Insurance won’t fix a weak document, but it might still get your money back - Covenant Exchange Singapore

Singapore was the latest stop in my documentation risk roundtable series, and ranks among my favorite conversations because I learned so much. Around the table were a credit investor who reads documents for a living, a trade-credit and political-risk insurer, a sustainability specialist, an allocator who rarely sees an individual deal document, and a ratings agency analyst focused on the more complex side of the market. Our conversation kept coming back to the ultimate question for lenders: how can you tell if the document is strong enough for you to get your money back, and if it isn’t, what other options do you have?

Somewhat unexpectedly, insurance turned out to be the most interesting aspect of the conversation. Loan agreements can run to several hundred pages long; in stark contrast, a credit insurance policy runs to twenty or thirty. While that brevity carries its own risk - the scenarios that matter most in are structuring might be the ones not contemplated - the claims experience beatscontractual enforcement by a long way.

In recent years, effectively every claim has been paid, and even where the insured hadn’tfully met its conditions, a large part still gets paid, because this is a smallmarket of repeat players and reputation is everything. Insurance has become anorigination and distribution tool rather than purely facilitating risktransfer. It’s invisible to the borrower, unlike a syndication, so lenders use it to manage capital and counter party limits while keeping the relationship. And once the insurer pays, it’s subrogated to the lender’s claim and pursues the recovery itself, however long that takes.

This doesn’t mean you can insure your way out of weak documentation, but lenders are increasingly turning to it as a par repayment solution  precisely because the document might not get them repaid on its own, and that market is growing fastest where enforcement is hardest.

A contract is only as good as your ability to enforce it, and the whole purpose of lending is to get principal back at maturity. Singapore and Hong Kong are common-law jurisdictions, while much of the rest of the region runs on civil law, and the enforcement realities differ sharply. Enforce across several jurisdictions at once and you can get different results in different courts, slowly and expensively. And nobody really wants to take the keys, least of all on a half-built asset, so lenders keep the operator in place and extend, and extend again, hoping the process resolves what the document can’t.

The conversation covered structures the market is unsure still qualifies as innovation. PIK toggles were top of the list, with most of the room treating them as a way to delay a breach rather than manage one, and least welcome of all when they’re bolted on after the fact because a deal can’t be refinanced or sold. We heard about fund-finance structures turning evergreen, open-ended funds into closed-ended ones with dated debt, carrying PIK and the unusual ability to defer principal and interest without triggering default, designed as protection that lets a manager ride out depressed marks rather than sell. And private market secondaries, where a buyer acquires at a discount and marks up on day one, and a small club rotates the same assets among themselves, with the covenant package thinning a little more on each pass. There was a clear distance between what people said they disliked and what’s actually being printed, because in a market this competitive, capital still has to be deployed.

Underpinning it all is the familiar story of covenant erosion. Maintenance covenants have all but gone from broadly syndicated loans and are fading from the upper middle market of private credit. EBITDA definitions now run pages long, and how you calculate debt and interest can move a ratio a full turn or more. Newer wrinkles keep appearing too: cash sweeps set outside the coverage ratio so a deal earns rating relief, and the monetizing of future cash flows, so that when distress comes, recovery doesn’t reach what’s already been moved off the balance sheet. Use of proceeds to fund dividends and buybacks is the one the room most suspects that lenders will regret once the cycle turns and the private credit market sees its first real stress event - which it still hasn’t.

The topic that ran through the whole discussion was how interconnected everything has become. Leverage on leverage, valuations, sentiment, insurance, and a fast-growing base of non-bank lenders - each piece resting on another. Asia’s bank-led markets offer some protection from the more complex structures, but the region’s investors are buying into them abroad without always seeing what they’re taking on. The contract underpins all of it, and its strength only gets tested when it’s too late to renegotiate.

That’s why I built Fox Legal Training: to equip lenders with the knowledge to read the docs before they become the leading risk with a credit.

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