In private credit, covenants serve as functional tools for risk management. Maintenance covenants provide early warning signals, and incurrence covenants prevent actions that increase lender risk.
Covenant use shifts with borrower size. Maintenance covenants are more prevalent with smaller borrowers, while incurrence covenants are the primary guardrails as companies grow.
Strong documentation and lender vigilance matter more than the mere presence of covenants.
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