The Credit Market Rush - What You Need to Know

I recently caught up with Bloomberg's James Crombie and Aidan Cheslin on The Credit Edge podcast and discussed how the credit markets are experiencing something I've never seen before in my career. We're witnessing unprecedented (and possibly misplaced) optimism and covenant flexibility alongside a frantic rush to get deals done, and the consequences – defaults, LMEs, restructurings, Chapter 11 – are playing out in real time.

The New Reality of Deal-Making

Remember when we had weeks to analyze new issues? Those days are gone. Now everything can happen in a single day and most deals are wrapped up in a single week. Companies are rushing to reprice tens of billions in leveraged loans and high-yield bonds while market windows remain open. Why? Because these windows have become incredibly unpredictable - geopolitical events can shut markets within 24 hours, as we've seen recently.

This creates a perfect storm. Borrowers and their advisors have become opportunistic, squeezing lenders who have cash to deploy but increasingly tight timelines to digest hundreds of pages of documentation. Meanwhile, we saw over $60 billion worth of leveraged loans come to market in a single week - that's not normal by any stretch.

The Confidence Gap

When it comes to reviewing documentation, the biggest obstacle for most market participants isn't capability - it's confidence. Too many believe that because they're not lawyers, complex legal documentation is beyond their grasp. That's simply not true.

I want a mug on my desk that says: "Covenants are complicated, but they're not rocket science." Because that's the reality. These contracts are designed to be navigated – they have table of contents, defined terms, and interpretation guidelines. With basic foundational knowledge, the process gets easier and faster.

Fighting Back: The Rise of Protective Measures

With less time to review docs and as liability management exercises grow more aggressive, we're seeing more specific protective terms emerge. The "omni blocker" is becoming more common - language that prevents borrowers from using negotiated terms to contractually or structurally subordinate lenders in non-pro-rata deals. It's not perfect, but it's better than nothing.

In fact, a recent Octus research put a price tag on the Omni-Blocker: “Octus’ models suggest that first lien lenders should be willing to pay about 60 bps per year on a five-year term loan for an omni-blocker, reflecting the sub-1%annual loss risk from non-pro-rata uptier or drop-down LMEs that we calculate.”

These protections represent the market's natural evolution. After watching the real costs of excessive flexibility play out through restructurings like Altice France, lenders are demanding safeguards. I argue in the FT that this protection should be in every deal.

The Altice Lessons

We also discussed how the Altice France situation taught us several crucial lessons. First, co-op agreements can be incredibly useful for organizing lenders against aggressive tactics. Second, understanding documentation is critical - this was a moment when knowing how to read the docs would have provided competitive advantage.

Possibly most importantly, planning is taking place earlier than ever before– by borrowers and lenders alike.

La La Land

The most concerning trend from my perspective are provisions that completely detach from economic reality. We're seeing "super growers" and builder baskets that only go up, not reflecting actual business performance. Some provisions now ignore losses entirely - creating what I call "La La Land" where numbers don't match reality.

What's Next?

I expect more liability management exercises to spread to Europe, though local law restrictions and director duties may provide some protection. The dynamics haven't fundamentally changed - there's still more demand for credit than supply, and nothing seems to stick in this Teflon market.

The lenders who will thrive are those who invest in understanding documentation. It's the one thing they can control. When borrowers come asking for waivers because they've painted themselves into corners, that's the moment to negotiate stronger protections.

Market participants need to arm themselves with knowledge. Your conversations with desk lawyers get better, external counsel becomes less expensive, and covenant services work harder for you when everyone understands the implications of the language.

The credit markets may be moving faster than ever, but the fundamental questions remain: What are you really buying into, and what could go wrong? Those who remember this while navigating the current rush will emerge better positioned when conditions change – and that they will certainly change is one solid guarantee in a market full of unpredictability.

Listen to the full podcast here.

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