HOOPP: Light covenants in private credit are a growing source of concern

The Healthcare of Ontario Pension Plan, HOOPP, the C$123 billion pension fund for Ontario’s hospital and community-based healthcare sector, is the latest long-term investor to flag mounting risks in private credit.

High profile corporate failures last year make strong covenants a vital ingredient to investment outcomes in one of the fastest growing areas of finance, yet Jennifer Shum, senior managing director, structured and private credit, tells Top1000funds.com that covenants have got notably lighter.

The boom in private credit has been accompanied by a spike in lighter covenants, reducing protection and guardrails for lenders including their ability to bring corporate boards to the table when things don’t go according to plan, she warns.

Meanwhile the cost of compound losses and already thin returns in the asset class would leave investors hard hit by any corporate collapse, she says.

“It’s hard to get out of a loss in this environment because returns are really skinny. How many good deals are you going to have to do to make up for that one loss?”

HOOPP has a 5 per cent target allocation to private credit that was only formalised from an opportunistic allocation to a core part of the return-seeking portfolio in 2023. The allocation encompasses real estate debt, direct lending and asset-backed finance in a strategy focused on diversification, downside protection, income generation and limited drawdowns.

Shum also attributes the rise in worrying Liability Management Exercises in private credit to weaker covenants: light covenants, she explains, allow stressed corporate borrowers to restructure or refinance without filing for bankruptcy, often by negotiating directly with lenders.

HOOPP’s investments in the asset class spans fund investments, co-investments and secondaries and by using all three, all the time, the team can maintain the sweet spot between diversification, downside protection and yield.

Yet she notes issues with covenants have spiked in the secondaries market too. Challenges around underwriting deals with the level of control and downside protection HOOPP would have insisted on had it invested at the onset, make her wary of some vintages.

“We’ve become more selective. Recent vintages simply don’t hit the mark for us particularly 2024 vintages, which raise flags around covenants.”

Her team views GP counterparties as essential partners, particularly supporting diversification in the portfolio. “We lean on them, and they bring us amazing deals and amazing strategies to which we will tack on co-invest alongside structured on a no fee no carry basis.”

She also sees a silver lining in HOOPP’s small private credit team of eight.

“We have so much to do, and there are so many incoming calls, it really helps with underwriting discipline. We can’t waste any time and have to move on quickly,” she says.

A Total Portfolio Approach

Her team is also supporting the integration of private credit into HOOPP’s total portfolio approach (TPA) launched in January 2026. Under TPA, the role of credit supplying yield, but also downside protection and diversification, will be formalised into an all-weather platform alongside public/private equity, infrastructure and real estate.

“Credit is now a very strategic part of how we construct the whole portfolio and its role in total portfolio construction has shifted a little,” she says.

She adds that HOOPP is still in the early days of implementation. The strategy is central to pillar two of its 2030 strategic plan which is focused on improving the resiliency and adaptability of the portfolio to maximise returns within a stated risk appetite, measured by real returns and funded status.

TPA is the latest innovation at the fund, founded in 1960, long-famed for its unusual LDI strategy.