Covenant-Lite Loan

Last Updated: Jun 6, 2019

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A Covenant-Lite Loan is a type of loan that does not contain the usual protective covenants whereby the loan is granted with minimum restrictions for the benefit of the borrowing party (which makes the financing more bond-like). Such loans are generally available in red-hot markets only.

"The competitive landscape for making commercial and industrial loans is a challenging one. The low-interest rate environment of recent years, coupled with the overabundance of investment capital (from banks and non-banks alike), has become a long-term feature of the marketplace. This environment has resulted in a relative shift in bargaining power from lenders to borrowers in the middle market.

One of the oft-cited consequences of this shift is the high level of issuance of so-called “covenant-lite” leveraged loans, which lack many of the standard early warning trip-wires (in the form of financial maintenance covenants) that lenders would typically utilize. Standard & Poor’s Leveraged Commentary and Data unit reported that covenant-lite loans totaling approximately $240 billion were issued in 2014. This far exceeded the 2007 peak of $96.6 billion prior to the financial crisis. In addition, covenant-lite loans made up approximately 60% of total institutional leverage loan issuance in 2014."

Read more about strategic approaches commercial lenders are taking to address the challenges of covenant-lite loans and the current low-interest rate environment in The Secured Lender June Digital Issue.