Intense competition is dismantling the final protective barriers in the high-yield loan market. As lenders aggressively finance mergers and acquisitions, maintenance covenants continue to weaken, quietly expanding credit risk exposure.
According to Moody's analysis of a sample of over one hundred leveraged loans executed between 2024 and 2025, nearly half of the revolving credit facilities with maintenance covenants set their leverage trigger thresholds above 8 times EBITDA. Twenty-six percent exceeded 9 times, while 11% reached 10 times or higher. In contrast, pre-pandemic samples (2019-2020) generally featured thresholds between 4 and 7.35 times. This implies that borrowers can accumulate significant leverage without triggering a default, rendering lender protection mechanisms largely ineffective.
Moody's analysts warn that if such high leverage thresholds are breached, investors may be facing the borrower's "final curtain call"—by which point the company's financial health could be severely deteriorated, making it difficult for lenders to recover losses in a timely manner.
**Significantly Higher Thresholds Render Protection Mechanisms Hollow** Maintenance covenants are most common in revolving credit facilities. Their core function is to allow lenders to intervene when early signs of borrower stress appear and to restrain excessive leverage increases. However, a team of Moody's analysts led by Derek Gluckman points out that this function is being progressively eroded.
Beyond leverage thresholds, the trigger conditions for "springing covenants" have also been notably relaxed. Springing covenants are clauses that only become active—or "spring" into effect—when the borrower utilizes more than a certain percentage of their revolving credit facility on a testing date. The market now commonly sets this trigger at 40%, a higher level than observed in the 2019-2020 sample. This allows borrowers to draw more heavily on their revolving loans without undergoing financial tests or activating protective covenants.
Historically, "cov-lite" loans with maintenance covenants (including Class A term loans and revolvers) offered some protective advantage compared to the majority of Class B term loans that had already adopted weaker covenant structures. But as covenant standards for these cov-lite loans continue to weaken, the Moody's report indicates this "already limited" advantage is shrinking further, narrowing the protective buffer for investors.
**Intensifying Private Credit Competition Makes Loose Covenants the Norm** Competition in the private credit market is more aggressive, further dragging down overall market standards. Moody's analysts observe that in private credit deals with weak covenants, revolving credit covenant thresholds have reached as high as 15 times EBITDA, with springing covenant triggers set at 50%. The Moody's report states, "This competition will continue to push the broader syndicated loan market toward more lenient maintenance covenant controls."
Regarding deal types, transactions with double-digit leverage thresholds in Moody's sample are primarily concentrated in two categories: leveraged buyout financing and dividend recapitalization deals. This suggests that as the leveraged buyout market accelerates its recovery, lenient leverage terms will increasingly become market convention, lowering creditor protection standards.
Moody's stated in the report, "We anticipate that once market risk appetite returns and the leveraged buyout market fully recovers, the use of such loose covenant structures will become even more prevalent." For investor protection, already at historically low levels, this signals a potential further accumulation of risk.
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