hard · Private Credit loan-structures-instruments

According to Black-Cox theory, why is this specific 'value' created?

1. The covenant primarily allows the lender to begin charging a contractually higher, penalty-level default rate of interest earlier in the overall credit cycle.
2. The barrier protection embedded in the covenant package itself reduces the underlying probability that any default event occurs in the loan's life.
3. The maintenance covenant acts as a 'down-and-in' barrier, allowing the lender to intervene and trigger a restructuring earlier, which preserves recovery value.
4. Maintenance covenants increase the perceived volatility of the sponsor's equity returns, which discourages the sponsor from pursuing further risk-increasing behavior.

Sign up free to see the explanation and track your rank →