How Borrowers Quietly Rewrote the Loan

Over two cycles, the borrower side quietly rewrote the leveraged loan. The covenants that once disciplined a deal were not so much renegotiated as relocated — and in liquid markets, relocated out of the document altogether.

The LMA’s leveraged template has long tracked the US Term Loan B market, and private-equity sponsors drove the drift: each hot market set a new borrower-favourable precedent that the next deal treated as the floor. The result is a loan that looks, clause for clause, far friendlier to the borrower than its early-2010s ancestor — but the change is subtler than “weaker covenants”. The discipline moved.

From maintenance to incurrence

The core shift: maintenance financial covenants — ongoing leverage and coverage tests the borrower had to pass every quarter — gave way to cov-lite structures for the institutional term debt, where compliance is tested only when the borrower does something (incurs debt, pays a dividend). The lone survivor is often a springing leverage covenant for the revolving facility, tested only when it is drawn past a threshold. Lenders did not lose a number; they lost the early-warning tripwire.

The flexibility migrated into the definitions and baskets

Where a maintenance test once sat, the borrower’s freedom now lives in the fine print. EBITDA stopped being a fixed number and became an adjusted one — synergies, run-rate cost savings and long look-forward periods inflate it, and almost every permission is then measured against that elastic figure. Grower baskets (the greater of a fixed sum and a percentage of EBITDA) expand as the adjusted number grows. Incremental debt arrives as a free-and-clear “freebie” amount plus ratio-based incurrence; available-amount or “builder” baskets accumulate capacity over time. And the MFN protection that once guarded existing lenders’ pricing was narrowed with thresholds, carve-outs and sunset periods. Layer in change-of-control portability — a sale that no longer triggers prepayment if leverage is within a test — and the leverage definition becomes the unit of account for the whole deal.

The battleground moved to the collateral

The most consequential evolution was not a basket at all. Once covenants went incurrence-based, the contest shifted to what a borrower could do with its assets: move prized collateral to an unrestricted subsidiary and finance against it (the drop-down), or layer existing lenders with new priming debt (the uptier). Lenders answered with documentary protections — the blockers now demanded as standard — so the negotiation today is less “did you breach a test” and more “what can you move, to whom, and ahead of whom.”

A pendulum, not a ratchet

None of this runs one way. Terms loosen when liquidity is abundant and the borrower holds the pen; they tighten when liquidity contracts. The 2022–23 rate shock brought real pushback — harder scrutiny of EBITDA addbacks, tighter documentation, and liability-management blockers moving from bespoke asks to market standard. Borrower counsel wins most in hot markets; lender counsel claws it back in cold ones. Reading a facility well means knowing where in that cycle it was struck.

General market commentary on leveraged-finance documentation trends, not legal advice, and not pin-cited to any document set; market practice varies by deal, vintage and jurisdiction. Any specific facility needs advice on its own terms.