Financial Covenants in Private Credit Transactions: Leverage Ratios, Covenant Design and Risk Allocation

This article, “Financial Covenants in Private Credit Transactions,” published in Pratt’s Journal of Bankruptcy Law, examines how financial covenants function in private credit agreements and how they are tailored across industries, capital structures and borrower business models. The piece analyzes leverage ratios, EBITDA definitions, incurrence and maintenance testing, covenant-lite structures, equity cure rights and other provisions that shape lender-borrower relationships in private credit transactions. It also explores how sponsors and lenders negotiate covenant flexibility, risk allocation and performance monitoring in sponsor-backed and growth-oriented financings. Readers will gain practical insight into private credit documentation, covenant structuring and evolving approaches to financial maintenance and credit risk management.