Despite covenant-lite trend, lender protections are stronger in private credit than in BSL market – Proskauer

Sami Vukelj

Fri, February 13, 2026 at 5:18 AM GMT+9 5 min read

A new Proskauer report showed that private credit deals were increasingly covenant-lite in 2025, rising to 21% of all private credit deals from 4% in 2023, bringing the market more in line with the syndicated loan market, but lender protections are still stronger in private credit.

“Where borrowers have access to BSL execution, you begin to see cov-lite, but these are still private credit documents, not BSL documents,” said Stephen A. Boyko, private credit partner and co-founder of Proskauer’s Private Credit Group, in an interview with PitchBook LCD.

“Even if private credit lenders offer cov-lite to remain competitive with BSL options, these private credit cov-lite executions still have reserved leverage, reserved additional debt capacity, strong LME protections, and other protections that distinguish them from the more flexible and borrower-friendly BSL documents.”

The Private Credit Insights Report, based on data from over 450 deals representing a transaction value of $124 billion, said that direct lenders continued to offer larger loans, as 39% of loans were made to companies with at least $50 million of EBITDA in 2025, compared to 35% in the prior year.

The rise in cov-lite deals was driven primarily by upper-market borrowers, with 91% of cov-lite deals involving borrowers with EBITDA of at least $50 million.

While the terms considered market precedent are generally based on EBITDA brackets, top PE firms are often able to push cov-lite terms across their deals regardless of EBITDA, sometimes for borrowers with EBITDA as low as $30 million, since lenders are eager to maintain and build relationships with these sponsors, according to the law firm.

Additionally, LME protections have strengthened in private credit over time, said Adam R. Nelson, partner at Proskauer. Sponsors have largely stopped resisting J.Crew protections in deals with unrestricted subsidiaries, and the newer Pluralsight and Envision protections are becoming increasingly accepted by sponsors in loan documents, Nelson said.

While these document protections are robust, one of the main barriers to successful LME transactions remains the behavior of private credit lenders, who often stress that theirs is a relationship business.

“Many private credit lenders transact together regularly, so many will not participate in an LME transaction unless it is offered pro rata, even including lenders that are typically aggressive otherwise,” said Boyko.

“It does seem like there is a strong consensus among lenders in the market as to how to deal with LME threats.”

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While the possibility of LMEs remains part of negotiations between creditors and sponsors, Boyko said he is not aware of any successfully executed LMEs in private credit deals.

Additionally, even in cov-lite deals, private credit lenders retain another protection in the form of a springing financial covenant applicable to the revolver. Revolving lines of credit typically have a springing financial covenant that only applies to the revolver (not the term loan) which allows the lender to test a financial covenant once revolvers are drawn above a certain amount, indicating some liquidity strain.

While revolvers are often provided by different lenders in the BSL market, revolvers in private credit deals are usually provided by the same lender or club of lenders that provided the term loan, giving these lenders a chance to test financial covenants once revolvers are drawn above a certain amount even when term loans are cov-lite, creating an opportunity for lenders to exercise rights that are only exercisable by revolving lenders, Boyko said.

The report also showed that equity contributions as a percentage of total capitalization declined in private credit deals in 2025 to 46%, as the share of deals with an equity contribution of at least 50% fell to 10% in 2025, compared to 55% in 2024. However, the share of deals with equity contributions of 45-49.9% increased to 56%, suggesting that the decrease in average equity contributions was driven by a dip to slightly below the 50% mark.

Private credit’s favorite sectors maintained their prominent roles in portfolios, as healthcare/life sciences, manufacturing, software/tech, and business services remained the top four sectors and accounted for 57% of deals in Proskauer’s sample in 2025.

Average closing leverage among private credit deals in Proskauer’s sample increased modestly to 5.1x in 2025, from 4.8x in 2024. Average debt capacity was 6.3x, indicating that lenders are permitting 1.2x turns of additional debt after closing.

The Proskauer report also showed that borrowers have generally gained more incremental debt capacity as the share of deals that give borrowers incremental “free-and-clear” baskets (the amount of incremental debt a borrower can raise without a leverage condition) greater than or equal to 100% of EBITDA rose to 81% in 2025, from 64% in 2024.

Pricing on deals declined, as interest rate margins fell to an average of 5.6% in 2025, compared to 5.9% in 2024 and 6.8% in 2023. The decline was steeper in the second half of the year, when the average was 5.51%. For highly competitive deals, interest rate margins for first-lien/unitranche deals averaged 4.77%.

The data also showed an increase in the share of deals supporting dividend recapitalizations, which accounted for 10% of deals by transaction type in 2025, double the 2024 level. Dividend recaps have been used more often by sponsors amid the muted M&A environment as a way to realize investment gains on businesses they still own, particularly helpful in environments where full exit opportunities are limited.

PIK toggles were featured in 9% of deals in Proskauer’s dataset, and in 15% of deals among borrowers with EBITDA of $50 million or more.

Thirty-nine percent of deals that included EBITDA add-backs for non-recurring expenses included caps on add-backs, down significantly from 47% in 2024 and 66% in 2023.

Featured image by Bet_Noire/Getty Images/iStockphoto

This article originally appeared on PitchBook News

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