In the world of leveraged finance, a subtle yet significant shift is underway. Traditionally dominated by borrowers wielding market influence to secure advantageous terms, recent capital market turbulence has begun altering the balance of power. This development presents lenders and investors with an opportunity to regain leverage, demanding stronger protections in financing agreements. While borrower-friendly clauses such as "super-grower baskets" and provisions ignoring losses have proliferated, there are emerging signs of resistance. Lenders are now introducing innovative safeguards like "J Crew Blockers," designed to prevent borrowers from exploiting contractual flexibility at their expense. As market dynamics evolve, this could herald a new era where repayment promises regain their rightful prominence.

For years, the lending landscape has tilted heavily in favor of borrowers, who have exploited their bargaining power to negotiate increasingly lenient terms. These include expansive carve-outs allowing additional borrowing regardless of financial performance and provisions that disregard losses when calculating dividend-paying capacity. Such practices have undermined the foundational promise of debt repayment at maturity, leaving lenders exposed to heightened risks. However, recent developments suggest a potential turning point. Market volatility has weakened borrower dominance, creating openings for lenders to push back against covenant erosion. Instances of lender resistance even before the current market upheaval offer hope that this trend can be reversed.

A notable example of borrower advantage lies in so-called "super-grower baskets." These allow companies to borrow more funds based on earnings before interest, tax, depreciation, and amortization (Ebitda), with a critical twist: the allowable borrowing limit never decreases, even if Ebitda falls. According to data from Octus, nearly a quarter of European high-yield bond deals featured these baskets in 2024, up from less than 10% the previous year. Additionally, some agreements permit borrowers to exclude working capital debt from leverage ratio calculations, further disconnecting contract terms from financial realities. Yet amid these challenges, lenders are crafting innovative solutions. Nearly 40% of 2024 high-yield deals included provisions restricting borrowers from moving valuable intellectual property out of reach—a marked increase from just 10% in 2022.

One particularly promising development is a provision first appearing in last year's RR Donnelley high-yield bond deal. Though complex in language, its essence prohibits borrowers and their subsidiaries from using contractual flexibility to bypass their obligation to repay lenders at maturity. This safeguard has since been incorporated into other deals, including a recent Getty Images bond issue. Its inclusion underscores a growing recognition among lenders of the need to protect against excessive borrower flexibility. In light of mounting risks, every leveraged finance agreement should incorporate similar provisions to ensure repayment commitments remain sacrosanct.

As market conditions continue to evolve, the interplay between lenders and borrowers takes on renewed significance. While borrower-friendly terms have dominated recent years, current trends indicate a possible reversal. Lenders are increasingly asserting themselves through creative contractual protections, signaling a potential return to more balanced agreements. For both parties, this recalibration represents an opportunity to restore trust and stability within the leveraged finance ecosystem. The future of lending hinges on reestablishing the primacy of repayment promises, ensuring sustainable growth for all stakeholders involved.