Private credit funds, flush with cash and competing more intensely to win lending business, are increasingly giving up key safeguards that protect them in tougher times, Bloomberg News reported. About 20% of private loans in the third quarter had lending agreements known as “covenant-lite,” giving creditors fewer ways to trigger bankruptcies or other restructurings for companies that fall into distress, according to investment bank Lincoln International. That’s up from 10% a year ago. And loans offering lenders better protections with two covenants fell to 30% from 50% over the same period. The shift is making the debt look more like syndicated loans that banks sell to investors, but for lenders there’s a key difference: in the syndicated market, money managers end up with just a slice of any loan, sharing risk with dozens of others. In private credit, lenders including standalone funds and credit arms of buyout fund managers like Blackstone Group Inc. or KKR & Co. make much bigger bets in every transaction as they hang onto the loans, leading to more potential losses if even one borrower falls into trouble.
