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How AI and Managed Services Enhance Portfolio Stability for Banks Navigating Complex Covenants
How AI and Managed Services Enhance Portfolio Stability for Banks Navigating Complex Covenants

July 17, 2025

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Covenants serve as an important mechanism for lenders to monitor borrower behavior and manage credit exposure. They include both financial measures—such as leverage or interest coverage ratios—and non-financial terms like reporting timelines or restrictions on new debt.

As lending practices evolve, covenant structures are becoming more complex, requiring more sophisticated methods of monitoring to ensure compliance, detect early warning signs, and support overall portfolio stability.

Increasing Complexity in the Lending Landscape

The changing dynamics of the lending ecosystem—driven by  private credit expansion and macroeconomic volatility—are making covenant frameworks more layered and harder to manage manually.

a. Growth in Private Credit Markets

The private credit market has expanded rapidly over the past decade. By 2028–2029, global assets under management are projected to reach between $2.6 and $2.8 trillion, up from approximately $1.5 to $1.7 trillion in 2024. In Europe alone, private debt deal volumes hit a record €68.7 billion in 2024, with larger and more customized deal structures becoming common.

As private credit becomes a more prominent alternative to traditional bank lending, the associated covenant frameworks are also growing more sophisticated. Features like unitranche structures, asset-based financing (ABF), and hybrid instruments require monitoring systems that can handle complexity at scale.

b. Macro Conditions Driving Risk

At the same time, macroeconomic uncertainty continues to elevate credit risk. Persistent inflation, higher-for-longer interest rates, and monetary tightening have increased pressure on borrowers. While private credit default rates remain relatively modest—around 2.4% in Q1 2025 according to recent estimates—forecasts suggest defaults may rise, particularly among highly leveraged borrowers.

Asset-based lending introduces additional monitoring complexity. Collateral valuation, financial statement compliance, and liquidity indicators must be evaluated alongside more traditional borrower metrics. Manual tracking methods in such cases are often insufficient.

c. Varying Levels of Lender and Borrower Maturity

The continued expansion of credit markets has brought in both new lenders and borrowers. On the lender side, not all institutions are equally equipped to evaluate and monitor customized covenants, especially those new to private or bespoke credit deals. On the borrower side, smaller or less sophisticated entities may struggle to interpret and meet technical covenant requirements, increasing the risk of non-compliance.

These shifts create a need for tools and processes that can streamline covenant oversight and make monitoring more accessible across different levels of experience.

The Role of Technology in Covenant Monitoring

Emerging technologies—particularly AI—are helping institutions automate, accelerate, and improve the accuracy of covenant monitoring processes, while reducing operational load.

Advancements in artificial intelligence (AI) have opened new possibilities for covenant monitoring. AI platforms can now analyze loan documents, extract financial and legal terms, and flag potential compliance issues in real time. These systems are capable of processing multiple document formats—PDFs, scanned agreements, spreadsheets—and mapping the relevant terms to borrower profiles. When integrated with existing credit risk or loan origination systems, they enable ongoing covenant tracking with limited manual intervention.

Institutions adopting these tools have reported operational efficiencies, faster processing cycles, and improved accuracy in breach detection—particularly valuable when monitoring high volumes of commercial or private credit loans.

Beyond extraction and alerts, AI-enabled platforms offer advanced reporting capabilities. Real-time dashboards, covenant trend analysis, and deviation tracking allow risk managers to act quickly and make informed decisions. Features such as audit trails, automated document classification, and customizable workflows help institutions maintain regulatory readiness, particularly as regulatory expectations around early warning indicators and documentation increase.

Managed Services as an Operational Strategy

In parallel with technology adoption, many financial institutions are exploring managed services as a way to scale and streamline covenant monitoring. These service models allow institutions to access domain expertise and operational capacity without building or maintaining large internal teams.

Managed services can support functions such as document intake, data validation, compliance checks, and ongoing reporting. For institutions dealing with complex portfolios or limited internal bandwidth, these partnerships can help ensure monitoring remains consistent, timely, and aligned with best practices.

Implications for Risk and Compliance

Effective covenant monitoring serves as an early warning system in credit portfolios. Breaches of financial ratios or reporting obligations can signal emerging stress—well before formal defaults occur. By identifying these signals early, lenders can take corrective action, restructure loans if necessary, or enhance oversight.

Also, covenant monitoring is increasingly emphasized in supervisory guidelines.

For example, the European Banking Authority (EBA) requires financial institutions to assess covenant compliance as part of broader credit risk management frameworks. Guidelines stress the use of compliance certificates, ratio tracking, and non-financial indicators to identify potential deterioration in borrower profiles.

Emerging regulations are also starting to address environmental, social, and governance (ESG) considerations. While ESG-related covenants are not yet standard, institutions are being encouraged to factor ESG risks into credit assessments—suggesting that ESG-linked monitoring could become more prominent over time.

Best Practices Going Forward

To adapt to this evolving landscape, financial institutions may consider the following approaches:

  • Automating documentation workflows to reduce manual errors and ensure timely covenant tracking

  • Implementing real-time alerts to flag potential breaches and trigger internal reviews

  • Leveraging historical data to understand borrower behavior and anticipate risk trends

  • Establishing borrower-level visibility for tracking compliance on a granular level

  • Partnering with external experts or service providers for specialized support in complex scenarios

These practices can help institutions stay resilient and responsive, even as market conditions and regulatory expectations continue to evolve.

Conclusion

As private credit continues to scale, the complexity of covenant structures and the expectations around real-time compliance are only set to grow. Lenders will need to evolve beyond manual tracking and fragmented oversight to meet these demands. A combination of domain expertise, intelligent workflows, and integrated monitoring capabilities will be key to achieving this at scale.

Purpose-built solutions are beginning to emerge that help financial institutions operationalize covenant oversight—bringing together automation, analytics, and compliance-readiness in a unified approach. One such example is CovenAce, a platform designed to streamline covenant monitoring through structured workflows and domain-aligned intelligence.


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Anaptyss is a digital solutions and business services company based in Alpharetta, GA. The organization delivers digitally enabled, value-led managed services to a diverse clientele in the financial services industry. Anaptyss co-creates innovative solutions to help clients evolve their standalone tasks and processes to fully integrated and versatile functions/CoEs, transforming their business and technology operations. Anaptyss' globally scalable managed services ecosystem, driven by the proprietary Digital Knowledge Operations™ approach, offers clients access to new-age intelligent digital technologies, deep-domain expertise, and top-tier talent.

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