A massive quarterly jump in "lien subordination" protections (to 84% of deals) signals a strategic shift among lenders. Instead of focusing on terms that prevent default, they are obsessed with securing their place in the payment line during bankruptcy, suggesting they view distress as increasingly likely.

Contrary to the belief that a large blocking position is needed, a 4-5% stake in a single debt tranche can be enough to secure a seat on the steering committee and influence a restructuring, especially in smaller capital structures.

Companies opt for more expensive private credit over public markets for non-price benefits like speed, customized structures, and a direct lender relationship. This simplifies future renegotiations, a critical advantage over broadly syndicated public loans.

Borrowers lose leverage by waiting until the legal documentation phase to negotiate critical loan terms. Key operative clauses, such as recourse carve-outs and lockbox provisions, should be negotiated with the loan originator or salesperson at the term sheet stage, not with the lender's attorney later.

In complex corporate restructurings, mathematical valuations become secondary to the game theory among creditors. The dynamics of negotiation, voting rights, and legal positioning are paramount, embodying the market expression that being a passive observer makes you vulnerable.

When lenders exercise their right to take board control, the standard playbook is to immediately appoint an independent director. This person's fiduciary duty is to maximize the company's value for all stakeholders, providing a crucial legal defense against potential lender liability lawsuits.

The underwriting quality in private credit is declining. Key red flags include lenders accepting "EBITDA add-backs"—projected, unrealized earnings improvements—and allowing borrowers to retain more proceeds from asset sales. These terms signal a shift in negotiating power to borrowers and rising risk.

Despite weak documentation, private credit deals proceed because lenders underwrite the sponsor relationship, not the legal text. For a top-tier sponsor in a preferred industry, lenders will forgo strong covenants and rely on their ongoing relationship as the primary form of protection.

A sign of eroding discipline, private credit underwriters are beginning to offer covenant-lite deals, once unthinkable in a market known for strong investor protections. This shift indicates that intense competition for deals is forcing lenders to lower underwriting standards, mirroring a late-cycle trend previously seen in public markets.