By Matt Tracy
(Reuters) -A growing number of U.S. companies are seeking more flexible covenants in their credit agreements to increase their debt loads while avoiding approvals from all their existing lenders, according to a new report by ratings agency Moody’s Ratings.
Moody’s said in a report released on Thursday that U.S. corporate borrowers with weaker credit profiles were leaning harder on their lenders to get more flexibility in agreements to take out more debt without full consent from existing lenders, as they struggled to issue new debt in public markets.
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Deals with covenant changes that ensured a boost to a company’s capacity to raise more debt – whether for opportunistic purposes or to avoid liquidity crunches – amounted to as much as 40% to 300% of their EBITDA, according to Moody’s.
Such dramatic debt load increases present a major credit risk to existing lenders, especially when borrowers’ private equity sponsors use the added debt for dividend recaps, add-ons and acquisitions, the ratings agency noted.
Borrowers on several recent deals have sought more flexible covenants to allow this greater debt capacity, it said, adding that 10%, or nine of 89 credit agreements, have done so between the start of 2024 and May 2025.
All of the 10% involved PE-backed borrowers, the report noted. They included the initial proposed term sheets for debt that was funding PE firm Turn/River Capital’s leveraged buyout of IT systems provider SolarWinds in March, and KKR’s leveraged buyout in May of derivatives market software provider OSTTRA.
These recent deals point to a growing trend of borrowers’ “unfettered access” to debt, even those in financial distress, Moody’s highlighted, as lenders in the public debt market face ever fiercer competition from lenders in the expanding private credit market.
(Reporting by Matt Tracy in Washington; Editing by Matthew Lewis)
