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September 17, 2026

M&A Finance: How Private Credit Documentation is Evolving

Private credit has become a dominant force in private equity-backed M&A, and this Herbert Smith Freehills Kramer memo (p. 4) discusses how documentation for private credit financings continues to evolve. Here’s what the memo has to say about the current state of financial covenants in private credit financings:

Financial covenant frameworks remain a key point of differentiation in U.S. private acquisition finance. In traditional middle-market unitranche deals, lenders rely on a quarterly-tested leverage-based maintenance covenant as an early-warning tool.

Competitive dynamics in prior years drove a shift toward “covenant-loose” structures (distinct from “covenant-lite” in the broadly syndicated loan market), where leverage covenants were set with wider headroom, limited to a single test, omitted entirely or replaced with a springing revolver-only covenant triggered when drawn above a specified threshold. However, 2026 has shown early signs of a correction, with new originations incorporating more robust covenant packages as lender discipline reasserts itself.

The memo notes that private credit documentation increasingly incorporates syndicated loan concepts, including EBITDA-based baskets and more permissive debt, investment, and restricted payment capacity as EBITDA grows. It also says that provisions allowing PIK payments in lieu of cash have moderated in 2026 as lenders’ negotiating leverage has increased. Finally, the memo says that as PE sponsors have increased their focus on liability management, lenders have refined credit documentation to address in greater detail “value movement within capital structures and conditions under which new money can be introduced.”

– John Jenkins

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