Documentation Risk Has Crossed a Threshold: Insights from Our Paris Breakfast

Last week, I hosted a breakfast roundtable in Paris with a group of European credit professionals. The room included CLO managers, high yield portfolio managers, direct lenders, distressed investors and stressed credit analysts. What they had in common was that they are all grappling with documentation risk in one way or another.

Deals are being declined on documentation alone

Participants described walking away from deals over the past two years purely because of the documentation, not the credit alone. They had specific hard lines and they held them.

That might not sound revolutionary, but it is. Two years ago, this was not happening at the same scale. The documentation erosion that many of us have been watching for years has now crossed a threshold where experienced investors are saying: this is too much. 

The tension, of course, is that not everyone has the luxury of walking away. Participants with mandates to stay invested described the frustration of knowing the docs are loose and not being able to do much about it in primary. The market is too competitive, the technicals are too strong, and there is always someone behind you willing to take the allocation.

The passive minority holder is in real trouble

When a credit gets into distress and there is an LME on the table, you are either at the table or you are not. And if you are not, recovery can be close to zero.

Several participants described situations where the outside group got layered to the point of irrelevance. The inside group provides new money, moves up in the capital structure, and the outside group is left holding something that might look like a bond or a loan but has no real economic value.

The practical takeaway was brutal: if you can’t go big enough to be in the steering committee, and if you can’t provide new money, you are probably better off selling early. One participant shared a statistic that out of all high yield names trading below 90 in 2025, only 16% recovered in cash price. The rest fell further. That changes the math on when to cut your losses.

Real money managers are not set up for this

The restructuring and LME process requires a completely different skill set and time allocation than credit analysis. It is a deal-making job. It involves legal advisors, steering committee calls, negotiation, new money commitments and sometimes board-level involvement.

Most long-only European credit managers are not resourced for that. Fund rules may prevent holding loans. Mandates may be fragmented across client accounts with different permissions. Even when a firm holds a large aggregate position, only a fraction of those mandates may be eligible to participate in a restructuring.

One participant described the response from their US team, which has built a small dedicated restructuring team to handle LME situations. In Europe, the more common approach has been to sell early and let the US distressed funds take the other side. As one participant put it: Europe is selling to the US.

Covenant analysis is not a standalone exercise

I say this a lot, but hearing it confirmed by the room was validating. Documentation risk only becomes meaningful when you understand the credit underneath it.

We discussed the concept of putting a company’s assets into three buckets. The first bucket is your collateral: everything secured in your favor. The second is collateral pledged to other lenders. The third is unencumbered assets, which is the bucket that a third-party lender or an opportunistic sponsor is going to look at when they want to come in with new money and prime you.

Once you understand those three buckets, you know where to look in the documentation. If the third bucket is full of valuable hard assets, then permitted liens and permitted indebtedness capacity become critical. The credit analysis funnels the covenant analysis down to what actually matters.

The feedback from the room was that this approach saves time. And nobody (apart from me) wants to spend more time on covenants than they absolutely have to.

European sponsors have shown restraint. For now.

The room took some comfort from the fact that the most aggressive LME tactics have not yet been deployed by the top-tier European sponsors. The view was that reputational risk and CLO market access are real deterrents. European directors’ duties also came up as a factor that gives management teams pause before going along with aggressive sponsor playbooks.

But the concern is clear. It only takes one. The analogy used in the room was the four-minute mile. Once someone proves it can be done, everyone does it. And the US has already shown what happens when that permission slip is granted. The pattern there was not a gradual shift. It was a trickle, and then a flood.

Several participants flagged that the real risk may come not from the established sponsors but from the next wave of distressed situations where a less reputation-conscious party decides to push the boundaries.

The cooperation agreement is under attack from two directions

We spent time discussing anti-cooperation agreement provisions, which have now appeared in six European loan transactions (all rejected by investors) and in various forms in the US.

The irony is that the cooperation agreement is under attack precisely because it works. When lenders coordinate effectively, they have real negotiating leverage. The response from borrowers and their counsel has been to try to make that coordination either contractually void, a breach of the credit agreement, or grounds for disenfranchising the lender from voting.

At the same time, the Altice litigation in the US is testing whether cooperation agreements themselves can be challenged as anti-competitive. The outcome of that case could have real implications for how lenders organize in both US and European markets.

What comes next

The group agreed that documentation risk is not a static problem. It is a cycle. Sponsors and their counsel learn from each LME what flexibility they didn’t have when they needed it. Those lessons get fed back into the next primary deal as new provisions. The documentation gets looser, the next LME gets easier, and the cycle continues.

The only thing that breaks the cycle is lenders stepping off the wheel. Either by putting capital to work elsewhere, or by being equipped enough to negotiate effectively when the opportunity arises.

That opportunity, by the way, is not in primary. Primary is the hardest time to negotiate. You are under time pressure, you are competing with other lenders for allocation, and the divide-and-conquer dynamic works against you. The real opportunity to negotiate is during an LME, when the borrower is asking you for something. That is when documentation knowledge becomes a weapon, not just a shield.

This post reflects themes from a facilitated roundtable discussion held under Chatham House Rule. No participants or institutions are identified. Fox Legal Training hosts these discussions as part of our Covenant Exchange initiative, which brings credit professionals together to discuss documentation risk. If you are interested in joining a future session, please get in touch.