Private equity-backed borrowers are increasingly turning to loans with weaker credit protections, contributing to lower recoveries for lenders in default, according to a report by Bloomberg citing new research by Moody’s Ratings.
Between 2023 and mid-2025, first-lien cov-lite loans – loans with minimal financial maintenance covenants – recovered an average of 57% in distressed scenarios, compared with 66% for the small number of loans with traditional covenants. Moody’s said nearly three-quarters of cov-lite borrowers are backed by private equity sponsors.
The Moody’s report notes that buyout firms are tapping the “most flexible terms the market can bear,” driven by over=leveraged capital structures, inflation, and higher interest rates. While looser covenants allow struggling companies to delay bankruptcy, they can also result in larger restructurings later and give borrowers room to increase leverage or move assets in ways that disadvantage lenders.
Moody’s warned that recovery rates for first-lien leveraged loans remain depressed, with little sign of improvement, highlighting elevated credit risk in deals sponsored by private equity firms.
