The other day we pointed to a primer on private equity that ran in the New York Sun. Almost in passing, that article noted that a private equity firm had recently "concluded a deal in which there were no covenants." This is something that deserves more attention than it gets, in part because easier access to debt is one of the things that is helping drive the boom in private equity.

Debt covenants are promises companies make to lenders when they borrow money in the form of bonds or bank debt. Often these covenants restrict the amount of additional debt a company can borrow, require the company to meet certain financial revenues and may restrict the kinds of business a company can engage in, what kind of capital expenditures it can make and prohibit dividends until the debt is paid off. Particularly for troubled companies, these covenants are often merely common sense and may even help a company by giving it some corporate discipline.

But they can also be a burden on a company, particularly in a dynamic or growing industry. The amendment process to change the covenants can be difficult, requiring the agreement of many lenders. Substituting new debt is often an expensive process, giving rise to prepayment premiums and fees from lawyers and investment banks.

Getting lighter covenants is a goal of most companies seeking debt. And here is where private equity has an advantage. A single company may only need to come to investment banks seeking debt once every five years or so. This is a very long time on Wall Street. It means that bankers with relationships with these companies aren't going to be collecting fees from them very often, which gives the companies less leverage when negotiating covenants.

Private equity firms change the dynamic. They may have multiple portfolio companies seeking new debt each year. Which means they are throwing a lot of fees at the bankers involved. This gives them greater leverage in the conference room. Everyone wants the business of the private equity shops, which means they get concessions a single company wouldn't be able to get. When KKR or Tommy Lee are on the other side of the table, they basically get what they want. You can bet that the borrower who got a covenant free loan was sponsored by one of these guys (assuming it wasn't an investment grade company).

In short, private equity shops can get good deals for their companies because they do so many deals.