A fierce battle for deal financing is dismantling the last significant protection for lenders in the junk loan market, with a Moody's analysis revealing that leverage triggers have been pushed to historic highs, severely weakening investor safeguards.
"Once such high leverage thresholds are breached, investors are likely facing the borrower's 'last hurrah'—by then, the company's financial situation may have deteriorated so severely that lenders will find it difficult to recover their losses in a timely manner," a Moody's analyst team led by Derek Gluckman said in the report.
The analysis of over 100 leveraged loans executed between 2024 and 2025 found that nearly half of the deals with maintenance covenants set leverage triggers at more than eight times EBITDA. Twenty-six percent of those were above nine times, and 11 percent were at 10 times or higher. This stands in stark contrast to the pre-pandemic period (2019-2020), when triggers were typically set between four and 7.35 times EBITDA. The change effectively allows borrowers to accumulate significantly more debt before a default is triggered, rendering the protection mechanism almost useless.
The core function of these maintenance covenants is to allow lenders to intervene at the first signs of financial stress. However, these historically high thresholds mean that by the time a covenant is tripped, the borrower’s financial condition is likely already dire. The report also notes that "springing" covenants, which only activate when a borrower draws a certain percentage of their credit line, have also been loosened. The trigger is now commonly set at 40 percent, up from around 30-35 percent historically, allowing borrowers to draw more cash without facing financial scrutiny.
This trend is being accelerated by aggressive competition from the private credit market, where terms are even looser. Moody's observed that some private credit deals feature covenant-lite structures with leverage thresholds as high as 15 times EBITDA and springing triggers at 50 percent. "This competition will continue to drive the broadly syndicated loan market toward looser maintenance covenant controls," the report states.
These double-digit leverage thresholds are most prevalent in financing for leveraged buyouts (LBOs) and dividend recapitalization deals. As the LBO market shows signs of recovery, Moody's expects that transactions with these weak covenant structures will become more common, further eroding creditor protections from what are already historical lows and increasing systemic risk for investors.
This article is for informational purposes only and does not constitute investment advice.
