be viewed as the dawn of a new day for lender protections, but as a Pyrrhic victory. Even with the revised terms, the resulting covenant package, coupled with unmodified borrower-friendly financial definitions, basket high-water marking, covenant testing optionality, affords lenders with limited protections against value leakage, collateral dilution and the incurrence of structurally and effectively senior debt.

The original covenant package and subsequent revisions reflect a trend in US and European leveraged finance whereby sponsors and their advisors continuously test the limits of investor and lender risk appetite by throwing increasingly aggressive terms against the wall to see what sticks. The result, even in instances of targeted lender pushback, is the inexorable march of the “market standard” towards the covenants-in-name-only end of the spectrum.

Hopefully, lenders will not need to wait until 2037, the next scheduled super blue moon, for additional investor-friendly recalibration of terms.