Exploring the Implications of Maintenance Covenants in Traditional Private Credit

In the realm of Traditional Private Credit, maintenance covenants play a crucial role. They serve as leverage limits that are frequently assessed. With the breach of these limits, various actions can be sought from the lender’s side. This could range from requiring an equity injection from shareholders or private equity owners to pressuring them into asset sales that favor lenders. The lender could also compel the borrower to provide additional collateral.

What Happens When a Borrower Breaches Their Limits?

A breach in the maintenance covenants can trigger different scenarios based on the lender’s preference. If they favor debt restructuring, that could come into play. Alternatively, the lender may even wish to take control of the company. In such cases, a covenant breach marks the inception of this process.

Fallout of a Covenant Breach

The repercussions of a covenant breach in traditional private credit are extensive. It can impact the business operations, potentially triggering asset sales or requiring the infusion of additional equity from shareholders. This could lead to a significant shift in the company’s financial structure and control.

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