When private equity firm Veritas Capital was structuring the private credit facility for its $3.1bn buyout of energy data provider Wood Mackenzie, it built a super-priority revolver into the capital structure — a revolver that could be upsized without the approval of other lenders.

Some of those other lenders didn’t like that, so they pushed back. And, in a departure from the hot market conditions of years gone by, the sponsor gave them what they wanted.

The credit agreement was revised to say that the revolver could not be enlarged without voted approval by the company’s term loan lenders. They wanted to prevent the company from raising new priming debt without their consent.

“Before that loophole was closed, they could have upsized the capacity without putting it to a vote,” a source close to the deal told 9fin.

The situation is emblematic of a shift in the way private credit firms are negotiating with borrowers in recent months, particularly when it comes to the finer points of credit agreements.

After years of offering tighter spreads and looser covenants — partly the result of a boom in private credit fundraising, which made dealmaking more competitive — lenders have become more demanding when it comes to documentation, according to 9fin sources.

They are pushing for more favorable terms across credit agreements, from demanding smaller ‘baskets’ for incremental debt raises, to enforcing stricter standards on EBITDA adjustments, MFN provisions, maintenance covenants and permitted payments.

Direct lenders are also pushing for protections from the kind of covenant loopholes that have been exploited to siphon value away from debt investors in the past, in situations like J. Crew and Serta, one source noted.

People-pleasing

This more cautious approach comes as many private lenders are scaling back on the size and riskiness of their investments, because of rising interest rates, scarcer liquidity and the possibility of a recession this year.

One follow-on impact of these tighter market conditions is larger lender groups: many lenders are now writing smaller checks for each deal, so each deal requires more lenders than it might have in the past.

With more lenders at the negotiating table, and lenders more risk-averse in general, dealmakers are encountering a level of scrutiny that is unfamiliar after years of easy borrowing.

“Overall there is reduced risk appetite, and you need more people to write checks,” said a lawyer specializing in private credit. “Things are getting harder. There’s an enhanced focus on diligence, both on the business and legal side, and terms are tightening.”

At the same time, the current market backdrop gives borrowers a strong incentive to build as much flexibility into credit agreements as possible. Borrowing is no longer cheap, and access to capital is less reliable than it used to be, so flexibility — say, to upsize a revolver — is valuable.

There is precedent for them in syndicated LBO debt (such as Yak Access and Husky Injection Molding back in 2018) but they are often associated with smaller borrowers in the lower middle-market space.

Smaller borrowers might have no-option but to offer super-priority to revolver lenders, because many private credit firms can’t do revolver lending or simply prefer not to, sources said. The extra security offered by super-priority might help them clinch a deal.

However, for lenders underneath the super-priority debt, that introduces the risk of being primed — especially if those more junior lenders don’t have to give their consent in the event that the company wants to upsize the revolver.

Interest spiking

The tension over documentation in private credit can also include existing deals.

Late last year, Harvest Partners-backed Integrity Marketing tried to avoid paying higher interest on its existing debt when it raised a more expensive add-on loan, by structuring the deal in a way that circumvented MFN protection.

Ultimately, lenders in the add-on decided they didn’t want to be seen as acting against the best interest of their fellow credit investors. The company downsized the new debt raise, and negotiated a tiered coupon bump with existing lenders.

That situation highlights the rising risk of lender-on-lender violence as levered businesses come under pressure. In the syndicated markets, this is assumed to be one factor behind the recent non-aggression pact signed by Carvana creditors.

Private credit funds typically present themselves as long-term capital partners rather than opportunistic traders or arbitrageurs; as such, their market has less history of spats between warring lenders.

Indeed, sources said that so far sponsors appear willing to make concessions as lenders apply more scrutiny on terms. And while the liquid markets appear to be thawing for certain borrowers, private credit is still the best option for many LBOs.

Milk Specialties, for example, recently turned to the private credit market to fund its acquisition by Butterfly Equity, after a drawn-out auction process. The deal replaces the borrower’s pre-buyout syndicated debt.

In new deals like this, the terms of the credit agreement are likely to reflect the more exacting standards of today’s market. Opening up existing deals, such as the Integrity Marketing saga, may be more contentious.

“Sponsors have to accept the reality of the market, and on new deals, terms have reset,” said one lender, who estimated it the shift started in the middle of last year. “But if you have to open up an existing document, that’s where it gets difficult.”

Veritas and Wood Mackenzie did not respond to requests for comment.