Covenant quality is weakening at a measurable rate, and software credits are where it is going to matter most.

Full analysis: https://open.substack.com/pub/fixedfloating/p/why-software-credits-are-lme-catnip?r=718tew&utm_campaign=post&utm_medium=web

Josef Pschorn speaks with Sabrina Fox of Fox Legal Training about the systematic erosion of lender protections in leveraged finance documentation and why software credits sit at the intersection of weak covenants and uniquely portable assets.

Key takeaways:

* LBO covenant quality deteriorated from 3.33 in 2023 to 3.53 in Q1 2026, compounding on a base that had been weakening since the early 2010s — 2024 saw a record 34 LME transactions

* Software IP can be transferred to unrestricted subsidiaries, valued at board discretion without independent appraisal, and licensed back the same day — making drop-downs a low-friction exercise that standard covenant packages were never designed to prevent

* Xerox circumvented its own J.Crew blocker by structuring a joint venture instead of a subsidiary, exploiting the definition of "subsidiary" as >50% voting power — a maneuver ION Platform lenders should be watching closely

* Two pending court cases on creditor co-ops could determine whether lenders retain their primary collective defence mechanism against LMEs in 2026

Sabrina Fox: sabrina@foxlegaltraining.com

Fox Legal Training: https://foxlegaltraining.com | LinkedIn: https://linkedin.com/in/sabrinafox

Connect with Fixed + Floating: LinkedIn https://www.linkedin.com/company/fixed-floating | X https://twitter.com/FixedFloating

Disclaimer: Fixed + Floating is for informational purposes only. Not investment, legal, or tax advice.

Recorded: 17.04.2026

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