Dealmaking Competition Erodes Junk Loans’ Last Line of Defense

Relaxing covenant requirements to win competitors in the race to fund deals is leaving sub-investment grade loan investors without their last line of defense, according to an analysis by Moody’s Ratings.

Maintenance covenants, most common among revolving loans, serve to protect lenders from early signs of stress and constrain borrowers from heaping excessive leverage onto deals. But some are becoming increasingly permissive, allowing borrowers to do just that, a group of analysts led by Derek Gluckman wrote in a report.

Of over a hundred leveraged loans executed in 2024 and 2025 that Moody’s sampled, nearly half of deals with ...