Structured Credit: A Narrow Window, Carefully Walked
Selective opportunities are reopening in private and structured credit. Where we are willing to underwrite, where we are not, and the documentation tells we look for.
After eighteen months of generalised caution on private credit, we are selectively underwriting again. The window is narrow, the discipline required is high, and the difference between a strong vintage and a weak one will be measured in covenant quality, not headline yield.
We are willing to underwrite senior secured direct lending to sponsor-backed mid-market businesses with EBITDA above USD 25m, leverage at or below 4.5x, and maintenance covenants that actually bind — not the cov-lite documentation that has been standard for the last cycle. Spreads in this corner are 525–625 bps over base, which we view as appropriate compensation.
We remain unwilling to underwrite generalist private credit funds with broad mandates, BDCs trading at premiums to NAV, or any structure where the manager controls valuations of underperforming assets without a genuine third-party check. The asymmetry is wrong.
On the structured side, conduit CLO equity has reopened in a measured way. We are participating in 2026 vintages from managers whose 2019–2021 vintages performed through stress, with a strong preference for those who retained meaningful skin in the game.
The documentation tells we focus on are: maintenance covenants with real cushions, restricted payments baskets that are not unlimited, definitions of EBITDA that exclude run-rate adjustments above 15%, and lender consent requirements on material amendments that cannot be voted away by an affiliate.
- Selectively reopen senior secured direct lending — but only with binding maintenance covenants.
- Stay out of broad-mandate private credit funds and premium-to-NAV BDCs.
- On CLO equity, prefer 2026 vintages from managers with proven 2019–2021 performance.
- Underwrite the documents — EBITDA add-backs and restricted-payments baskets are where downside lives.