Financial maintenance covenants have a greater presence in smaller private credit loans than larger ones, based on Moody's recent analysis of 28 private credit loans that business development companies originated from January 2022 through September 2023.
The rating agency, which also examined 15 broadly syndicated loans, notes that maintenance covenants became largely absent in these types of loans.
Generally, private credit loans' permitted addbacks to EBITDA (e.g., run-rate cost savings) are lower for smaller loans. For loans of less than $250 million, a combined 34% of the companies capped addbacks at 20% and 25% of EBITDA, and 50% were limited at 30% of EBITDA. For loans greater than $250 million, 50% capped addbacks at 30%, and 45% limited the amount to 35%.
For broadly syndicated loans, nearly half of companies, 47%, had no cap on adding back to EBITDA.
Look-forward periods, the time that certain EBITDA benefits can get accelerated and added to the figure, are shorter for smaller private credit loans. For loans of less than $250 million, permitted addback periods were 15 to 24 months. About two-thirds were 15 to 18 months. Loans greater than $250 million had the majority, 64%, receiving a 24-month addback window.
For broadly syndicated loans, 40% had an 18-month window, and 20% had 36 months.
