The loosening of covenants in private debt deals is clearly a product of growing competition.

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The loosening of covenants in private debt deals is clearly a product of growing competition.

A similar trend is being seen in the US, where the balance has also shifted from lender to sponsor/borrower according to data gathered by Street Diligence, a New York-based firm providing analysis of covenants in bank loans and high-yield bonds. One example of this is the increasing use of equity cures, where the sponsor can inject cash to head off the threat of a financial covenant breach, with the cash treated as EBITDA. In some cases, this can allow sponsors to extract cash from the balance sheet in the form of special dividends while still adhering to the provisions set by the lenders – a case of operating within the rules but not exactly in the spirit of the rules.

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