What is a covenant lite loan?
A covenant lite loan is a loan agreement that has less covenants to safeguard the lender and less limitations on the borrower in regards to payment terms, income requirements and collateral. Covenant lite loans are normally utilized for leveraged buyouts and other large, sophisticated loan transactions.
More profound definition
Covenant lite loans are riskier than traditional loans. In a run of the mill loan, for example, a mortgage, borrowers must meet various requirements before being approved. They must show proof that they can repay the loan and stick to certain payment terms, among different criteria. In any case, a covenant lite loan, here and there called a "cov lite," doesn't contain requirements that would offer a lender warning hints that a borrower is going to default, for instance, or that assets are going to break down.
The ubiquity of covenant lite loans developed as private equity firms and bank organizations turned out to be all the more remarkable and the lending market turned out to be more sophisticated. As these financial heavyweights vied for business, they offered less requesting terms to borrowers for leveraged buyouts. Risk in covenant lite loans is spread about through credit derivatives or syndication.
The 2007-2008 financial crisis put the brakes on the utilization of covenant lite loans, however because of low interest rates, the rise in business activity and developing competition in the lending market, covenant lite loans have bounced back.
Covenant lite loan model
Company A requirements to raise capital, so it chooses to issue bonds instead of borrow from a bank in light of the fact that a bank loan would accompany too numerous limitations and would be more expensive than paying bond investors.
Typically, a legal agreement for giving bonds would put limitations on Company A, for example, shortening its ability to assume more debt. Yet, Company A gets a covenant lite bond deal that puts essentially no limitations or requirements on Company A. One explanation Company A had the option to get a covenant lite deal is on the grounds that yields are low, so investors will face more risk challenges the journey for higher yields.
- Additionally called "cov-lite" loans, covenant-lite loans are normally riskier to the lender, however with the potential for larger profits.
- The starting points of covenant-lite loans trace back to leveraged buyouts sent off by private equity firms.
- The loans are favorable in terms of the borrower's level of income, collateral, and the payment terms of the loan.
- Covenant-lite loans are unique in relation to traditional loans since they have less protection for the lender and more amiable terms for the borrower.