Amid Rising Private Credit Defaults, Analysis Group Authors Explore Loan Covenant Mix as Signal of Borrower Risk

July 15, 2026

The US Federal Reserve and market participants have expressed concern over the increased rate of defaults in the private credit market, now estimated at approximately $3 trillion. In an environment of rising default risk, accurate information about borrower quality is crucial for lenders. In an article for Law360, Analysis Group authors explore an underappreciated source of information about borrower risk: the mix of financial covenants that borrowers agree to comply with in their loan contracts.  

In their article, Vice President Carlo Gallimberti, Manager David Tsui, and academic affiliate Christopher Armstrong explain that the rise in stressed debt in private credit markets coincides with a trend in which loans containing relatively few covenants – or “cov-lite” loans – have become the dominant form of lending. The authors reference their prior research showing that even when loans contain few financial covenants, the combination of accounting measures they rely on can still convey meaningful information about borrower risk. For example, borrowers who intend to pursue riskier strategies are more likely to steer the negotiation toward loan covenants tied to balance sheet measures such as liquidity as opposed to those tied to profits because negative shocks are less likely to trip the former. In contrast, businesses anticipating less risk are more likely to agree to loan covenants tied to profitability, especially when paired with cheaper loan spreads. The authors emphasize that what matters is not the total number of covenants but the mix of covenants that borrowers select. The article concludes by discussing implications of this research for both lenders and borrower counsel in the deal room.