hard · Private Credit & Debt loan-structures-instruments
A unitranche lender calculates that the 'covenant value' of their maintenance package provides an 80 bps advantage over a 'cov-lite' BSL peer at the same leverage.
According to Black-Cox theory, why is this specific 'value' created?
- The covenant allows the lender to charge a 'default rate' of interest earlier.
- The barrier protection reduces the probability of any default occurring.
- The maintenance covenant acts as a 'down-and-in' barrier, allowing the lender to intervene and trigger a restructuring earlier, which preserves recovery value.
- Maintenance covenants increase the volatility of the equity returns, discouraging the sponsor from taking risks.
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