Stephanie McCann discusses fallaway covenants in private credit with LevFin Insights

Stephanie McCann spoke with LevFin Insights about the emergence of “fallaway covenants” in private credit documentation and how lenders are responding to increasingly aggressive sponsor requests.

Fallaway covenants can allow financial maintenance covenants to fall away once a borrower reaches a specified metric, such as an EBITDA threshold, effectively converting a covenanted loan into a cov-lite facility.

“This is an up-market ask by sponsors,” Stephanie told LevFin Insights. “In the middle market space, our lenders are not agreeing to this ask.”

Stephanie also discussed how lenders are approaching financial covenants amid competitive deal dynamics. “From an investment committee perspective, they often need one financial covenant in the loan documentation,” she said. “In order to be competitive, they are agreeing to cov-wide with no step-downs. In practice in a down-side scenario, the borrower/company is going to face liquidity issues before they trip the financial covenant.”