From Covenant Wars to Legal Fluency: How Lenders Are Learning to Live with Looser Docs

From Covenant Wars to Legal Fluency: How Lenders Are Learning to Live with Looser Docs

By Sabrina Fox

Over breakfast and coffee, a room full of lenders, investors, and credit professionals gathered to talk about something that has quietly reshaped European leveraged finance over the last decade: documentation risk – and the implications of borrowers actually using the flexibility they’ve negotiated.

What followed was not a technical training session or a legal lecture. It was a candid, experience‑driven conversation about how we got here, what has changed in practice, and what lenders can realistically do next.

My Journey into the Covenant Wars

I’m a finance lawyer by background, and I’ve been drafting high‑yield bonds and negotiating covenants since 2002. In the early part of my career, I worked for borrowers and sponsors, structuring and negotiating deals throughout the 2000s.

In 2010, I moved to the analytical side of the market, working at DebtExplained and Covenant Review. Between 2010 and 2019, I reviewed thousands of leveraged finance transactions. That gave me a front‑row seat to what I now call the Covenant Wars – roughly 2015 to 2018 – when borrowers began pushing documentation in ways I never imagined I’d see.

I’m a covenant purist. I learned from people who were involved in designing these structures in the first place. They were meant to work in a certain way. Watching that internal logic erode – sometimes clause by clause – was both fascinating and deeply frustrating.

In 2019, I helped establish the European Leveraged Finance Association, a buy‑side trade body, with the hope that collective lender engagement might slow the erosion. What I learned instead was that structural knowledge – not coordination – was the missing ingredient.

We don’t challenge what we don’t understand. And without confidence in the documentation, lenders default to commercial instinct alone.

That realization ultimately led to the creation of Fox Legal Training.

The State of the Market: 2025 in Review

To set the scene, it’s worth being clear about where the market stands today.

In 2025, just over €250 billion of loans came to market in Europe. Only around 13% was related to LBO or M&A activity with the rest largely repricing, refinancing and A&E activity. Borrowers used those repricings to loosen terms, not just margins.

According to data from Octus, the European leveraged loan market saw:

• Significant increases in Day One debt capacity (average 13% increase).

• Continued erosion of EBITDA add‑back discipline, with weaker caps or no caps (the latter feature in 11% of deals), longer realization periods, and more management discretion.

• A sharp rise in portability, now a cornerstone of the loan market rather than a niche feature (20% of loans excluding refis and repricings).

• The spread of “pick‑your‑poison” provisions, allowing restricted payment capacity to be repurposed for debt incurrence (now present in ~38% of deals).

• Weakening of the builder basket concept, including zero floors and the disappearance of full loss deductions (70% of deals contained them, with 25% using the most borrower-friendly quarterly zero floor).

The common theme here is that optionality has shifted decisively to borrowers.

From Flexibility on Paper to Reality in Practice

For years, much of this risk was theoretical. Now it isn’t.

Borrowers using the flexibility they negotiated. Liability management exercises (LMEs) are no longer an imported US concept; they are now firmly established in Europe. While some cases may still be litigated, many settle, leaving the market to infer outcomes rather than rely on clear precedent.

This is where the pain has become real.

As several participants noted, documentation often determines when lenders get a seat at the table – if they get one at all. In cov‑lite structures, meaningful leverage may only arise when a payment is missed, by which point value may already have migrated elsewhere.

The Lender Perspective: Experience from the Front Line

Participants with largeinstitution lending experience described how documentation risk plays out in practice across a wide range of products, including largecap syndicated loans, direct lending and private credit, club deals, midmarket transactions, and hybrid structures combining loans and highyield bonds.

For senior execution teams, the role is increasingly less about originating or executing individual transactions and more about stresstesting documentation choices, supporting deal teams in negotiations, and navigating the grey areas where commercial pressure collides with legal and structural risk.

A consistent theme across the discussion was that documentation risk is rarely driven by a single problematic clause. Instead, it is the cumulative effect of 15 or 20 seemingly incremental concessions – each defensible in isolation – that only reveal their full impact once a company comes under stress.

At the same time, participants acknowledged how difficult it is to push back in real time:

• Market “standard” terms move quickly.

• Deals declined on documentation grounds often reappear months later as accepted precedent.

• Raising too many questions can reduce allocations.

• Lenders frequently do not know who else is in the syndicate until commitments are signed.

In that environment, legal terms can easily be treated as a formality rather than an active risk lever – until market conditions change and the consequences become unavoidable.

Legal Fluency as a Strategic Tool

This is where the conversation turned from diagnosis to response.

Legal fluency doesn’t mean turning credit professionals into lawyers. It means understanding documentation well enough to:

• Ask precise questions

• Spot second‑order consequences

• Challenge advisers constructively

• Recognize when flexibility becomes asymmetrical risk

Several participants noted that:

• Lawyers don’t always give clear answers – sometimes because they can’t.

• Different legal teams can interpret the same clause differently.

• Time pressure increases the risk of accepting incorrect advice.

• Email exchanges rarely surface uncertainty; conversations do.

Confidence matters. Not performative confidence – but the kind that allows you to say:

“Explain that again.”

“Explain it differently.”

“What happens if EBITDA falls after this capacity is created?”

If someone can’t explain a provision in multiple ways, they may not fully understand it themselves.

Credit Selection Still Matters – but It’s Not Enough

There was broad agreement that documentation doesn’t replace credit analysis. Strong businesses survive longer – even under weak docs. But the reverse is also true: weak documentation can destroy value even when the original credit case was sound.

Several themes emerged:

• Documentation risk has trickled down from large‑cap to mid‑market and even SME deals.

• Cov‑lite structures are now appearing at EBITDA levels that would have been unthinkable a decade ago.

• Smaller businesses are less resilient, less sophisticated, and more prone to operational surprises.

• Post‑restructuring deals remain particularly risky, with high rates of repeat distress.

The market has bifurcated – not just on yield, but on outcomes.

Where Do We Go from Here?

Looking ahead, a few things seem clear:

1. Documentation will not tighten on its own.  

  Any reversal depends on lenders knowing what to negotiate and why.

2. US developments will continue to influence Europe.  

  Whether through LMEs, litigation strategies, or sponsor behaviour, the spillover is real.

3. Governance matters as much as negotiation.  

  Institutions need internal frameworks to assess documentation risk consistently – across teams, deals, and cycles.

4. Knowledge creates optionality.  

  You may not always be able to push back – but when leverage shifts, you need to be ready to act.

Final Thoughts

What struck me most about this discussion was not cynicism, but realism.

Everyone in the room understood the commercial pressures. Everyone accepted that flexibility can sometimes save a business. But there was also a shared recognition that not understanding documentation is no longer a viable strategy.

At Fox Legal Training, our goal isn’t to slow markets down or eliminate risk. It’s to help lenders build the confidence to engage with documentation deliberately – so that when flexibility is given, it’s a conscious trade‑off rather than an unintended one.

And if you ever come across a clause that makes you think, “This feels a bit weird” – pick up the phone. I genuinely love talking about covenants.

Our Global Documentation Risk Discussions

Following on the success of this event, I am representing Fox Legal Training in a series of private discussions with senior credit professionals across the world – the full itinerary is below. If you would be interested in surfacing your views and hearing from like-minded peers in the finance industry, get int ouch to register your interest in attending.

February 10^th: Los Angeles, California, USA

March 12^th: Paris, France

April 13^th: Seoul, South Korea

April 21^st: Tokyo, Japan

April 27^th: Sydney, Australia

April 29^th: Melbourne, Australia

May 20^th: New York City, New York

Late June: Hong Kong, Singapore

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