Even at the height of the 2007 lending frenzy, only about one-fifth of financing deals were written with loose covenants. Now the figure is close to four-fifths. Credit rating agency Moody’s warned recently that this could hamper recovery rates for investors in the next downturn.
More than 70 percent of syndicated US leveraged loans are now covenant-lite, compared with 25 percent during 2006-2007, according to Thomson Reuters LPC.
What are 'Covenant-Lite Loans'
Covenant-lite loans are a type of financing that is granted with limited restrictions. Traditional loans generally have protective covenants built into the contract to protect the lender, including financial maintenance tests that measure the debt-service capabilities of the borrower. The issuance of covenant-lite loans means that debt is being issued to borrowers with fewer restrictions on collateral, payment terms and level of income. Covenant-lite loans are also referred to as "cov-lite loans."
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