“How’s your pipeline?” we asked the head of one of the leading middle market arrangers in December. He shook his head. “The quality-adjusted deal flow is down.”

That distinction resonated with a number of our middle market brethren. Complaints centered around ebitda adjustments, over-liberal debt allowance baskets, and covenant-lite (or covenant-wide) structures. “High leverage per se is not the problem,” one lender fretted. “It’s the fictional ebitda the leverage is built around.”

Some of this structural erosion is attributable to sponsors trying to bring large cap terms down market. The same credit document that the PE firm used for a $250 million ebitda issuer is being rolled out for the $50 million borrower.

Another culprit is the hyper-competitive auction climate for buyers. To justify double-digit purchase price multiples, particularly for otherwise run-of-the-mill businesses, sponsors are pushing the envelope on what defines true ebitda. “We draw the line when pro forma adjustments effectively double actual cash flow,” a mid-cap fund manager said. “Those deals don’t even make it to committee.”

Of course, competition among loan arrangers is a driver of sell-side friendly features.